Cummins India Limited

Quarter Four Earnings Conference Call, 2015-16

May 26, 2016

Anant:

Good afternoon, ladies and gentlemen. Im happy to

convey the results of the last fiscal year 15-16 as well
as the January through March quarter. And certainly
Im happy to relay that CIL legal entity broke a new
record in terms of revenue in its history in the fiscal
year with a sales of 4603 crores. This has happened
at a time when the global markets have been
depressed and the Indian economy yet to fully take off
and so we feel pretty good about that. We believe that
we have gained market share in many of our
domestic segments which is where we saw domestic
sales improve in the year by 13%. Profit Before Tax
was 906 crores, which improved by 6% over the prior
fiscal year, and profitability was maintained despite
the headwinds of exports decline. In the quarter, sales
were 1038 crores, which actually declined by 7% over
the same quarter last year. And that was entirely due
to a 30% decline in exports over the same quarter last
year. Again, despite this, we were able to maintain
profitability largely.
As we look ahead, we see continued growth in the
domestic side of our business, and a flat to slightly
down picture on exports. And we continue to invest in
new products, capabilities in our human resources,
cost reduction and customer focus. And you can
count on us outperforming in our industry and
delivering top quartile results. So with that, Ill turn it
over to your questions. Thank you.

Moderator:

Thank you very much, sir. So participants, with this,

we open it for Q&A session. Should you wish to ask
questions, please press 0 then 1 on your
telephone keypad and wait for your name to be
announced. Id like to repeat. Participants, should you
wish to ask question, please press 0 then 1 on
your telephone keypad. So we have the first question
from Mr. Ashutosh from HSBC. Your line is un-muted,
you may please go ahead and ask your question.

Ashutosh:

Good morning, gentlemen. Two questions.

Page 1 of 24

Anant:

Good morning.

Ashutosh:

Just to understand how long do you see the

weakness in the export continue, and is there any
way the company can look at different markets
especially in the Middle East or Africa where we can
be able to kind of compensate for the drop? Thats
one.
And second, if you could give the usual breakup of
your revenues especially as per kVAs.

Anant:

Yes. So, the answer to your first question is we do not

know. We do not know how long the global softness
will continue. I wish I had a better news. But right
now, there are no indications out there that may
cause optimism on our part. And how long thats
going to continue is anyones guess I guess. So thats
were its at.
In terms of your second question, lets go to the kVAs
income.

Ashutosh:

Meanwhile, sir, just one small question. On the

domestic business, any specific segment which has
done well during the quarter?

Anant:

In the domestic segment I would say that weve done

well pretty much across the board, but the one that
we feel good about is the powergen segment
sequentially. Weve been able to hold our sales out
there. Weve seen some growth. But again, I dont
think sequentially will give you a good picture
because theres too much variation that goes on.

Ashutosh:
Anant:

Sure.
So again, back to your question around the sales
composition, I would say that our LHP composition
was about 10%. The midrange was about 25%, heavy
duty was about 7%, high horse power 30%. Our
distribution business was about 25%.

Ashutosh:

Sure. And similarly, would I be able to get a breakup

of the export segment?

Page 2 of 24

Anant:

Yes, definitely. Okay. So when you look at our

exports, we exported about 325 crores in the quarter,
out of which low horsepower was about 70 crores,
midrange was about 100 crores, heavy duty was
about 17 or 18 crores, high horsepower 120 crores
and the rest was spare parts, about 50 crores.

Ashutosh:

Sure. So the earlier sales make a composition which

you gave us for the total revenues, right, including
exports?

Anant:

Correct. Yes.

Ashutosh:

Sir, given the current scenario, where would you kind

of guide for the next year in terms of top line growth
both at the exports as well as the domestic business?

Anant:

Right now my guidance should be for domestic

somewhere in the 8-12% range and exports being flat
with some downward pressure.

Ashutosh:

Sure. Thank you, Mr. Taulalicar. All the best to you.

Anant:

Thank you.

Moderator:

Thank you very much. We have the next question

from Renu, from IFL. The line is un-muted, you may
please go ahead and ask your question.

Renu:

Good afternoon, sir.

Anant:

Good afternoon.

Renu:

Sir, my first question is though we have seen a bit of

softness in sales, if you look at the gross margins we
have seen... I know sequentially its not right to
compare but overall gross margins of 37% look
reasonably healthy. So apart from drop in exports,
has there been any particular mix factor which has
helped us to get this kind of expansion gross margins,
and how sustainable you think it would be for the next
12-15 months?

Anant:

So yeah, the number that you quoted, 37% is a

material margin, not gross margin.

Page 3 of 24

Renu:

Yes, sorry, material margin.

Anant:

So having said that, thats okay. What I would say is

we had some one-time charges last quarter. And that
was approximately 20 crores which consisted of
excess and obsolete and scrap which obviously was a
one-time. So it didnt carry over in this particular
quarter. So this quarter actually is a better reflection
of our performance. And in terms of your question
around sustainability, I would say not at the material
margin level, but when you look at an operating
margin level, we should see sustainability.

