CUMMINSINDNSEQ4 FY22May 30, 2022

Cummins India Limited

8,632words

87turns

11analyst exchanges

2executives

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Management on call

Ashwath Ram

MD, CUMMINS INDIA LIMITED

Ajay Patil

CFO, CUMMINS INDIA LIMITED.

Key numbers — 40 extracted

Rs.1468 crore

For the quarter ended March 31, 2022, with respect to the same quarter last year, our sales at Rs.1468 crores were higher by 19% compared to Rs.1231 crores recorded in the same quarter last year. Domestic s

19%

31, 2022, with respect to the same quarter last year, our sales at Rs.1468 crores were higher by 19% compared to Rs.1231 crores recorded in the same quarter last year. Domestic sales at Rs.1046 cror

Rs.1231 crore

respect to the same quarter last year, our sales at Rs.1468 crores were higher by 19% compared to Rs.1231 crores recorded in the same quarter last year. Domestic sales at Rs.1046 crores were higher by 7%. Expo

Rs.1046 crore

igher by 19% compared to Rs.1231 crores recorded in the same quarter last year. Domestic sales at Rs.1046 crores were higher by 7%. Exports at Rs.423 crores increased by 66%. Profit before tax and exceptional

31 crores recorded in the same quarter last year. Domestic sales at Rs.1046 crores were higher by 7%. Exports at Rs.423 crores increased by 66%. Profit before tax and exceptional items at Rs.244 cro

Rs.423 crore

ded in the same quarter last year. Domestic sales at Rs.1046 crores were higher by 7%. Exports at Rs.423 crores increased by 66%. Profit before tax and exceptional items at Rs.244 crores is lower by 1% comp

66%

t year. Domestic sales at Rs.1046 crores were higher by 7%. Exports at Rs.423 crores increased by 66%. Profit before tax and exceptional items at Rs.244 crores is lower by 1% compared to Rs.245 crore

Rs.244 crore

gher by 7%. Exports at Rs.423 crores increased by 66%. Profit before tax and exceptional items at Rs.244 crores is lower by 1% compared to Rs.245 crores recorded in the same quarter last year. For the quarter

423 crores increased by 66%. Profit before tax and exceptional items at Rs.244 crores is lower by 1% compared to Rs.245 crores recorded in the same quarter last year. For the quarter ended March 3

Rs.245 crore

eased by 66%. Profit before tax and exceptional items at Rs.244 crores is lower by 1% compared to Rs.245 crores recorded in the same quarter last year. For the quarter ended March 31, 2022 with respect to the

14%

r ended March 31, 2022 with respect to the last quarter our sales at Rs.1468 crores were lower by 14% compared to Rs.1701 crore recorded in the last quarter. Domestic sales at Rs.1046 crore were lowe

Rs.1701 crore

, 2022 with respect to the last quarter our sales at Rs.1468 crores were lower by 14% compared to Rs.1701 crore recorded in the last quarter. Domestic sales at Rs.1046 crore were lower by 17%. Exports at Rs.42

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Guidance — 19 items

Ashwath Ram

opening

“Considering these uncertainties, the Company will not be providing any guidance for FY23.”

Parikshit Kandpal

“Sir if you can give some sense on the average order size, which was before COVID so as compared right, what kind of pre COVID and now will be the price increase because what we have for some of your competitors, not your competitors, but companies that they assume 19% to 20% kind of price hike over last two years, so we just wanted to understand for us, like how much are we in this quantum?”

Parikshit Kandpal

“Sir my second question is on, the last call you had highlighted that you were doing some demonstration projects, and pilot project on hydrogen for both North East and sea-land locomotives.”

Parikshit Kandpal

“So, if you can quantify some measures and qualitatively also, it will be helpful.”

Parikshit Kandpal

“So, over the next five years how do you see the industry on the genset side, the power gen side, how it will evolve and what will be the impact of this, if you can just highlight for us?”

Renu Baid

“What are you seeing in terms of bottom up demand momentum across various end markets and customers effectively on the export market and also the domestic market if you could share your views are you also seeing project delays or risk of CAPEX getting slowed down or do you think the broad momentum is still intact?”

Ashwath Ram

“Construction came very, very slow out of the gate at the beginning of this year and we do expect construction to pick up pretty strongly, do a bit of catch up and then then bounce back as compared to last year.”

