CUMMINSINDNSEQ2 FY'23November 10, 2022

Cummins India Limited

8,442words

113turns

13analyst exchanges

2executives

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Management on call

Ashwath Ram

MANAGING DIRECTOR,

Ajay Shriram Patil

CHIEF FINANCIAL

Key numbers — 40 extracted

Rs. 1,922 crore

or the quarter ended September 30th, 2022 with respect to the same quarter last year our sales at Rs. 1,922 crores were higher by 14% compared to Rs. 1,689 crores recorded in the same quarter last year. Domestic

14%

0th, 2022 with respect to the same quarter last year our sales at Rs. 1,922 crores were higher by 14% compared to Rs. 1,689 crores recorded in the same quarter last year. Domestic sales at Rs. 1,391

Rs. 1,689 crore

espect to the same quarter last year our sales at Rs. 1,922 crores were higher by 14% compared to Rs. 1,689 crores recorded in the same quarter last year. Domestic sales at Rs. 1,391 crores were higher by 11%. E

Rs. 1,391 crore

her by 14% compared to Rs. 1,689 crores recorded in the same quarter last year. Domestic sales at Rs. 1,391 crores were higher by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptio

11%

crores recorded in the same quarter last year. Domestic sales at Rs. 1,391 crores were higher by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336

Rs. 531 crore

in the same quarter last year. Domestic sales at Rs. 1,391 crores were higher by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% co

21%

. Domestic sales at Rs. 1,391 crores were higher by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% compared to Rs. 293 cr

Rs. 336 crore

by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% compared to Rs. 293 crores recorded in the same quarter last year. For the qua

15%

crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% compared to Rs. 293 crores recorded in the same quarter last year. For the quarter ended Septembe

Rs. 293 crore

her by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% compared to Rs. 293 crores recorded in the same quarter last year. For the quarter ended September 30th 2022 with respect t

Rs. 1,922 crore

ast year. For the quarter ended September 30th 2022 with respect to the last quarter our sales at Rs. 1,922 crores were higher by 16% compared to Rs. 1,657 crore recorded in the same quarter. Domestic sales at R

16%

September 30th 2022 with respect to the last quarter our sales at Rs. 1,922 crores were higher by 16% compared to Rs. 1,657 crore recorded in the same quarter. Domestic sales at Rs. 1,391 crore were

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Guidance — 20 items

Ashwath Ram

“So, we anticipate gross margin continuing to improve over subsequent quarters.”

Parikshit Kandpal

“And also, when do you think you will reach the optimal capacity utilization that will call for a CAPEX, if you can address this question?”

Ashwath Ram

“So, we do expect to see the situation gradually keep improving, but unfortunately, we have no news which tells us that this problem is just going away right now.”

Ashwath Ram

“So, we do think there will be a strong pre-buy sometime in the latter half of 2020 or the early half of 2023.”

Deepak Krishnan

“So, any further color on the export front and the detail breakup among the four segments that will be helpful?”

Renu Baid

“My first question is on the gross margins, while you did mention that pricing actions have been in place, and you expect sequential improvement in gross margins to continue.”

Renu Baid

“But if we look at CPCB-4 implementation coming in the next year, there will be changes in cost structure, sourcing mix.”

Renu Baid

“So, from a medium-term perspective, how should we look at Cummins journey to bring back to the old gross margin levels of 34%.”

Renu Baid

“In the last call, you did mention that you would target the margins to be back in 34% to 35% levels.”

Ashwath Ram

“So, we hope to see that beginning to catch up and then beginning to go ahead of where we were in the past.”

Risks & concerns — 15 flagged

Or you think there could be pockets of continued impact from the Europe slowdown which is now looking more evident.

— Renu Baid

It’s very difficult to predict Renu, with the way the global economies are going, it all depends, if everyone keeps increasing interest rates and multiple economies are driven into recession, then it's going to be difficult to sustain this kind of growth.

