The domestic capex cycle is expected to have accelerated in Q2FY25, and demand in the long term should remain robust. One of the beneficiaries will be Cummins India which should benefit from the strong demand across sectors, good R&D support from multinational parent, Cummins Inc., and strong repair and maintenance business. End-user industries generating demand include data centres, manufacturing, general infrastructure, rental, hospitality, and real estate. Revenue and earnings growth over the FY24-27 period should be in the high teens (18-19 per cent).
Diesel generators are in demand across sectors, and there are strong export opportunities as well since India could be a global export hub. Cummins has gained market share across categories with access to the parent’s technology enabling rapid rollout of new products, and it has an excellent distribution network.
Traditionally gensets are linked to power deficits but they are also standby power sources, even in developed countries for data centres among other industries. Large scale infrastructure and construction as is occurring in India creates another area of demand for gensets. Data centres in India will require 1,700 MW of power by March 2025, up from around 800 MW in 2022. This entails investments of $5 billion and the data centre pipeline indicates over 3,000 MW is required, implying a capex of $23 billion. Cummins is the market leader in gensets to data centres.
Cummins India is also tech-agnostic, with capacity in diesel, gas and electric and the scale up of CPCB 4+ emission norms will probably lead to market share gains. It has the technological capacity to adapt to new emission norms and this has driven it to 50 per cent market share in the premium HHP (high horsepower) segment. But it suffers from being relatively expensive in a price sensitive market in the more competitive LHP segment.
It has three national level distributors to manage region specific areas. Distribution is a critical component contributing 25 per cent to revenue. It is seeking deeper penetration to Tier III and Tier IV. Cummins has also invested in parts, services and network enhancement. Growth in sales of spare parts, enhanced warranties, uptime and service extension to more areas is driving growth in the aftermarket. Demand softening is holding back exports but this should grow in the long term, given competitive advantages.
Q1FY25 saw a slowdown in government activity due to elections but also strong pre-buying as the market was anticipating the imposition of stricter CPCB4+ emissions norms. From Q2 onwards there should be a pickup. Defence sector ordering will also ramp up from Q3FY25 onward. Raw material costs remain fairly benign. Copper and aluminium prices have eased by 2 per cent and 4 per cent, respectively year-on-year (Y-o-Y) and zinc prices are flat Y-o-Y. For Cummins and competitors, this could mean margin expansion.
Demand is driven by channel inventory filling, along with fresh demand. The festive season will also drive genset demand in Q3FY25. Genset prices are higher by 20-40 per cent due to changed emission norms and strong demand and may remain high until the festive season, after which we can expect moderation. Volumes may have improved Y-o-Y but segments like real estate, MSMEs did pre-buying and hence these segments would generate less demand.
Volumes are higher on a Y-o-Y basis but there may be a sequential negative impact on volumes due to pre-buying. The HHP demand is driven by the fast-growing data centre market which is not price sensitive. While there are positive domestic factors for the company, a ‘sell’ call by Goldman Sachs citing poor export demand and greater adoption of battery energy storage has pushed down Cummins India stock price by 4.5 per cent in trade on Friday.
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First Published: Oct 11 2024 | 9:24 PM IST
