Cummins India had a tough June quarter (Q1FY27). Standalone Ebitda declined marginally by 1.2% year-on-year to ₹616 crore despite a healthy 18% rise in revenue to ₹3,426 crore.
Not only did raw material costs increase sharply, other cost items also rose significantly. As a result, Cummins' gross margin contracted by about 350 basis points (bps) year-on-year to 33.5%. In contrast, FY26 Ebitda had grown 25%. Besides the challenge of protecting margins, the engine manufacturer will also undergo a management transition following the resignation of managing director Shveta Arya, effective 31 August.
Demand strength
Cummins' revenue growth in Q1FY27 was led by the domestic market, where revenue rose 22% year-on-year.
Exports, which contribute about 15% of revenue, fell marginally by 0.4%. This is the second consecutive quarter of exports decline, impacted by geopolitical headwinds.
While domestic demand is expected to remain steady, input cost pressures continue to weigh on profitability amid intense competition. The management said during the earnings call that it implemented a price hike in early July and will take further action depending on customer response.
Exports could also recover, as Cummins has secured board approval for related-party transactions (RPT), or sales to global affiliates, worth ₹3,000 crore for FY27—56% higher than FY26 RPT approvals. Over the past two years, actual RPTs have been 1.3-1.4 times the approved amount.
"Cummins India witnessed higher than expected margin contraction in Q1FY27 due to commodity cost headwinds and margin recovery will hinge on company's pricing action and the inflationary environment, which will be key monitorable," noted Nomura Global Markets Research, revising its FY27 Ebitda guidance downwards marginally by 1% while increasing its revenue projection by 4%.
Data centre boost
Domestic demand is being driven by new-age sectors such as data centres, where revenue surged 135% year-on-year in Q1FY27, alongside real estate and manufacturing.
The data centre segment now accounts for about 17% of total revenue, up from 8% a year ago. Robust demand from data centres should also boost Cummins' distribution business—which caters to after-sales services, spare parts and related support—over the next two to three years, the management said during the earnings call.
Margin risks
Even so, rising demand from data centres could create a new challenge if customers increasingly shift to higher-horsepower (hp) models such as the QSK78 and QSK95 (3,500-4,500 hp) from the currently popular QSK60 (2,000-3,000 hp). While Cummins manufactures the QSK60 in India, the higher-horsepower models are imported from the US, and such a demand shift could dilute the domestic entity's profit margins.
Cummins India's shares are down about 11% from their year-to-date high of ₹6,100 touched on 29 May, but valuations still offer little comfort.
"We expect Cummins India to deliver 15-16% earnings per share CAGR while valuations remain stretched at 57x and 47x FY27 and FY28 price-to-earnings ratio, capping an upside," said Nuvama Institutional Equities.