Renu:

So the EBITA, excluding the other operating income

14% should be sustainable?

Anant:

Yes.

Renu:

Okay. Sir, then just understanding a little more on the

segmentwise, you did share HP wise split, will it be
possible for you to share the Rupee value of sales
split between powergen, auto, industrial, distribution
and how have they performed for the quarter and
overall for the year?

Anant:

So when you look at the quarter, our domestic sales

were about 715 crores, out of which power gen was
about 290-odd crores. The industrial business was
about 150, auto was about 25, distribution was about
235. From a full-year basis, our domestic sales were
2940 crores of which power gen was 1250, industrial
was 560, auto was 70, distribution was 985 crores.
Then some miscellaneous about some 50-odd so
revenue items.

Renu:

Right. And, sir, how is the growth outlook that we are

seeing? Other industrial has now sustained to that
150-170 crores kind of volumes in terms of sales
value. So how are we looking these growth numbers
to sustain in the next one to one-and-a-half years both
in power gen and industrial?

Anant:

Yeah, Im actually relatively more bullish on our

industrial business which is the off-highway, which
includes applications such as construction, mining,
rail, marine, compressor etc. And I say that because

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the current government is doing the right thing by

priming the pump. So we are actually spending
money versus just talk. And we are clearly seeing
that. So the road construction, the mining activities,
railways, all that is now working at a significantly
higher level as compared to two years ago under the
prior government. And that is clearly driving demand
for our products. And Im feeling better that if this is
sustained by the government, at some point, private
industry will also start kicking in terms of capital
investments. So thats where I sit on the industrial
which is why we are guiding overall domestically
somewhere in that 8-12% growth range for the year.
Powergen also we should continue to see growth,
perhaps not as robust as the industrial, where my
guidance is.
Renu:

Okay. And sir, one last question.

Anant:

In terms of our distribution business, again, thats not

a cyclical business. Weve continued to show growth
in the 5-10% range in a sustained manner in that
business. Auto, of course, has a smaller exposure to
CIL, but again, the medium and commercial heavy
truck industry, truck and bus industry, has grown
significantly in the last year, year-and-a-half by almost
30% I would say. And we expect that to grow another
10% or so.

Renu:

Right. Sir, my last question is just to understand a

little more with respect to what exactly are the engine
ranges today that CIL is making and is planning to
further expand. Recently we had seen that the 9-litre
engine expansion coming in from parent has been
happening in the 100% Cummins Inc. entity, not in the
Indian listed arm. At the same time some restructuring
is planned for the Pirangut facility. So one has to
understand over a period of time where do we see our
engine in-house manufactured engine range moving
into and what would be the growth drivers where we
can see incremental new products being added here.

Anant:

I would say thats not how exactly one should look at

it, not certainly from a financial perspective. CIL will
always be Cummins single face to the domestic

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market. Where product is made is another issue. I say

that because for a number of years we have
outsourced our smallest engines to Simpson. These
are products that are used in our power generation
segment. But obviously we manage that sourcing
activity, we make sure that it meets our cost quality
and delivery expectations. So whether its made
inside CIL or outside frankly has nothing to do to the
P&L of CIL. So that is one thing that should be
properly understood. So the key point is that no
matter what the product range is, it will always flow
through CILs P&L for the domestic market. So that is
the domestic side, which frankly at least for the next
foreseeable future is the one bright spot in the world
today. So thats one.
The second thing is when you look at CIL exports
opportunity, we have leveraged certainly what
capacity we had to export certain ranges of products
and those will continue into the future. Right now, of
course, those are facing bad times because of the
global situation. But obviously at some point, that will
change.
Renu:

Anant:

But any near to long-term plan, as in Kothrud we have

the HHP facility there. So, do we plan to reallocate
that at a later date from the city centre to outside the
city or other where we have light facilities?
There are no plans.

Renu:

No plans as of now on that?

Anant:

No plans as of now, yes.

Renu:

Thank you so much, sir, and all the best.

Anant:

Thank you.

Moderator:

Thank you very much. We have the next question

from Mr. Sandeep Tulsian from JM Financials. Your
line is un-muted, you may please go ahead and ask
your question.

Sandeep:

Yeah. A very good afternoon, sir.

Anant:

Good afternoon.

Page 6 of 24

Sandeep:

Sir, my first question is on the market share that were

having in the domestic DG set industry, how has that
moved, as in at what rate has the industry grown and
at what rate has CIL grown in the domestic power
gen. And if you could give us some colour in the
market share across different categories at the end of
FY16.

Anant:

Yeah. So if you look at agencies like Frost and

Sullivan, then they would say that the power gen
market, the DG set market in India has been
approximately flat in this period were talking about,
these two fiscal years. And in that period, our power
gen business, as you look at it, has grown by 18%. So
that tells us that we have picked up significant share
across the board. So thats what I would say to
answer your question.

