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Cummins India Limited Equity Research Summary (May 29, 2025)

Company Update

Cummins India Limited, the largest entity of the Cummins Group in India, specializes in manufacturing diesel and gas engines for power generation, industrial, and automotive sectors. The company faces margin uncertainties due to CPCB regulations and competitive pricing pressures.

Performance Overview

• 4QFY25 Results: EBITDA was 14% lower than expected, with sales missing by 19%. Year-over-year gross margins rose to 36.1%. Management guided for double-digit sales growth in FY26.
• Full-Year 2025: EBITDA declined 14% compared to expectations, yet gross margins improved due to cost optimization and product mix adjustments.
• Segment Analysis: Domestic powergen sales fell 7% YoY due to CPCB II-related pre-buying, but industrial and distribution segments showed growth. Exports surged 39% YoY in 4QFY25 and 6% YoY for FY25.

Key Risks and Uncertainties

• CPCB Pricing and Competition: Margins may be capped; CPCB IV+ pricing stabilization is expected in 1-2 quarters. This, along with end-market resistance, could delay margin improvements.
• Policy Impacts: The government's draft amendment for shifting to renewable energy may negatively affect medium-term genset demand.
• Macroeconomic Factors: Export growth is uncertain due to global conditions.
• Margin Concerns: Despite improvements, competitive dynamics may limit pricing power.

Valuation and Target

• Rating: Underperform, with a price target of INR2,405, indicating a 19% downside from current price.
• Justification: Valuation based on 25x PE for FY27E (20% below 10-year average of 31x). Upside risks include industry pricing discipline and faster export recovery.

Future Outlook

• Medium-Term: FY25-27 EPS CAGR of 18%, driven by domestic economic improvement and potential export growth.
• Growth Segments: Commercial real estate, infrastructure, and quick commerce warehouses could drive demand.
• Sustainability Focus: ESG commitments include reducing waste and enhancing energy efficiency, potentially aiding long-term resilience.

Financial Highlights

• Revenue Growth: Steady in recent years (e.g., 41.8% in FY22), but margin variability around CPCB impacts.
• EBITDA Trends: Improved YoY in 2025 due to cost cuts, but subject to competitive pressures.
• Dividend Yield: Around 1.6%, moderate discretionary income generation.

Overall Assessment

Cummins faces challenges in maintaining margins due to regulatory changes and competition, leading to an Underperform rating. Ry investors should monitor pricing stability and export performance for potential risks.