Sell Cummins India; target of Rs 332: YES Securities

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26 Aug, 2025 12:21

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YES Securities' research report on Cummins India

KKC’s PAT came in ahead of estimates as higher other income (incl. exceptional gain of Rs357mn due to interest on tax refund) & gross margin expansion negated the sluggish sales performance. Gross margin expanded by 757bps yoy due to favorable sales mix as distribution business was 37% of sales vs 26% in Q1FY20. Going forward, KKC expects gross margin to decline to sustainable level of 35% once other segments witness recovery in demand. Commercial/ Residential real estate activities expected to remain sluggish & will take longer time to recover, while data centers & healthcare would likely to support powergen biz. Rail & Mining (55% of industrial sales) to lead industrial biz recovery in next 2-3 quarters. Significant demand uncertainties persist in export markets, so recovery would be difficult to predict. We think fortunes of KKC’s powergen business are primarily dependent on realty & infra segments, which would be facing multiple demand headwind in medium term. Implementation of CPCB-IV is getting delayed by 2-3 quarters; weak end markets & price cautious customers won’t be able to absorb price hikes. KKC would struggle to maintain double digit growth on a sustainable basis given a structural downtrend in the core business. We remain highly skeptical on KKC’s margin recovery to 11%+ over FY20-FY22 due to, i) Unfavorable product mix (increasing share of industrials within domestic sales, delay in export revival), ii) Pricing pressure in India worse than global levels (LHP/ HHP pricing significantly below inflation levels in domestic market), iii) Competition getting fierce amidst slowing demand and iv) KKC’s inability to keep control over fixed costs.

Outlook

We also expect contraction in margins of Export biz in mid-term, foreseeing incremental competition over time. Retain ‘SELL’ with TP of Rs332 at 17x FY22E EPS. Deteriorating earnings quality (post tax non-core income as % of PAT at 56% in FY22E) & weakening return profile justify our target multiple.

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