transcript may 26 2016 q4 analyst call

8/16/2019 Transcript May 26 2016 Q4 Analyst Call

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Cummins India LimitedQuarter Four Earnings Conference Call, 2015-16

May 26, 2016

Anant: Good afternoon, ladies and gentlemen. I’m happy toconvey the results of the last fiscal year 15-16 as wellas the January through March quarter. And certainlyI’m happy to relay that CIL legal entity broke a newrecord in terms of revenue in its history in the fiscalyear with a sales of 4603 crores. This has happenedat a time when the global markets have beendepressed and the Indian economy yet to fully take offand so we feel pretty good about that. We believe thatwe have gained market share in many of ourdomestic segments which is where we saw domestic

sales improve in the year by 13%. Profit Before Taxwas 906 crores, which improved by 6% over the priorfiscal year, and profitability was maintained despitethe headwinds of exports decline. In the quarter, saleswere 1038 crores, which actually declined by 7% overthe same quarter last year. And that was entirely dueto a 30% decline in exports over the same quarter lastyear. Again, despite this, we were able to maintainprofitability largely.

As we look ahead, we see continued growth in thedomestic side of our business, and a flat to slightly

down picture on exports. And we continue to invest innew products, capabilities in our human resources,cost reduction and customer focus. And you cancount on us outperforming in our industry anddelivering top quartile results. So with that, I’ll turn itover 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 askquestions, please press “0” then “1” on yourtelephone keypad and wait for your name to be

announced. I’d like to repeat. Participants, should youwish to ask question, please press “0” then “1” onyour telephone keypad. So we have the first questionfrom Mr. Ashutosh from HSBC. Your line is un-muted,you may please go ahead and ask your question.

Ashutosh: Good morning, gentlemen. Two questions.


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Anant: Good morning.

Ashutosh: Just to understand how long do you see theweakness in the export continue, and is there anyway the company can look at different markets

especially in the Middle East or Africa where we canbe able to kind of compensate for the drop? That’sone.

And second, if you could give the usual breakup ofyour revenues especially as per kVAs.

Anant: Yes. So, the answer to your first question is we do notknow. We do not know how long the global softnesswill continue. I wish I had a better news. But rightnow, there are no indications out there that may

cause optimism on our part. And how long that’sgoing to continue is anyone’s guess I guess. So that’swere its at.

In terms of your second question, let’s go to the kVAsincome.

Ashutosh: Meanwhile, sir, just one small question. On thedomestic business, any specific segment which hasdone well during the quarter?

Anant: In the domestic segment I would say that we’ve donewell pretty much across the board, but the one thatwe feel good about is the powergen segmentsequentially. We’ve been able to hold our sales outthere. We’ve seen some growth. But again, I don’tthink sequentially will give you a good picturebecause there’s too much variation that goes on.

Ashutosh: Sure. Anant: So again, back to your question around the sales

composition, I would say that our LHP compositionwas about 10%. The midrange was about 25%, heavyduty was about 7%, high horse power 30%. Ourdistribution business was about 25%.

Ashutosh: Sure. And similarly, would I be able to get a breakupof the export segment?


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Anant: Yes, definitely. Okay. So when you look at ourexports, we exported about 325 crores in the quarter,out of which low horsepower was about 70 crores,midrange was about 100 crores, heavy duty wasabout 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 whichyou gave us for the total revenues, right, includingexports?

Anant: Correct. Yes.

Ashutosh: Sir, given the current scenario, where would you kindof guide for the next year in terms of top line growthboth at the exports as well as the domestic business?

Anant: Right now my guidance should be for domesticsomewhere in the 8-12% range and exports being flatwith 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 questionfrom Renu, from IFL. The line is un-muted, you mayplease 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 ofsoftness in sales, if you look at the gross margins wehave seen... I know sequentially it’s not right tocompare but overall gross margins of 37% lookreasonably healthy. So apart from drop in exports,has there been any particular mix factor which hashelped us to get this kind of expansion gross margins,and how sustainable you think it would be for the next12-15 months?

Anant: So yeah, the number that you quoted, 37% is amaterial margin, not gross margin.


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Renu: Yes, sorry, material margin.

Anant: So having said that, that’s okay. What I would say iswe had some one-time charges last quarter. And thatwas approximately 20 crores which consisted of

excess and obsolete and scrap which obviously was aone-time. So it didn’t carry over in this particularquarter. So this quarter actually is a better reflectionof our performance. And in terms of your questionaround sustainability, I would say not at the materialmargin level, but when you look at an operatingmargin level, we should see sustainability.

Renu: So the EBITA, excluding the other operating income14% should be sustainable?

Anant: Yes.

Renu: Okay. Sir, then just understanding a little more on thesegmentwise, you did share HP wise split, will it bepossible for you to share the Rupee value of salessplit between powergen, auto, industrial, distributionand how have they performed for the quarter andoverall for the year?

Anant: So when you look at the quarter, our domestic saleswere about 715 crores, out of which power gen wasabout 290-odd crores. The industrial business wasabout 150, auto was about 25, distribution was about235. From a full-year basis, our domestic sales were2940 crores of which power gen was 1250, industrialwas 560, auto was 70, distribution was 985 crores.Then some miscellaneous about some 50-odd sorevenue items.