Rajesh Kothari

“My question is, just like in the industry segment can you also give you a little bit more insights into the power gen segment particularly on the data center side what kind of traction we are seeing, are there any other –26:43 large project which are coming into this, and also more insights into the distribution side of the business?”

Charanjit Singh

“So, my question is regarding if we have to break up this growth in terms of the volume and value growth for Cummins India, in the power gen or in the export market what could that be and from volume growth perspective going forward in FY23 while your commentary is extremely positive, but from here on how we should look at the volume growth in the domestic margin as well as in exports.”

Charanjit Singh

“And there the gensets faced with more traction in the market so any thought there in terms of how this scenario will be panning out on the ground, maybe renewables not able to cater to that peak demand.”

Risks & concerns — 15 flagged

Cummins India employed tactical pricing actions and continued efforts of cost containment and reduction to help mitigate impact of commodity inflation.

— Ashwath Ram

We are closely watching the impact of high inflation, geopolitical events unfolding in different parts of the world and their impact on demand and the supply chain as a consequence.

— Ashwath Ram

So, would you be able to guide us, had this exchange not been there, the gross margin decline would have been even sharper.

— Sandeep Tulsiyan

So, to what extent have we taken pricing action and when this mix normalizes, in the coming quarters, do you foresee the gross margin pressure to continue and if any price hikes which are taken maybe say, during the end of quarter are not fully impacted?

— Sandeep Tulsiyan

Depends on the impact of commodities, but certainly they have been in the double digits is what I can at least give you an indication so it’s been large.

— Ashwath Ram

So, over the next five years how do you see the industry on the genset side, the power gen side, how it will evolve and what will be the impact of this, if you can just highlight for us?

— Parikshit Kandpal

So, certain ministries have gone ahead and despite us submitting white papers on the advantages of tightening emissions, the advantages of moving to newer technologies and the overall impact of gensets on the environment and on the supply of power.

— Ashwath Ram

What are you seeing in terms of bottom up demand momentum across various end markets and customers effectively on the export market and also the domestic market if you could share your views are you also seeing project delays or risk of CAPEX getting slowed down or do you think the broad momentum is still intact?

— Renu Baid

But do you see a risk of slowdown in the coming two quarters or do you think it’s more about liquidity adjustment at the end market demand environmental robust to that extent?

— Renu Baid

But other than that, we haven’t seen too much of a slowdown.

— Ashwath Ram

It’s very difficult at this time to predict how long it will last, all of these variables have an impact on the overall global supply chain.

— Ashwath Ram

Data centers, it’s some of these execution timing issues we continue to remain highly optimistic whether every quarter we will get whatever 150 or 200 crore order or not it’s difficult to say this, but certainly we will keep growing that business and every year, we expect at least double digit growth in that segment.

— Ashwath Ram

And sir this is industrial segment has seen a sharp Y-o-Y decline also Q-o-Q, we can understand that can be something but the strap Y-o-Y decline.

— Renjith

So, only the fourth quarter we have seen a decline.

— Ashwath Ram

We still remain, we’ve got very clear factors as to why we see that decline versus the previous quarter, if you look at the full year, you can see that we have still grown and we continue to believe that even this year we will see growth even as compared to last year.

— Ashwath Ram

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Q&A — 11 exchanges

First question is pertaining to the margins especially gross margin. What we have observed in the current quarter the mix between domestic and export is usually treated towards export its more like 70:30 versus the usual run rate of 75:25 what we have. But despite that, we’ve had almost 100 to 150 basis points margin contraction at gross level. So, would you be able to guide us, had this exchange not been there, the gross margin decline would have been even sharper. So, to what extent have we taken pricing action and when this mix normalizes, in the coming quarters, do you foresee the gross ma

Ashwath Ram

Yes, so Sandeep very good question. And this is a question, which has been our continuous battle now for the last almost four quarters. And we think this battle will continue for at least a few more quarters. So, the commodity rises are unprecedented and the rate of growth of commodities has been unprecedented. And so the biggest impact on the margins has been because of the commodity increases, we have been able to partially offset some of those because of the mix as you mentioned, because of some of the price increases that we have passed through, because of cost reduction activities and cos

Sir if you can give some sense on the average order size, which was before COVID so as compared right, what kind of pre COVID and now will be the price increase because what we have for some of your competitors, not your competitors, but companies that they assume 19% to 20% kind of price hike over last two years, so we just wanted to understand for us, like how much are we in this quantum?