— Ashwath Ram

And one last, if I can ask within the Industrial segment, Rail segment was one where the growth numbers or volume uptake has been a bit volatile.

— Renu Baid

So, when they want to use that equipment, it doesn't matter what, the net impact of those price increases are very small compared to the cost of building those roads, etc.

— Ashwath Ram

So, it's the slowdown of funds to build those actual projects on the ground which is what in my view is the reason for it lagging.

— Ashwath Ram

So, everyone's become more cautious about having all their eggs in one basket and in one region.

— Ashwath Ram

So, there is a whole bunch of work happening in dual sourcing and risk management.

— Ashwath Ram

But like I mentioned earlier, there is an offsetting concern that with USMCA even if we were to be able to do that we may not be able to still supply entire products, but we were able to supply subsystems of products.

— Ashwath Ram

I wanted to first of all stress a little bit more on the distribution segment.

— Aditya Mongia

And also, we are because of the impact of commodities etc.

— Ashwath Ram

Are you suggesting that this kind of decline that has happened the last two years can be kind of fully covered up over the next 18 to 24 months, as you suggested.

— Aditya Mongia

It's not going to be easy in this kind of volatile environment.

— Ashwath Ram

And we are hoping that commodities will soften further.

— Ashwath Ram

We are waiting and watching to see if the impact of all of these global turmoil is going to have any negative effect on us.

— Ashwath Ram

Is it because of the decline in the raw material you are calling out that or you are talking about positive pricing?

— Gopal Nawandhar

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Q&A — 13 exchanges

My first question is on gross margin. So, despite such strong performance we are still almost 300 to 400 basis points lower than our standard gross margin, so just wanted your view level of pricing, has it receded, are you still not able to absorb the commodity inflation? Or have you rolled back some price increases, because a large part of EBITDA margins is getting justified because of operating leverage, but you still are not able to get back to our historical levels of gross margin of 35% to 36%. Just your views on that, that's my first question.

Ashwath Ram

I think the main factor here is that commodities while they have started softening, we have still not caught up. So, we anticipate gross margin continuing to improve over subsequent quarters. We haven't rolled back any price increases. As a matter of fact, some more price corrections are on the way, which have been planned ahead of time. So, there is that lag effect of commodities, and we are catching up, it’s going to continue to improve. Second question is on, you have been highlighting the supply chain issues as being impacting us to the extent of 10% to 15% of demand. So, given the strong

I just had a question on the export front, given how we have done on the LHP side (inaudible 00:11:44) increase YoY. What is specifically driving this and what geographies are we gaining share? And further given that we manufacturer in India, China and U.S. has any China disruption lead to incremental orders coming to the India entity? So, any further color on the export front and the detail breakup among the four segments that will be helpful?

Ashwath Ram

Yes, so I think, as I have mentioned in previous call, Cummins has three major manufacturing hubs for products around the world. The first is in North America, the second is in China and the third is in India. Of course, we also have some older historical plants in Power Generation, etc, which are based in the United Kingdom, as well, with some of the European market. So, for certain types of products especially the low horsepower products, India is the sole supply center for pretty much the rest of the world other than North America and China. So, as demand in those markets keeps fluctuating

My first question is on the gross margins, while you did mention that pricing actions have been in place, and you expect sequential improvement in gross margins to continue. But if we look at CPCB-4 implementation coming in the next year, there will be changes in cost structure, sourcing mix. So, from a medium-term perspective, how should we look at Cummins journey to bring back to the old gross margin levels of 34%. In the last call, you did mention that you would target the margins to be back in 34% to 35% levels. So, what would be the timeline to get back to those levels of margins and the

Ashwath Ram

We want it as soon as possible. The reality is that commodities have been slowly coming down. And we have held the pricing. We continue to increase prices in strategic nodes where gross margins have dropped more heavily. So, we want to, by the time we launch the CPCB-4 Plus and get that into a stable state to attempt to get back to the previous levels of margins. So, I am not talking about two or three or four years, we would want to get to that kind of margins in the next 18 to 24 months. And broadly from given that the notification is out, there is no clarity on the final changes required. W

I just wanted to get, an understanding was that the export side you don’t exports to the other hub that is North America and China at all?

