Cummins India: Higher valuations, slowing exports could be the new challenge
While growth has been good and domestic demand is improving, the stock seems to be running ahead of earnings.
Highlights
-
- Exports sluggish due to lower demand, geopolitical issues
-
- Easing cost pressure, better product mix to bring in higher margins
-
- Stock trading at 55 times fiscal 2026 estimated earnings
Cummins (CMP: Rs 3520, Market capitalisation: Rs 97574 crore, Stock Rating: underweight) stock has done phenomenally well. In the last one year, the stock has more than doubled — from around Rs 1,600 to Rs 3,520 apiece now. It is now trading at 55 times its fiscal 2026 estimated earnings, which is quite expensive.
While growth has been good and demand is improving, the stock seems to be running ahead of its earnings. The market is currently building too much of optimism, which might not materialise, particularly in the light of the slow growth in international markets and possible surprise on the margins front.
Result analysis
In Q4FY24, the company recorded a good 20 percent year-on-year (YoY) growth in consolidated revenues.
This was largely led by domestic revenue, which accounts for close to 70 percent of the company’s revenues, and grew by 38 percent. Domestic growth continues to be better, led by a strong demand from the industries. Demand from data centres, services, real estate, mining, marine, defence and a few other sectors have witnessed good demand.
On the other hand, exports remain challenging, reporting a steep 30 percent decline in revenues, led by lower demand and geopolitical issues impacting new orders, particularly from Europe, Middle East and Africa.
Importantly, its efforts to control cost, lower input prices and get a better mix of products have helped the company command better margins. During the quarter, its EBITDA margins expanded by 615 basis points to 23.22 per cent. While part of this is due to a one-off transaction of about Rs 60 crore, even adjusting for that, overall profitability has improved. It helped the company report a strong 54 percent YoY growth in net profits. For fiscal year 2024, net profit jumped 40 percent to Rs 1,721 crore.
The company does not expect a steep recovery from the international markets in the light of the geopolitical issues in its key markets. Some of its markets could take another 1-2 quarters before one could see a growth in demand. The domestic market will continue to grow, particularly in the light of the strong growth in industry capex, infrastructure spending, etc.
From July, the company hopes to implement the new pollution-related norms, which will shift the market for new products. The company has already created a basket of products, which will be compliant with the new norms. In terms of margins, while commodity prices pose a new challenge, the company is working or hoping to maintain margins at the current levels.
Bymoneycontrol
