Cummins powers up on strong Q4 results; near-term outlook upbeat

Cummins’ portfolio primarily consists of sub-800kW rated products, constituting 80% of its offerings.
Cummins’ portfolio primarily consists of sub-800kW rated products, constituting 80% of its offerings.

Summary

All said analysts have warned that demand after Q1 of FY24 needs close scrutiny due to rising product prices. Furthermore, supply chain disruptions remain a challenge, which impacted Q4 gross margin recovery

Shares of Cummins India Ltd rose nearly 5% in Friday’s trade on the National Stock Exchange, pushing the stock to a new 52-week high of 1735.85 apiece. Not only did the company see a robust March quarter (Q4FY23), but the near-term outlook is also bright.

Cummins, a manufacturer of diesel and natural gas engines for power generation, industrial, and automotive sectors, noted a significant pre-buy for its sub-800kW power generator sets. This is in preparation for the upcoming implementation of Central Pollution Control Board (CPCB-IV) regulations, set to be effective 1 July. The new guidelines pertain specifically to power generator sets.

Cummins’ portfolio primarily consists of sub-800kW rated products, constituting 80% of its offerings. These products are expected to undergo substantial modifications to comply with the new environmental standards. Consequently, prices are likely to increase 20-50%, leading to increased realization.

The management, in the earnings call, indicated that the new energy efficiency standards exceed global norms, thereby creating export opportunities. Cummins anticipates robust demand in foreign markets, fueled by the introduction of Fit-For-Market 3.0 products.

The company aims for products under the new regulations to augment both margins and customer value. Analysts at Kotak Institutional Equities note that alongside low capacity utilization of 60%, this strategy could drive margin improvement. In Q4, the Ebitda ((earnings before interest, tax, depreciation and amortization) margin increased by approximately 310 basis points year-on-year (YoY) to 16.9%.

All said analysts have warned that demand after Q1 of FY24 needs close scrutiny due to rising product prices. Furthermore, supply chain disruptions remain a challenge, which impacted Q4 gross margin recovery. Without providing any FY24 guidance, Cummins remains cautiously optimistic, noting strong demand in sectors such as infrastructure, data centres, hospitality, and manufacturing. Commercial and residential real estate markets are also showing signs of recovery.

“Despite factoring in higher industry growth rate with largely stable margins, we find limited upside in Cummins while clouds of CPCB-IV norms (pricing/cost challenges) may lead to slower growth," said analysts at Nuvama Research in a report on 25 May.

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