Ashwath Ram

We export some, but we don't export too much of the product there because one is because of treaties such as US MCA, they have requirements to produce majority of the product within the countries of United States, Canada or Mexico, so it doesn't fit, you don't fit the pricing targets, if you have to add the duties and then still sell into those markets as far as that is concerned. As far as China is concerned, we sell some products into China, but they also have capacities within China to produce as many products as we can produce, if not more, so the access to that market is limited. Similarl

First is, if you could just help us with what are the implications of Cummins in India, from the acquisition of Meritor by the global entity? And also what will be the implications for the listed entity? That's one. Second is more color on Exports will be appreciated, if you could give geography wise breakup of the exports and how are you seeing the macro trend there? Third question is on the Industrial side, if you could give us a breakup, Compressor Construction, etc. as have you been giving. And last is if you could help us with the capacity utilization at the Kothrud facility and at our me

Ashwath Ram

The Meritor being an axle and brake company acquired by Cummins Inc. globally has very little impact on the Cummins India business other than we can now in the construction and in some of the other heavy-duty applications, we can now aspire to sell an entire powertrain solution rather than just selling an engine and an after treatment. So, it improves the ability to sell a complete package. So, I think those are opportunities, we are just evaluating and trying to figure out where those opportunities are, it gives us a play in and to utilize synergy in some of these segments like construction m

Couple of questions from my side, #1, when this new version of CPCB-4 gensets will be launched?

Ashwath Ram

The target for when it becomes effective is July of 2023. So, they have to be launched by 1st July 2023. Once these new versions are launched, do we see a strong export growth from here on, when basically the Indian manufacturer gensets are at par in terms of the compliance with the global standard. So, do we see strong export growth from there on? We see access to some markets, which we did not have access to earlier. So, we do see more access to some cities and some areas in Europe. We do see access to some areas in North America like Canada and the United States where they buy some of our p

My first question is with respect to the CPCB. From 1st of July, will you not be allowed to manufacture or do not be allowed to sell the products of the previous generation?

Ashwath Ram

We will not be allowed to manufacture, our OEMs and our dealers and distributors who have bought inventory which has been manufactured before 1st of July will still be able to continue selling it till they run out of it, I think and there's a cutoff for that as well, I think it's the end of the year, by which they will not even be able to sell product for which they have inventory. Okay so there is a six months benefit. Yes. Second is if you can also talk about, you said that you don't need to increase capacity, but you may need to add labor. Can you also elaborate on how much labor would you

You mentioned the data center opportunity seems to be descent in Indian market. So, what is the current contribution to this particular segment to our sales? And what is the outlook for that going forward?

Ashwath Ram

I won't do the exact breakup in terms of value. But I can tell you that it is one of the fastest growing segments. If I look at the power generation market, the Top 3 segments for us in the previous quarter that grew were data centers, pharmaceuticals and biotechnology and overall manufacturing. And so, we have had the highest number of large gensets shipments ever in our history for data centers, commercial realty and manufacturing. So, that gives you a kind of indication of how strong this market is. And we don't think this market will slow down for at least a couple of years, we think that

I wanted to first of all stress a little bit more on the distribution segment. The segment appears to be probably growing faster than product sales over 1H. And while we have been reading about, in the annual report endeavors of yours to grow, it would be good if you could kind of bucket down what all is firing for you? Is it more, let's say offering more services to your existing installed customer base, is it more competitions, customer base that you are able to get insight or maybe let's it is it more because auto linked, spares and services sales are going up? If you could give some color

Ashwath Ram

Yes so in one line it’s all of the above. And so we have been putting in tremendous focus into this segment, because we feel that what we are entitled to and what we have seen as Cummis’s entitlement in other markets, it's been lower in India. And so there has been a lot of focus to improve availability of parts for customers. So, parts have been growing in multiple segments. We are doing more reconditioning and recon, and that’s greener, better for the environment and is better value for customers because we provide a warranty on all rebuilt and recondition products. So, as utilization increa

So, my first question is regarding this CPCP4 tech transition. So, what I understand is the customers still have a window to buy let's say the order products after let’s say 1st July 2023, so till distributors have stocks. Is that the correct understanding?