Ashwath Ram

I can’t give you the exact numbers because it differs by market segment by, by type of product, etc. Depends on the impact of commodities, but certainly they have been in the double digits is what I can at least give you an indication so it’s been large. We are seeing this in early teens. I won’t confirm that because we continue to pass through increases, but certainly they are pretty large. Okay. Sir my second question is on, the last call you had highlighted that you were doing some demonstration projects, and pilot project on hydrogen for both North East and sea-land locomotives. Any tangib

I’m not sure if I missed your initial comments. My first question is, broadly in the current environment post the Russia, Ukraine war and significant liquidity tightening across global markets, including India. What are you seeing in terms of bottom up demand momentum across various end markets and customers effectively on the export market and also the domestic market if you could share your views are you also seeing project delays or risk of CAPEX getting slowed down or do you think the broad momentum is still intact?

Ashwath Ram

To first answer the very broad global view is that demand is not slowing down demand is continues to remain pretty strong. It’s as a matter of fact supply chain is a bigger impact to our growth rather than actual demand from multiple segments as a Company Cummins has pulled out of Russia, and that certainly has a, it doesn’t have such a big impact on our India business because the Russian market was a smaller market for us. But it does have a limited impact but overall as of today, our demand far outpaces our ability to supply. And it’s not slowing down either in India or in other parts of the

Decent business in otherwise challenging environment. My question is, just like in the industry segment can you also give you a little bit more insights into the power gen segment particularly on the data center side what kind of traction we are seeing, are there any other –26:43 large project which are coming into this, and also more insights into the distribution side of the business?

Ashwath Ram

Sure. So, suddenly demand is incredibly strong, like in all other segments and all other parts of our business Q4 tends to be a weaker quarter than Q3. But when you compare Q4 of this year versus Q4 of last year, which was also not a COVID impacted quarter, you’ll see that we have grown pretty, pretty significantly, with almost like something like 33% growth over the last year. So, demand is strong across multiple segments, whether it’s high horsepower, medium horsepower, pretty much across the board demand is strong. Data centers the potential is huge. We are booking lots of orders, we have m

Sir just in the domestic as well as on export side on the power gen front if you can highlight. So, my question is regarding if we have to break up this growth in terms of the volume and value growth for Cummins India, in the power gen or in the export market what could that be and from volume growth perspective going forward in FY23 while your commentary is extremely positive, but from here on how we should look at the volume growth in the domestic margin as well as in exports. That’s my first question.

Ashwath Ram

The power generation growth is very directly proportional to growth of GDP and the growth of the economy. So, as our economy keeps growing and becoming stronger we always need more power, as our society becomes more affluent, they need more power, as their dependence on data or their dependence on information increases, they become more dependent on power. So, as our economy keeps increasing, the demand for power generation will keep growing proportionately. From a value perspective, the value buckets keep increasing as the technology gets more sophisticated. So, for the last four or five year

I have two question. Sir my first question is that if the government is reducing the diesel engine usage, when the parent new technology will come to the listed entity, or the unlisted or not sure as of now?

Ashwath Ram

All the businesses which are there in the listed entity will continue to remain in the listed entity. So, power generation business as such remain in the listed entity. As far as if the power generation, for example moves to different technologies like CNG, LNG, hydrogen in ice, all of those technologies which are already part of what is in the core they continue to remain. What is to be done with some of the newer technologies which have still not come into the country that is something which is being explored to try to figure out what is the best, best path to market from an end user perspec

Ashwath, I have two questions. One, you did mention about the supply chain issues prevailing for the last four quarters. So, if you could just help us understand the changes that we have made to our supply chain. And when do you see these issues getting sorted out that’s question one. The second question is freight rates have seen a considerable increase and exports being a significant part of the business are we actually seeing an impact on our competitive that’s for our products because the freight rates have gone significantly higher we need somebody who is manufacturing locally?

