Cummins India is upbeat after exports boosted Q4. But competition's heating up.
Cummins India Ltd's standalone Ebitda of ₹520 crore for the March quarter (Q4FY25) represents a 7% year-on-year rise, excluding a one-off cost-saving of ₹60 crore. This growth is subdued when compared with the 27% increase in Ebitda for the nine months ended December (9MFY25).
In fact, Cummins's reported Q4FY25 Ebitda is down 4.5% without adjusting for the one-off savings. Yet, the shares are up about 13% since the results were announced last week. Investors seem upbeat about the company's recovery in exports and robust growth outlook across key segments, further aided by cost efficiency.
However, competition can dent a part of the margins for Cummins, a manufacturer of diesel and natural gas engines for the power generation, industrial, and automotive sectors.
Cummins's FY25 revenue surpassed the milestone of ₹10,000 crore, growing 15% year-on-year. Lower raw material and staff costs meant 17% Ebitda growth to ₹2,100 crore.
The management expects to maintain double-digit revenue growth rate in FY26, aided by positive domestic demand outlook and sustained margins (FY25 gross margin: 36%) thanks to cost savings.
Strong growth is envisaged from key sectors such as residential realty, commercial reality, infra-related segments, data centers and emerging sectors like quick commerce for their warehousing needs. Further, the industrial segment is expected to benefit from railways ordering traction and momentum in construction.
'We raise our FY26/FY27F Ebitda estimates by 2% as we factor in management's gross margin guidance and focus on cost efficiencies," Nomura Global Markets Research said in a 30 May report. The brokerage estimates Cummins India to report a net profit CAGR of 15% over FY25-28.
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Cummins's pricing challenges
Cummins' growth prospects are driven mainly by its largest segment—power generation, contributing almost 40% of FY25 sales, and comprising gensets and other similar products.
The Central Pollution Control Board of India (CPCB) implemented a change in emission rules from July 2024 in the gensets market called CPCB IV+. Current sales are still at 80-85% of volumes sold under the older rules. This is expected to normalize from Q2/Q3FY26.
While several companies have launched CPCB IV+ compliant products leading to stiffer competition, Cummins's management said the company has been able to largely hold on to its pricing.
Cummins's FY25 power generation revenue grew by 14% even as it dropped 7% in Q4FY25 on a high base. Industrial segment revenue, contributing 16% of total, was up 29% in FY25, driven by sustained momentum in construction and railways orders.
Overall, Cummins's Q4FY25 revenue stood at ₹2,450 crore, up a modest 6% year-on-year on a high base given the pre-buying of CPCB II products in Q4FY24, before the new norms kicked in. Q4FY25 domestic revenue was up just 1%, but exports jumped 39%, led by Latin American and European markets.
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Exports, accounting for 17% of FY25 revenue, grew 41% in H2FY25, versus an 18% drop in H1FY25, signalling the worst is over. Exports are facing pressure due to price disruptions caused by dumping from other countries and muted demand due to general economic weakness.
Cummins's fourth-quarter gross margin expanded 116 basis points year-on-year, thanks to lower commodity prices and a change in product mix.
As things stand, the Cummins stock trades at about 44 times FY26 estimated earnings, showed Bloomberg data.
To be sure, post the new CPCB upgrade, the pricing environment remains challenging, accompanied by stiffer competition. In view of this, some such as Motilal Oswal Financial Services reckon their estimates factor in a gross margin of 35% in FY26/27 versus 36% in FY25 as they expect some gross margin contraction after price levels for CPCB IV+ normalize.
Increase in commodity prices and uneven exports recovery are other downside risks to watch out for.
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