Cummins India Rating: sell — Draft Bill poses risk to long-term prospects

Urges consumer to shift to cleaner energy sources

In light of rising pollution levels, particularly in metros and large cities, the draft electricity Bill states that the electricity distributor shall ensure uninterrupted (24×7) power supply so there is no requirement of running diesel generating (DG) sets. The State Commission may consider a separate reliability charge for the distribution firm, if it needs funds for investment in infrastructure, to ensure the reliability of electricity supply to consumers.

Urges consumer to shift to cleaner energy sources: The Draft Bill further states consumers using DG sets as backup power shall endeavour to shift to cleaner technology (such as RE with battery storage) within 5 years of the date of publication of the Amendment or as per the timelines given by the State Commission – the timelines are still ambiguous.

Onus to lower DG set consumption on DISCOM: The Bill mandates the distribution licensee to simplify the process of providing temporary connections to consumers for construction activities or any other temporary usage.

Minor risk to DG set players in metro markets: Since this draft bill does not talk about a blanket ban on diesel genset usage, no material impact is expected over the near term. However, it does take away a portion of the addressable market in metros as well as prospective customers over the medium term.

First step not likely to be last: We believe the draft version may be followed by stringent measures in due course of time. We carry a structurally negative view on diesel gensets. The draft Bill solidifies our long-term thesis on industry evolution in India. Additionally, disruptions from solar energy and battery storage, among others, would only limit category growth. Notably, Domestic Powergen forms 27% of Cummins’ revenue. Moreover, the Distribution segment (28% of rev) drives growth from the installed bases of the Powergen and Industrial segments. Thus, there may be a risk to growth for 40–45% of Cummins’ revenue over the longer term.

Valuation and view: We maintain our long-term thesis on the company, as rising power availability poses a risk to the business structurally. We forecast an FY21–24E revenue /Ebitda/ adj. PAT CAGR of 15%/18%/14%. We maintain Sell , with TP of Rs 695/share. Cummins is a potential exports story (better captured in the unlisted entity) and fails to impress us as a proxy to domestic capex.