Sandeep:

Any specific movement in terms of different subsegments, mid kVA, low kVA?

Anant:

No, I think its been across the board. I feel pretty

comfortable that we gained ground across the board
across all our competitors. The only exception to that I
would say could be at the very lowest end. Im talking
about below 12 kVA where we frankly dont
participate in any significant way. But other than that,
in the range that we have played, I believe we played
better than others.

Sandeep:

And, sir, my second question is on the consolidation

of manufacturing facilities that we had across various
places and weve seen capacities either move into
Phaltan and now we are contemplating to outsource
the low kVA engines manufactured in the company.
So theres a lot of land band now available to the
company and Daman and various plots in Pune. So
what are your though t process on monetising that
from a near-to-medium-term perspective?
Yeah, so thats a good question. Daman we have
discontinued operation now for almost a couple of
years. So now we are getting ready to sell that
property. And given the bureaucracy and corruption
that goes on in India, it will take us some period of
time to do it in a clean way. So I dont have a

Anant:

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prediction for you when that could happen.

Optimistically certainly in this fiscal year youll see that
transaction take place. I dont believe it will be
materially significant to CIL, not materially significant.
Itll be a few crores, but again, not something that will
significantly alter our bottom line numbers, because
its a relatively smaller facility in a place like Daman.
Now, when you look at the other facility, Pirangut, that
were talking about, by shutting Pirangut down and
outsourcing that operation, this is going to have a
benefit to CILs bottom line. So this is a positive
actually from a financial perspective. And this will
have a benefit about 10 - 11 crores to the bottom line
per year. So thats one thing that needs to be
understood. So we are trying to move it as quickly as
practical. So by some time July-August timeframe, we
hopefully will be done with that operational action.
And then subsequently we will start marketing the
property which is the land and the building that we
own. And yes, there should be a good, a better I
would say gain on the sale of that particular property.
Again, I dont have any estimates for you because we
really havent engaged our brokers yet and so on. So
its based in Pirangut which is just outside of Pune. So
you think that the valuation would be better there as
compared to Daman. And its also a larger property.
So thats my response to your question.
Sandeep:

Sir, my last question is on, of course, one of the

facilities was mentioned in the presentation that has
been moving from Seymour Engine Plant to PHP in
Phaltan. Theres another factory of Cummins Inc. in
Kent, UK, part of which productions was also
expected to move to India Phaltan facility. So which
range of engines are being manufactured? Does it fall
under CIL entity or Cummins Inc. entity in India, if you
could just elaborate on that.

Anant:

So Seymour Plant, the line that we are talking about

is the 19-litre product. So we call it the K19 or the
electronic version is referred to as the QSK19. And
thats what under consideration. So the decisions with
made to move it out. Were still in the final discussions
whether it should move to India, China, etc. So its not
a completely done deal yet, but obviously we are
putting our best foot forward. It is not going to be into

Page 8 of 24

CIL though. Let me make that very clear. In terms of

manufacturing, again, as we market those products
into India, CIL will be the only outfit that does that.
But to the extent that theres an exports opportunity,
that will be done through CTIL out of Phaltan. So,
thats the situation on the 19 litre from Seymour.
Now, what will happen is aside from one thing we
have to consider is if we get that business which we
are hopeful for, it will essentially double the volumes
in a country of being manufactured. So, the 19 litre
product that CIL manufactures is at about 10 a day,
10 engines per day. And if we transfer all of what
Seymour has, that will be another 10 or so a day. So,
as we do that, obviously well be sitting down with all
our suppliers and re-negotiating all the contracts. And
to that extent certainly it should help CILs cost
structure. So, that will be a certain benefit that CIL will
certainly see. Then, to your question on the Kent
plant, so what we are doing is a portion of that
generator manufacturing which is on the high
horsepower side, these would be high horsepower
generators. That production will be shifted to India
again into the India Phaltan high horsepower engine
plant. So, today its manufacturing a 23-litre engine, it
will continue to do that but well add some generators
assembly operations to that same plant and we will
start exporting those generator sets to certain
countries where it makes sense from a logistics
perspective, because these are large volume
products when you have a generator of that size, so
youre moving a lot of volumes. So, it has to make
sense from a total cost of ownership perspective.
So, again, CIL legal entity will not see the
impact of that Kent production moving into India.
Sandeep:

Okay. Got it, sir. Thanks for verifying my queries.

Thats it from my side.

Anant:

Thank you.

Moderator:

Thank you very much. We have the next question

from Mr. Ravi Swaminathan from Spark Capital. The
line is un-muted. You may please go ahead and ask
your question.

Page 9 of 24

Ravi Swaminathan:

Good afternoon, sir. Thanks for taking my question.

