Export woes loom large for Cummins India

The engine manufacturer’s operating revenue rose 16% to  ₹2,534 crore, with net profit rising by 26% to  ₹455 crore. (Image: Pixabay)
The engine manufacturer’s operating revenue rose 16% to 2,534 crore, with net profit rising by 26% to 455 crore. (Image: Pixabay)

Summary

  • In Q3, revenue from exports fell 40% from a year earlier to 325 crore, due to falling demand in key global markets

Cummins India Ltd’s robust performance in the December quarter (Q3FY24) propelled its shares up by over 8%. The engine manufacturer’s operating revenue rose 16% to 2,534 crore, with net profit rising by 26% to 455 crore. Besides, Cummins maintained double-digit sales growth forecast for FY24.

However, its sluggish export numbers cannot be ignored. In Q3, revenue from exports fell 40% from a year earlier to 325 crore, due to falling demand in key global markets. It was further exacerbated by the typical end-of-year inventory adjustments and disruptions in shipping and supply chains caused by the turmoil in the Red Sea.

The management said in its Q3 earnings call that demand in export markets has been softening in recent quarters and might have bottomed out. The Red Sea crisis resulted in a 2-4 week delay in deliveries, but the firm expects to address the issue by next quarter. The Red Sea crisis resulted in a 2-4 week delay in deliveries, but the firm expects to address the issue by next quarter.

Yet, the path ahead may not be smooth. “We fear structural cracks appearing in the next six months on falling exports, uncertainty around market acceptance and competition-led price war once CPCB-IV becomes mainstay," said analysts at Nuvama Institutional Equities. However, robust domestic demand offset the weakness in exports. Cummins’ power generation business saw a volume growth of about 20% driven by data centres, commercial and residential realty, infrastructure and manufacturing. Amit Anwani, analyst at Prabhudas Lilladher, anticipates robust domestic demand driven by a strong power generation sector, traction in CPCB-IV products, improved margin profile, and significant growth potential in the distribution business.

In FY25, Cummins aims to outpace GDP growth twofold, targeting a minimum 100 basis points improvement in profit margin. Some analysts expect the rollout of new CPCB-IV engines to drive this growth.

CPCB-IV products command higher realizations and are expected to expand export opportunities in the developed markets. Cummins’ shares rallied by 65% in the past one year, trading at 40 times estimated FY25 earnings, which looks pricey. It suggests that investors are factoring in the brighter picture adequately, for now.

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