Kotak Raises Cummins India Target Price On Expected Margin Expansion

Kotak Institutional Equities has upgraded the target price of Cummins India Ltd. as it expects quick expansion in their gross margins.

Cummins India may alter its defensive stance on pricing, resulting in improvement in gross margins, the brokerage said in a Nov. 23 note.

A positive outlook on margins from its peer, Kirloskar Oil Engines Ltd., also led Kotak to raise the target price for the heavy electricals firm.

Factoring in quick pricing moves and a 60-basis-point higher Ebitda margin, Kotak has revised Cummins India's target price from Rs 1,510 to Rs 1,560, implying an upside of about 15% from current levels.

Based on Cummins India's guidance of complete normalisation of gross margins to historical levels, the value still remains lower by 200 bps as targeted by the firm.

Cummins India is also looking at reducing production costs, improving engineering processes and product management, which will further aid gross margins of the firm, Kotak said.

The company reported its highest-ever sales in the second quarter of the fiscal. The June to September quarter saw revenue grow 13% year-on-year to Rs 1,680 crore.

Ebitda and profit after tax for the company grew 2% and 15% year-on-year to Rs 290 crore and Rs 25 crore, respectively. It was led by volume growth and inflation-led price hikes.

Ebitda margin was stable at about 15%, as it improved by 220 basis points, despite a 120-basis-point quarter-on-quarter drop in gross margins.

"We factor in a 16.5% margin in FY25 and are 10% higher on our standalone EPS estimates versus the consensus. We take comfort on margin from recent related-party disclosures for H1 FY23, suggesting a marked uptick in exports to Cummins U.K. and a YoY reduction in royalty payout in spite of growing sales," Kotak said.

The company, the brokerage said, is still 200 basis points short of the 400-basis-point gross margin improvement targeted by Cummins India.