Anant:

Good afternoon. Youre welcome

Ravi Swaminathan:

Sir, just wanted to know in the export market which

were the markets which had seen a fall during the
quarter? Should we look at it like that or which were
the broad regions which saw weakness in the
market?

Anant:

Yeah, yeah, absolutely. I will share the numbers with

you, but again Ill share it with a couple of caveats.
You should not look at the changes in these sales
numbers as necessarily market changes. So, thats
my caution to you because it could be an impact of
our supply chain, whether lets say we had some
delivery issues in the prior quarter, we caught up a
little bit this quarter, or there might have been excess
stocks sitting in those receiving countries and
therefore the demand on us was down and now its
catching up
So, all of that noise is baked into these numbers, my
only caution to you. But having said that, when you
look at our high horsepower exports, we saw in the
US the exports dipped down by 22%. The China
exports actually grew by 27%, Middle East dropped
by 40%, Europe dropped by almost 50%, and Brazil
grew by a 1000% on a very low base being almost
negligible in the earlier quarter. Okay. Very small
numbers but thats why youre seeing these kind of
wild swings. Africa was down by 26% and rest of Asia
was up by 13%.
So, again what Ive just told you is completely
meaningless by the way. So, but if you ask me to step
back and say whats going on out here, right, what is
really going on, then I would say that the US market is
about flat. China market is down. Again, when I say
these things, Im trying to say those in a slightly longer
term horizon, not quarter by quarter. So, I would take
these by the base line being something like almost
about six months kind of a picture. So, if you look at it
six months back to six months the most recent US
was about flat, China is down, Middle East is about
flat, Europe is about flat, Brazil is down significantly,
Africa is down, rest of Asia is down. Thats my best

Page 10 of 24

attempt to give you some guidance on markets versus

looking at our sales numbers. Does that help?
Ravi Swaminathan:

Yeah. And you had mentioned in earlier calls that our

share roughly in the export market is roughly around
5%, something of that sort. Given this low base that
we have, if the say market sees and improvement
from here, in all these markets that you had
mentioned, do we see significant growth that is
possible for us from here?

Anant:

Okay. So, the number that I quoted you earlier about

purely high horsepower exports. When you look at our
low horsepower, then the picture looks like Africa was
down 20% in the quarter, Mexico was down 30%,
Latin America was down 60%, Europe was up 80%,
Middle East was up 9%, rest of Asia was down 30%,
et cetera. Okay again, fairly meaningless numbers.

Ravi Swaminathan:

Anant:

Ravi Swaminathan:

Now, to your real question, yes there is upside. There

is clearly upside because once these markets come
back, I think the fundamental issue right now is the oil
prices and commodity prices. So, as those start
recovering, that is when the demand for these
products will start improving is our hypothesis. And
there is share gain to be made and certainly more like
more potential is the low horsepower side where yes,
we do have a lower share position as compared to the
high horsepower.
Okay, understood, understood. And typically these
products will go into all the end customers related to
commodity and oil and gas is what youre saying?
No. What I was trying to say was these countries
economies are depressed because a lot of them are
dependent on oil and other commodities. So, for
example, Nigeria or Russia or Brazil, I mean these
are all, you know, their economies are more based
upon the fundamental petrol chemical and steel and
copper and those kinds of commodities businesses.
And then, the other issue of course is China, right,
whats going on in China, which has been the major
consumer of these commodities globally; and that
economy is adjusting right now. Youve got these two
things playing out there.
Okay, understood, understood. And sir, regarding
shifting of this K19 engine from Seymour facility to

Page 11 of 24

Anant:

Phaltan, given that we already manufacture K19 in

Kothrud facility, wont it make more sense to add
more volumes to the same line than shift it to
Phaltan? I mean, what is the rationale behind this?
The rationale is simple. The line in Kothrud is now a
fairly old line, it does not have any more capacity. So
youd have to really substantially make an investment
into Kothrud, which we dont believe is as costeffective as making an investment in Phaltan. So, I
think we even have to look at should we even
consider moving the line out of Kothrud into Phaltan.
Im not saying thats the decision, but we even look at
that and make sure that whatever we do leads to the
best possible cost structure and best margin
opportunities for CIL as well as CMI.

Ravi Swaminathan:

Okay, got it. But, I mean effectively CIL wont be

benefiting from this, thats why from that point I was
asking?

Anant:

CIL, even if we manufactured it, lets say, within

Kothrud, right now it does not make any sense from
the exports perspective. So, because when you look
at it from the exports perspective, that is not a
business that CIL has ever had. These products while
they are of the same family are completely different
shop orders. So, this is not a business that CIL has
had in the past. So, we are not taking anything away
from CIL in terms of the export side. And certainly
from a CMI perspective, it makes sense to put in a
100% Cummins entity.

Ravi Swaminathan:

Okay. And for the full year, can you give the breakup
for power gen between 0 to 160, 160 to 380, 380 to
640 and 640 and high horsepower?

