Competitive Edge With CPCB IV+ Engines And Data Center Expansion Will Fuel Future Success

Key Takeaways

• Cummins India anticipates strong revenue growth driven by domestic demand and competitive positioning with CPCB IV+ engines.
  
• Expansion into data centers and improved supply chain efficiency indicate potential for enhanced margins and earnings growth.
  
• Decreased export sales and increased competition in key segments could challenge profitability, while geopolitical uncertainties exacerbate revenue stream fluctuations.

Catalysts

Engages in the design, manufacture, distribution, and service of engines, generator sets, and related technologies in India, Nepal, and Bhutan.

• Cummins India anticipates double-digit revenue growth for the fiscal year 2024-'25, indicating strong future sales potential driven by domestic demand and ongoing efforts in export markets. This is a positive sign for future revenue growth.
  
• With the full rollout of CPCB IV+ engines, Cummins India is positioned competitively in a market requiring higher emission standards. If price stabilization occurs as expected in the next few quarters, it could enhance net margins through sustained pricing power.
  
• Cummins India is actively working on cost management and material margin improvement programs, which are expected to provide sustainable improvements in margins, supporting future earnings growth.
  
• Expansion into the data centers segment is highlighted as a significant growth opportunity, given the global increase in demand driven by AI and digital transformations, indicating potential revenue and margin expansion.
  
• The expected improvements in the supply chain and localized production are likely to increase operational efficiency, contributing to improved gross margins and higher overall earnings.

Cummins India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cummins India's revenue will grow by 11.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.1% today to 18.1% in 3 years time.
• Analysts expect earnings to reach ₹24.6 billion (and earnings per share of ₹88.17) by about December 2027, up from ₹19.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹27.5 billion in earnings, and the most bearish expecting ₹21.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 60.7x on those 2027 earnings, up from 51.2x today. This future PE is greater than the current PE for the IN Machinery industry at 24.4x.
• Analysts expect the number of shares outstanding to grow by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.52%, as per the Simply Wall St company report.

Cummins India Future Earnings Per Share Growth

Risks

• The decrease in export sales by 13% compared to the same quarter last year indicates potential challenges in international markets, which could impact overall revenue growth.
  
• Increased competition in the CPCB IV+ segment as other players introduce their products could lead to market share erosion, affecting future revenues and profitability.
  
• Mixed geopolitical signals and muted demand in key export regions like the Middle East, Asia Pacific, and Africa create uncertainties in the export business, potentially impacting future revenue streams.
  
• Potential fluctuations in pricing due to competition and the introduction of new products could affect profit margins if price adjustments are needed to maintain competitiveness.
  
• Dependence on the projects business, which causes variability in gross margins, could lead to inconsistent profitability if the mix leans more heavily on lower-margin projects.

Valuation

• The analysts have a consensus price target of ₹3660.79 for Cummins India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹4867.0, and the most bearish reporting a price target of just ₹2250.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹135.9 billion, earnings will come to ₹24.6 billion, and it would be trading on a PE ratio of 60.7x, assuming you use a discount rate of 13.5%.
• Given the current share price of ₹3603.65, the analyst's price target of ₹3660.79 is 1.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.