Shares of Cummins India Ltd. jumped the most in three months after Kotak Institutional Equities increased its fair value for the stock citing business benefits from new pollution norms and growth in data centres.
The Central Pollution Control Board IV emission standards would boost pricing power of Cummins India as the transition is much steeper than to CPCB-II, the brokerage said. And peers do not have the “margin to cede this time”, it said.
Cummins India will be able to leverage technology support from the parent and related India ecosystem, Kotak said. “Key peers to Cummins have seen margin decline to single-digit levels or operate at negative margin in the domestic market.”
Growth in data centres will also increase demand for alternative power sources like generators. A recent report by JLL suggests a strong 30% growth in the installed base of data centers in 2020 as capacity addition is happening at a much faster pace. JLL expects the installed base to more than double over 2020-23, suggesting a 35% annualised growth in addition.
“We note that Cummins has a dominant market share in the segment, both in India and globally,” Kotak said. “Related growth in the data centre market should thus also be margin accretive.”
The brokerage expects the company’s margins to improve due to the 70-basis-point decline in royalty rate in FY21.
“Overall benefit on margin was masked in FY21 due to increase in absolute quantum of support services, which is a fixed cost and not linked to sales,” Kotak said. “We build in combined payout to parent to FY19 levels of 2.5% of sales from FY22 versus 3.3-3.4% seen in FY2021.”
Citing these benefits, Kotak increased the fair value of the stock to Rs 1,030 from Rs 890 earlier.
Shares of Cummins India gained as much as 6.3%, the most since March 3, on Wednesday to Rs 904.30. The stock has jumped 58% year-to-date compared with a 11.3% rise in the S&P BSE Sensex Index.
Of the 16 analysts tracking Cummins, 17 have a ‘buy’ rating, eight suggest ‘hold’ and eight recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies a downside of 11.3%.