Anant:

Okay. For the full year, when you look at our range in
power gen less than 160kVA, we saw a 28% growth
and the number in the latest fiscal year improved to
325 crores. When you look at the 160 to 380kVA
range, our sales grew by 40%. So, the new number
now is 270 crores. The 420 to 640kVA, we improved
by 15%, and so the new number was 180 crores. And
above 750kVA, we grew by 5% up to 460 crores.

Page 12 of 24

Ravi Swaminathan:

So, this 750kVA and above we have seen a dip

compared to last year?

Anant:

No, a growth of 5%.

Ravi Swaminathan:

Growth of 5%, because last year you had mentioned

550 crores in this.

Anant:

Im sure we are talking about different ranges then.

Ravi Swaminathan:

Okay.

Anant:

I stand by the ranges Im talking about and the growth

rates that I have just given you. Weve grown across
the board.

Ravi Swaminathan:

Okay, understood. And for the industrial, between

compressors, railways, and for the full year, can you
give me the breakup?

Anant:

The compressors grew by 33% to 130-odd crores,

construction grew by 11% to 180 crores, mining was
flattish I would say at about 60 crores. Then fire
pumps, which is a small business, actually declined
almost 40% to 13 to 15 crores, rail grew by 25% to
114 or so crores, marine declined by 10% to 45
crores and then there are some other miscellaneous
applications of approximately 15 crores.

Ravi Swaminathan:

Got it, sir. Thanks a lot.

Anant:

Youre welcome.

Moderator:

Thank you very much. We have the next question

from Mr. Bhavin from Axis Capital. The line is unmuted, you may please go ahead and ask your
question.

Bhavin Vithlani:

Afternoon, gentlemen.

Anant:

Good afternoon.

Bhavin:

My question is, again back to the same thing, the

K19. You said 10 engines a day is currently being
manufactured at the Kothrud facility. If you could help
us, what is the ballpark realization that we should be

Page 13 of 24

considering and what is the domestic export breakup

of that?
Anant:

Okay. So, approximate realization, again there is a lot

of variation in realization because it all depends on
the applications, the applications are proliferated, but
a ballpark number I would give you is about 15 lakhs
per unit.

Bhavin:

Okay. And the utilisation you said 10 engines a day

and 100% which is like we should say 10 engines into
365. Would that be a fair way to calculate?

Anant:

Yes, yes, absolutely. For the year I would say you

should use approximately 75% to 80% utilization,
because running a line at 100% throughout the year
not practical even from a manufacturing perspective.

Bhavin:

And what would be the domestic export breakup for

this product?

Anant:

Its all domestic. As I mentioned earlier, there are no

exports from CIL on this range.

Bhavin:

Okay. And as you said that in future, if the cost

economics does permit, the entire thing could be
shifted to Phaltan, so in that case, would there be any
loss to CIL or itll be just arms length sourcing from
the CTIL?

Anant:

We would not do it if there was any loss to CIL. I think

you need to understand that Cummins operates only
on the basis of gains, win-win. So, wed only do it if it
lowers CILs cost structure and helps it improve its
margins domestically.

Bhavin:

Okay. And what would be the total... with Kothrud, we

understand is 20 engines a day. So, what would be
the utilisation of Kothrud currently, and is it at two-shift
or three-shift basis?

Anant:

Well, today the utilisation, I mean, all over the map... if

you look at it from a total factory perspective, I would
say the average utilisation right now in the quarter
which has come down because of exports is about
45% to 50%.

Page 14 of 24

Bhavin:

At Kothrud?

Anant:

Yes, at Kothrud.

Bhavin:

Okay. Youre saying 45%, is that two-shift or threeshift basis?

Anant:

What we do is we do it on a six day per week basis.

And assembly we assume two shifts and machining,
we assume three shifts. So thats how we calculate
the hours and see what the utilisation is. Thats the
way we do our utilisation calculations. Machining
three shifts, assembly two shifts, six days a week.

Bhavin:

Okay, fair enough. My last question is more of a

housekeeping issue. If you could give the quarter
breakup of power gen, like you used to give it earlier
in terms of greater than 500kVA, 320 to 380 which is
the HP, MHP, which is 82.5 to 250 and less than
62.5?

Anant:

Yes. So if you look at the latest quarter, the 15

through 62.5kVA range, what we call LHP, in this
categorisation anyway, was about 33 crores.

Bhavin:

Okay.

Anant:

Then the 82.5 through 250kVA is kind of the midrange, lets say, was about 80 crores. The heavy duty
or the 320 through 380kVA was about 20 crores and
the high horse power, which is greater than 500kVA
was about 160 crores.

Bhavin:

Okay. So this high horsepower is more or less flattish.

What do you expect as a growth going, because we
see a lot of your competitors entering? So what would
be our strategy here, would we be defending our
market share or would we be protecting our margins
and well let go some share?

Anant:

No. We are looking to grow our share. So we are on

the offence.