Ashwath Ram

That is correct. If so, then how are we able to take up the price hikes that are necessary for the CPCB-4 engines. So, if the customer still has the option to buy something, let's say which meets his requirement and still at a relatively much more affordable? So, the first is right now there are certain nodes which are already capacity constrained. And so even if somebody wants to build up inventory, and then wants to buy products, it's not going to be available post the July timeframe. In all of the other nodes where extra inventory or material can be available, people will be pre-buying, and

My first question is, if we see in India, a lot of your peers are setting up electrolyzer of fuel cell capacities over the next two or three years. I understand you have an ambition out there, so to be cost competitive, do you think Cummins will also have to set up a facility soon in India? And if so, which of the Cummins entity will house the manufacturing units?

Ashwath Ram

That's still being evaluated. So, certainly, we will have to set up in India to be cost competitive in India also to meet the Make in India, PLI, those kinds of guidelines will have to produce in India. What’s being evaluated is what's the best way to produce whether it makes sense for Cummins to setup its own capacities or whether it makes sense for Cummins to partner with somebody, to get the leverage of scale and access to end markets. Those are the kinds of questions we are asking ourselves and then evaluations are being done on what's the best path to enter from an India perspective from

As I remember, earlier there used to be some arrangement with the parent on currency depreciation. So, if you can just highlight, how much of those currency depreciation benefits flows to Cummins listed, and how much is to be passed on?

Ashwath Ram

So, there is a quarter-on-quarter settlement as far as currency is concerned. From our perspective, in the current quarter, we have had a benefit on currency of something like 0.5%. And it will get trued up in future quarters. So, I remember earlier like it was like (+5%) currency movement is kept by us and then over and above that we generally used to pass it on to parents, is that same arrangement? There is a pre-arranged formula, but I don't have the exact numbers with me right now, so I won't comment on that. Secondly, just a clarification, in the beginning you mentioned about some price c

I want to thank all of you for your participation today and your patient listening to all the questions and all the commentary. Cummins India strongly believes that the demand in various end markets will sustain. However, as I have mentioned earlier, uncertainty in the industry prevail because of high inflation, interest rate, policy rates, supply chain disruptions. This week, again, China has announced that they will be cracking down on COVID. And so every time that happens, we see more disruptions. So, these kinds of disruptions continue. We continue to watch the geopolitical events and the

Management

Speaking time

Ashwath Ram

Moderator

Renu Baid

Sangeeta Purushottam

Puneet

Parikshit Kandpal

Priyankar Biswas

Dhaval Shah

Gopal Nawandhar

Deepak Krishnan

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Opening remarks

Ashwath Ram

Good morning ladies and gentlemen, I am Ashwath Ram, Managing Director of Cummins India Limited. Mr. Ajay Patil, our CFO is also on the call with me. Thank you all for joining us on this call today. I hope all of you had a great and safe festive holiday season. We are happy to announce that CIL has achieved the highest quarterly revenue and profits due to strong demand across various market segments and geographies. Financial Results Q2 FY'23 For the quarter ended September 30th, 2022 with respect to the same quarter last year our sales at Rs. 1,922 crores were higher by 14% compared to Rs. 1,689 crores recorded in the same quarter last year. Domestic sales at Rs. 1,391 crores were higher by 11%. Exports at Rs. 531 crores were higher by 21%. Profit before Tax and exceptional items at Rs. 336 crore is higher by 15% compared to Rs. 293 crores recorded in the same quarter last year. For the quarter ended September 30th 2022 with respect to the last quarter our sales at Rs. 1,922 crores we

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