Ashwath Ram

So, I’ll answer the second question first. The answer is yes, to a certain extent, freight rates are more than doubled. And there is no quick solution which is available and the increase on freight rates it’s two ways, it hits us on inputs of all important supplies as well as imports of all commodities directly impacts us from a cost perspective. And from a selling perspective there are two aspects again, one is that you don’t even get enough containers. And if you do get containers and the cost are more than doubled. So, certainly, the way it impacts us is it impacts our margin that’s what it

So, I had a couple of more questions. First one was on the overall employee expenses, we announced a VRS scheme, a week or two weeks back. So, if you could highlight in terms of the cost containment measures what you’d have rolled out, how do you see foresee these measures to contain your overall employee cost, what kind of growth rate your employee cost is likely to see what your sales growth over the next say one to two years?

Ashwath Ram

So, you can look at the way we have been managing employee costs currently, if you look at our employee cost it’s almost at the same level as what it was a couple of years ago. And the way we have manage that is through significant focus on productivity, significant focus on doing more with less every variable, both fixed costs and variable costs is looked at by the Company and we tried to optimize those, if you look at expenses on our books again they are lower today than what they were a couple of years ago, despite significantly greater volumes. So, we are able to get leverage out of that.

Sir one clarification which we would like to understand, in future when these smaller NHP gets converted to batteries and that kind of technologies so, how will that work in terms of the IP rights and royalty payments will that be transferred to the Indian entity or will we have to pay some higher royalty to the parent entity and as a follow up tomorrow when hydrogen also comes how are we going to structure these things, what is your thought process behind that, as a listed entity what we gain and how will that the whole thing will pan out?

Ashwath Ram

First of all these transitions are nowhere in the short term, the short term for power generation industry for transitions is anywhere from 10 to 25 years. So, at least in the near future, we don’t see anywhere in the world that our scale of business has transitioned to batteries, but it can 10, 15 years from now some portions of it. Cummins has a lot of IP as far as batteries is concerned. And like IP for diesel engine is transitioned to the listed entity in a similar manner, IP for batteries and some of those kinds of solutions like hydrogen, ice, etc., will get transitioned to the listed en

The question that I had was more on revenues and I am trying to make a see through the prospects of revenues to grow from here on versus what a business as usual scenario will suggest. So, obviously, there are linkages to underlying factors such as the economy and I am trying to kind of capture the alpha or the growth beyond that, that can happen because things are probably changing across segments. And I will start with power gen, as you rightly said there are several things that are going to play out in terms of there being a requirement for higher, societies wanting more and more gensets, t

Ashwath Ram

We think so, because even globally we have seen this trend work in multiple market segments including in the automotive space where there is consolidation also happening, which means as people are migrating to some of the newer technologies, they cannot keep investing in some of the legacy technologies and so, there is more consolidation happening as well and so and when consolidation happens the market leader has the greatest leverage. So, there are opportunities so we do see growth beyond the GDP as an opportunity for us. Okay. And then I would want to think may be 1.3x is also possible so j

I would like to thank all of you again for taking time to attend our investor call. These questions certainly help us to think about the way our investors think about our business. I remain cautiously optimistic about the demand for Cummins India and I thank you for all your support and wish you a safe and healthier year. Thank you.

Management

Speaking time

Ashwath Ram

Moderator

Sandeep Tulsiyan

Parikshit Kandpal

Renu Baid

Rajesh Kothari

Aditya Mongia

Renjith

Charanjit Singh

Harsh Shah

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Opening remarks

Ashwath Ram

Thank you. Good morning, ladies and gentlemen, thank you for taking your valuable time to come and talk to us. My name is Ashwath Ram – Managing Director of Cummins India Limited. I hope you and your families are doing well and staying safe. Joining me today on this call is Mr. Ajay Patil, our Chief Financial Officer of Cummins India Limited. Thank you for joining us for the CIL financial results call for FY22 and full year FY22. At the outset, I’m very happy to inform you that Cummins India Limited, closed FY22 with record revenues and so did our associate Company Cummins Generator Technologies India Private Limited and JV Valvoline Cummins Private Limited. Post wave two of COVID-19, we observed strong economic rebound enabled by a combination of factors like mass vaccination, government spends on infrastructure and social programs, pent- up demand across different sectors. Cummins India responded strongly despite significant supply chain challenges to meet the demand from domestic an

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