Page 15 of 24

Bhavin:

Okay. And what would be the pricing action if you

could give across on a ballpark basis for the quarter
or for the year as a whole?

Anant:

Well, I mean, you see thats already behind us now

pretty much. What we are doing now is doing it very,
very product-specific. And it is a headwind no doubt
financially. Right now the intensity continues to be
strong in the market. So, usually the pricing pressure
is in the downward range in power generation. So in
the quarter also we saw bit of an impact on pricing, I
would say somewhere in the 0.2 points of margins
sort of a range.
Okay. And what kind of pricing action you have done
in specifically in HHP over the last year or so?

Bhavin:

Anant:

Again, its been very much targeted. I would say if you

look at it from a full year basis, its probably had an
impact of about 0.3 points, 0.4 points.

Bhavin:
Anant:

Okay, fine. So, on a pricing basis, will it be like 2% to

3%, would that be a fair way to...
I would say probably more like 5%.

Bhavin:

Okay, fine. Yeah.

Anant:

More like 5%.

Bhavin:

Thank you so much, sir.

Anant:

Youre welcome.

Moderator:

Thank you very much. We have the next question

from Mr. Kishan Gupta from CD Equisearch. Youre
line is un-muted, you may please go ahead and ask
your questions.

Kishan Gupta:

Yeah, hi. Good afternoon, sir.

Anant:

Good afternoon.

Kishan Gupta:

Yeah. Just want to understand like unlike in the past,

why its becoming so difficult to gauge the mediumterm trends in exports?
I think this is a question really for the economists to
answer. I would say, again, when you look at whats

Anant:

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happening in the world today, you have the second

largest...
Kishan Gupta:

Im talking about CILs exports.

Anant:

Yes, because CILs exports are entirely based upon

whats happening in the global economy, entirely.

Kishan Gupta:

Yes. Like when we are estimating like for the quarter

or for half year, a lot of times there are misses on that
front. So, just want to understand why its becoming
so difficult to estimate or project growth trajectories?

Anant:

Because of the volatility that were seeing in the

marketplace. Our ability to forecast these changes is
not good enough. Its just not good enough.
And which markets do you think would remain under
pressure for this year, as you said that exports would
barely grow this year? So, which markets?

Kishan Gupta:

Anant:

I would say China, Africa, Latin America, Australia,

Indonesia, Russia. These would be ones that will
continue to be under pressure at least through this
year.

Kishan Gupta:

And what about telecom orders from Africa where you

did well couple of years back? So how that is fairing
now?

Anant:

Badly, for the same reason. Again, those economies

are struggling right now. Most of those economies are
commodity-based. So, we dont expect to see
substantial recoveries there.

Kishan Gupta:

Okay. Okay, thank you so much.

Anant:

Youre welcome.

Moderator:

Thank you very much. We have the next question

from Chockalingam, from Deutsche Bank. The line is
un-muted, you may please go ahead and ask your
question.

Chockalingam:

Yeah, hi. I think most of my questions have been we

answered. The one thing that I wanted to understand
was on this scrapping policy. Is there any potential in

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the automobile sector, any potential for CIL as an

entity to participate or its entirely under the Tata
Cummins that that will be getting it?
Anant:

No. You know, theres not going to be any material

impact to CIL legal entity as a result of the scrapping
whatever policies that Kerala has recently brought
out. By the way, I would have to say, since I do
participate in the auto side as well as Society of
Indian Automotive Manufactures, that we have been
promoting some kind of a policy to scrap old vehicles
for a very long period of time, because the old
vehicles are the ones that have the, I would say,
obsolete diesel technology which causes higher
emission. So, that is where India can get the biggest
bang in terms of cleaning up the air by actually
scrapping old vehicles, but not impacting the new
vehicles like are happening for example NCR,
because the new vehicles meet all our standards of
very low emissions in fact.

Chockalingam:

Okay. And second thing was on the tax rate, given

that exports has been a lower proportion this quarter,
ideally one would have expected the tax rate to be
slightly higher. How should we understand this?

Anant:

Yeah. So we did see our tax rate, effective tax rate

notch-up in the quarter because of lower exports from
our SEZ. And so, it went up by about one point. It
went up from about 16% to 17% in the fiscal year.
And in the quarter actually it moved up to 18.5%.

Chockalingam:

And last thing, exports, if its possible to provide for

full year the key geographies, at least the top five by
revenues, absolute numbers?

Anant:

Yes. Okay. So, when you look at the top five, then I
would say, the US would be one of them. And Im
referring to our high horse power exports, not the
power gen exports. So, these are engines. US was
about 123 crores and that was down 13% in the year.

Chockalingam:

Okay.

Anant:

China was about 130 crores and that was down 30%.

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Chockalingam:

Okay.

Anant:

The Middle East was about 106 crores, which was up

4%.

Chockalingam:

Okay.

Anant:

Europe was about 56 crores and that was down 9%.

Chockalingam:

Okay.

