Cummins India stock has been on a roll this year. The stock is up 41 percent year-to-date (YTD) against a 5% gain in the equity benchmark Sensex.
The stock hit its 52-week high of ₹1,391.80 on November 17, 2022. Brokerage firm Kotak Institutional Equities (Kotak Securities) has raised the target price for the stock to ₹1,560 from ₹1,510 earlier while maintaining a buy call.
In a report on November 22, Kotak highlighted that Kirloskar Oil Engines (KOEL) has improved its gross margin and EBITDA margin trajectory on a year-on-year (YoY) basis in the recent few quarters and has shared passing on 70-80% of the raw material (RM) cost pressures. In contrast, Cummins’ gross margin and EBITDA margin are both down YoY, potentially reflecting the defensive stance on pricing.
Kotak said Cummins might alter its defensive stance on pricing after seeing the gross margin improvement and positive outlook on margin from its key peer in Kirloskar Oil Engines.
Apart from the pricing argument, Kotak also underscored the margin from the growing influence of the distribution segment.
"The related sales have grown faster than product sales in the first half of FY23 (1HFY23) and the less noticed contribution coming from associates is also becoming more prominent," Kotak said.
"This is one segment where Cummins’ endeavours have started to play out—(1) reconditioning engines and providing warranty as well, (2) going beyond the engine and doing the whole powertrain for rail and (3) enhanced focus on customer outreach," said the brokerage.
Moreover, Kotak observed other parts of Cummins’ offering where it scores over peers including exports (becomes a bigger advantage after CPCB IV) and data centers (Cummins virtually as a monopoly).
Kotak factors in a nearly 16.5% margin in FY2025 and are nearly 10% higher on our standalone EPS (earnings per share) estimates versus consensus.
"We take comfort on margin from recent related party disclosures for 1HFY23, suggesting a marked uptick in exports to Cummins UK and YoY reduction in royalty payout in spite of growing sales. We are still 200 bps short of the 400 bps improvement targeted by Cummins India as it aims to normalize gross margin to historical levels fully," said Kotak.
For the September quarter of the current financial year (Q2FY23), the company's consolidated profit after tax (PAT) stood at ₹267.31 crore, up 21% against ₹221.03 crore in the same quarter last year.
Revenue from operations for the said quarter stood at ₹1,928.85 crore against ₹1,692.37 crore in Q2FY22, up 14% YoY.
Brokerage firm Prabhudas Lilladher gave an 'accumulate' rating on the stock with a target price of ₹1,514 after the Q2 earnings.
"We believe Cummins India is well placed to benefit in the long run given (1) healthy demand outlook, (2) reviving margin profile, (3) continued momentum in exports market, (4) implementation of CPCB-IV, and (5) technology-driven new product launches," said Prabhudas Lilladher.
According to a MintGenie poll, an average of 24 analysts have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firms. These do not represent the views of MintGenie.