Market Adoption Of CPCB IV+ Products Will Strengthen Competitive Position In Advanced Technology Segments

Key Takeaways

• Streamlining operations through non-core asset sales and efficiency improvements could enhance net margins and core competency focus.
  
• Strong domestic PowerGen growth and innovative product acceptance position Cummins India for sustained revenue and improved competitive edge in technology.
  
• Unstable pricing and cyclical industry trends could disrupt Cummins India's margins and revenue consistency, with geopolitical tensions further complicating export prospects.

Catalysts

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

• The sale of Cummins Sales & Service Private Limited is set to streamline operations, allowing Cummins India to focus on core competencies, potentially improving net margins as dealer model efficiency increases.
  
• Strong growth in the domestic PowerGen segment, driven by infrastructure growth and data center demands, suggests sustained future revenue increase, particularly as pricing stabilizes and market adoption of CPCB IV+ settles in.
  
• The introduction and acceptance of CPCB IV+ products enhance Cummins India's competitive positioning in advanced technology segments, likely improving revenue and possibly stabilizing or enhancing net margins as market acceptance grows.
  
• Increased CapEx plans, with potential parent company investment in India, suggest future capacity expansion and efficiency improvements that could boost production capabilities and revenue, possibly enhancing earnings in the long term.
  
• Continued double-digit growth outlook for full-year 2024-'25 indicates a sustained positive trajectory, with improved order execution and backlog clearance supporting future revenue growth.

Cummins India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cummins India's revenue will grow by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.6% today to 17.3% in 3 years time.
• Analysts expect earnings to reach ₹24.0 billion (and earnings per share of ₹86.34) by about March 2028, up from ₹20.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹26.7 billion in earnings, and the most bearish expecting ₹21.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 58.2x on those 2028 earnings, up from 41.4x today. This future PE is greater than the current PE for the IN Machinery industry at 28.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.05%, as per the Simply Wall St company report.

Cummins India Future Earnings Per Share Growth

Risks

• The ongoing evaluation of the impact of U.S. tariffs and geopolitical issues could potentially disrupt global demand and supply chains, affecting Cummins India's export revenues.
  
• There is uncertainty around pricing stabilization for CPCB IV+ products, which could impact margins if competitive pressures force price reductions.
  
• The divestment of the subsidiary Cummins Sales & Service Private Limited may remove a revenue-generating entity from Cummins India Limited’s financials, impacting overall earnings.
  
• The cyclical nature of the construction segment could affect industrial sales growth, potentially leading to revenue fluctuations.
  
• The growth sustainability in certain segments like data centers and rail heavily depends on tender releases and execution, posing a risk to consistent revenue and order backlog fulfillment.

Valuation

• The analysts have a consensus price target of ₹3394.042 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 ₹4597.0, and the most bearish reporting a price target of just ₹2213.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹138.4 billion, earnings will come to ₹24.0 billion, and it would be trading on a PE ratio of 58.2x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹3000.85, the analyst price target of ₹3394.04 is 11.6% higher.
• 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.