Anant:

And then we have a category called Others which is

just a lot of other countries. Its just a lot of other
countries which is about 170 crores, and that was
down 17%.

Chockalingam:

And if you were to look at the overall exports, both

power gen and engines put together, then how would
that number look like?

Anant:

So let me get to power gen specifically. So there, the

top exporting areas are Africa. Then you have
Europe, Middle East, and other parts of Asia. So,
Africa was up 10%, to about 260 crores.

Chockalingam:

Okay.

Anant:

And Europe was down 3%, which was about 115

crores, Middle East was up 125% to 200 crores and
rest of Asia was down 18% to 154 crores. So, these
set of numbers probably give you a little better
indication of what is happening in the markets. But
having said that, we need to remember that in the last
two years, weve also introduced new platforms. So
that is going to cloud the numbers to some extent.

Chockalingam:

Sure. Sure, sir. Thanks a lot.

Anant:
Moderator:

Youre welcome.
Thank you very much. We have the question from Mr.
Harish from Kotak Securities. Youre line is un-muted,
you may please go ahead and ask your questions.

Harish:

Hello?

Anant:

Yes, yes. Go ahead.

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Harish:

Good afternoon, sir. Sir, if you could also share the

breakup of exports for the full year absolute number,
LHP, mid-range, heavy duty, HHP and others

Anant:

When you look at LHP, then the total was 400 crores,
which was a decline of 13%, mid-range was about
490 crores, which grew by 40%. And again this is a
reflection of some new platforms added to the
exports, so its not all market-based. Heavy-duty was
112 crores, down 30%, high horse power was 595
crores, down 15%. And then the remainder, which is
about 70 crores is spare parts, which grew by about
50%.

Harish:

Okay, sir. My second question is once again on the

export thought process, whenever Cummins, Inc. and
Cummins India decides to shift some of the
manufacturing from overseas to India or to China and
other places. What is the thought process, which legal
entity typically we look at, because the last couple of
instances we have seen that most of the engines or
power gen manufacturing is getting shifted to the
unlisted entities. Which, in some cases, like a K19
although it seems that we may not kind of have a
contradiction but it is creating some of the issues. And
clearly in the mind of investors Cummins has kind of
performed with higher dividend payout, best of the
return ratios and operating cash, so which is great.
Nonetheless, on the export side, this particular policy
is something which is kind of worrying us a bit?

Anant:

Okay. So the way to think of it, I guess, most

simplistically is that whatever today CIL has in its
portfolio for domestic will continue. We will add new
platforms from a manufacturing perspective in the
100% Cummins-owned entity, and CIL will continue to
market it for the domestic economy. And any new
platforms, new technologies that are not in CILs
scope will fall in the 100% entity for exports. So again,
domestic is all CIL, from a market perspective, and
domestic manufacturing is all CIL in terms of the
portfolio that it already has and the capacities that it
already has. So I dont know if that helps you?
So, again, that kind of a strategy essentially makes
sure that CIL continues to be a profitably growing

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entity for good. And then of course, things that are

outside its scope are brought in through with CTIL
Cummins entity for best cost from a CMI perspective,
CMI meaning Cummins Inc. perspective.
Harish:

Thanks. If I may insist on this is that while we agree

that this has been done and a decision has been
taken at the top management level, but given that we
all are playing for the long-term, were looking at five
years, seven years outlook for Cummins India, which
is where some of the exports opportunity which could
have been catered through real estate arm and the
shareholders could have benefited, that is clearly kind
of missing out, which is one concern that we keep
hearing from investors and like to convey it to you on
this. So, yeah.

Anant:

Okay, I hear you. But again, the shareholders had

invested in CIL. Given CILs portfolio of offerings and
its growth potential, so to expect that now new
opportunities that were not even in scope, I dont
know if thats a fair expectation. But anyway, thats a
matter of debate I guess, we can continue to have it.

Harish:

Sure, sure. Sir, on the export LHP, you indicated

quarter back that we have about a 5% market share
globally. And what we understood is that even with a
market which is stagnating to a slight decline,
Cummins should continue to gain market share. How
is the progress on that? What is the growth outlook on
the LHP side over the next three to five years?

Anant:

I dont have that answer for you. Im not empowered

to have that answer really. And this is something that
you should query the global power generation or now
the power systems business of CMI. And I say that
because the people that are closest to it in terms of
understanding how distributors capabilities are
improving in these various countries, I dont have
visibility to that. So Im not well placed to answer that
question.

Harish:

Okay, okay. And on the..

Anant:

I mean all I can tell you is that we have a product

offering that is highly cost-competitive and the quality

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levels on it, now based upon all our data, shows that it
has the best quality levels compared to any other
Cummins plant globally. So we are on a very strong
footing from a supply chain perspective, which is what
we control from India. But all of the marketing efforts
in terms of the distributors we have in place in various
countries is not something we control at all. So to give
you a projection on that, I dont think it would be fair
thing to do.
Harish:

Sure, sir. Last question is on the fiscal year 2017

outlook for the power gen segment in terms of the
various nodes that we have. On the lower horse
power nodes, below 380kVA, how is the outlook like
and the competitive intensity? And on the high horse
power 450kV and above, how the overall things
looking like from a fiscal year 17 perspective?

Anant:

I would say, it continues to be very intense, Im not

seeing any material change in the intensity of
competition across the board. So, I cant differentiate
below or above. Sometimes the players change. So
you may have a Perkins and its GOEM combinations
play more at the upper end and someone like
Kirloskar or Mahindra play at the lower etc. But
despite that, I think overall the intensity continues to
be intense and I dont see that stopping in the next
fiscal year.

Harish:

And sir, if I can squeeze in one more, is that some of

the competitors try and offer five year service, like
Mahindra is offering right now along with the power
gen package, other competitors, Perkins is for higher
kVA offering, higher services and warranty, is that
something which we should really worry about or how
does Cummins deal with that?

Anant:

No. I mean these are all various marketing tactics that

we all engage in, including Cummins. So, I dont think
this is a matter of worry. Im not worried about it. In
fact the opposite, I feel like we are on a position of
great strength here as Cummins with the kind of
technology that we offer, the kind of cost base that we
have established in the country, the scale that we
have and the kind of relationships that we have with
our customers and the distribution support that we

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offer, the service support that we do offer. So frankly,

no, I dont worry about these things. Its not to say that
we should continue to improve our offering, which is
what we are committed to doing.
Harish:
Anant:

Great, sir. Thank you so much, and all the very best.
I think with this we can probably take one last
question.

Moderator:

Sure, sir. We have the next question from Mr. Girish

Nair from BNP Paribas. The line is un-muted, you
may please go ahead and ask your question.

Girish Nair:

Thanks for taking my question. Now, you have said

for the sales guidance, the domestic sales guidance
growth is about 8% to 12% for FY17, and flat for
exports. Now in the previous call, I recollect that you
had said that domestic sales would grow by about 1015%. So, effectively you have reduced the guidance.
But if you look at the overall commentary, you have
said that the domestic market is clearly picking up and
Capex is picking up in various sectors. So why is it
that your expectations have become more muted
compared to what it was last quarter? This is
specifically for domestic.

Anant:

Yeah, yeah. No. Absolutely. So, what weve been

seeing is weve come in the last year-and-a-half from
the back of a slowing down economy in India and it
had kind of flattened out and then with all the efforts,
the right efforts that the government is trying to take,
were starting to see the pickup now. And so as I
stood a year ago, I was feeling somewhat optimistic
that given the low base at which we have settled that
now we should be able to grow in that 10-15% range.
And as it turned out, we ended up almost in the mid
part of that guidance, which is about 13%, right?
Now, the thing what Im seeing is now the economy
has picked up in our sector, lets say, but a lot of the
activity is being driven by government spend right
now. The majority is still government-spend, not to
say that is zero in the private sector, but majority is
still government and some in the private. And now
that we have come up to a certain level, from here
incremental growth is what Im guiding of this 8-12%.
So you could look at it that way. Since weve already

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Girish Nair:
Anant:

improved to a certain range, now can we still sustain

the 10 to 15? I was thinking perhaps not, but I hope
Im wrong, because you could always conjure a
different scenario which says that now that theres
been an enough priming of the pump, all the other
sectors should start kicking in and Indias GDP should
start going to that 8-9% range in the next fiscal year.
Thats a possibility, but I dont think we can count on
that. I mean there still are pretty good headwinds, the
interest rates are still very, very high I would say. The
kind of the bad projects that are stuck are still very
large right now. There are certain bottlenecks, private
industry still has substantial overcapacity. So these
are all the headwinds that we are going to have to
maneuver through them, but well get out of it,
because the fundamentals still are, I would say, the
tailwinds are still stronger than the headwinds, but this
is where my caution is coming from. Does that help?
Yeah, very helpful. Thanks a lot for that.
Okay, all right. So with that, well close this session.
And again, thank you very much for your interests in
Cummins India Limited. We feel really good about the
results. I think in a tough time when the global
economy has been declining in fact in terms of its
growth, and at a time when Indias growth rate yet has
not quite taken off in our sector, in the capital goods
sector, I think we have done rather well. And Im very
confident and the data would indicate that weve done
better than any of our peers in our industry.
And again, I stay confident that despite whatever may
happen in the global economy or in the domestic
economy, you will see that Cummins India Limited will
outperform our peers. So, I think that commitment
remains, and that rests upon the fact that we do have
great products, great technology, you know, very,
very diverse and strong capable workforce that is very
mature now, the scale that we have, distributions
system along with the kind of support capabilities that
it can offer. So with this, I think you can count on
Cummins to deliver the best possible returns that you
see in the industry. Thank you very much.

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