Renu: Right. And, sir, how is the growth outlook that we areseeing? Other industrial has now sustained to that150-170 crores kind of volumes in terms of salesvalue. So how are we looking these growth numbersto sustain in the next one to one-and-a-half years bothin power gen and industrial?

Anant: Yeah, I’m actually relatively more bullish on ourindustrial business which is the off-highway, whichincludes 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 bypriming the pump. So we are actually spendingmoney versus just talk. And we are clearly seeingthat. 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 theprior government. And that is clearly driving demandfor our products. And I’m feeling better that if this issustained by the government, at some point, privateindustry will also start kicking in terms of capitalinvestments. So that’s where I sit on the industrialwhich is why we are guiding overall domesticallysomewhere 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, that’s nota cyclical business. We’ve continued to show growthin the 5-10% range in a sustained manner in thatbusiness. Auto, of course, has a smaller exposure toCIL, but again, the medium and commercial heavytruck industry, truck and bus industry, has grownsignificantly in the last year, year-and-a-half by almost30% I would say. And we expect that to grow another10% or so.

Renu: Right. Sir, my last question is just to understand alittle more with respect to what exactly are the engineranges today that CIL is making and is planning tofurther expand. Recently we had seen that the 9-litreengine expansion coming in from parent has beenhappening in the 100% Cummins Inc. entity, not in theIndian listed arm. At the same time some restructuringis planned for the Pirangut facility. So one has tounderstand over a period of time where do we see ourengine in-house manufactured engine range movinginto and what would be the growth drivers where wecan see incremental new products being added here.

Anant: I would say that’s not how exactly one should look atit, not certainly from a financial perspective. CIL willalways be Cummins’ single face to the domestic


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market. Where product is made is another issue. I saythat because for a number of years we haveoutsourced our smallest engines to Simpson. Theseare products that are used in our power generationsegment. But obviously we manage that sourcing

activity, we make sure that it meets our cost qualityand delivery expectations. So whether it’s madeinside CIL or outside frankly has nothing to do to theP&L of CIL. So that is one thing that should beproperly understood. So the key point is that nomatter what the product range is, it will always flowthr ough CIL’s P&L for the domestic market. So that isthe domestic side, which frankly at least for the nextforeseeable future is the one bright spot in the worldtoday. So that’s one.

The second thing is when you look at CIL exportsopportunity, we have leveraged certainly whatcapacity we had to export certain ranges of productsand those will continue into the future. Right now, ofcourse, those are facing bad times because of theglobal situation. But obviously at some point, that willchange.

Renu: But any near to long-term plan, as in Kothrud we havethe HHP facility there. So, do we plan to reallocatethat at a later date from the city centre to outside thecity or other where we have light facilities?

Anant: 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 questionfrom Mr. Sandeep Tulsian from JM Financials. Yourline is un-muted, you may please go ahead and askyour question.

Sandeep: Yeah. A very good afternoon, sir.



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Sandeep: Sir, my first question is on the market share that we’rehaving in the domestic DG set industry, how has thatmoved, as in at what rate has the industry grown andat what rate has CIL grown in the domestic power

gen. And if you could give us some colour in themarket share across different categories at the end ofFY16.

Anant: Yeah. So if you look at agencies like Frost andSullivan, then they would say that the power genmarket, the DG set market in India has beenapproximately flat in this period we’re talking about,these two fiscal years. And in that period, our powergen business, as you look at it, has grown by 18%. Sothat tells us that we have picked up significant share

across the board. So that’s what I would say toanswer your question.

Sandeep: Any specific movement in terms of different sub-segments, mid kVA, low kVA?

Anant: No, I think it’s been across the board. I feel prettycomfortable that we gained ground across the boardacross all our competitors. The only exception to that Iwould say could be at the very lowest end. I’m talkingabout below 12 kVA where we frankly don’tparticipate in any significant way. But other than that,in the range that we have played, I believe we playedbetter than others.

Sandeep: And, sir, my second question is on the consolidationof manufacturing facilities that we had across variousplaces and we’ve seen capacities either move intoPhaltan and now we are contemplating to outsourcethe low kVA engines manufactured in the company.So there’s a lot of land band now available to thecompany and Daman and various plots in Pune. Sowhat are your though t process on monetising thatfrom a near-to-medium-term perspective?

Anant: Yeah, so that’s a good question. Daman we havediscontinued operation now for almost a couple ofyears. So now we are getting ready to sell thatproperty. And given the bureaucracy and corruptionthat goes on in India, it will take us some period oftime to do it in a clean way. So I don’t have a


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prediction for you when that could happen.Optimistically certainly in this fiscal year you’ll see thattransaction take place. I don’t believe it will bematerially significant to CIL, not materially significant.It’ll be a few crores, but again, not something that will

significantly alter our bottom line numbers, becauseit’s a relatively smaller facility in a place like Daman.Now, when you look at the other facility, Pirangut, thatwe’re talking about, by shutting Pirangut down andoutsourcing that operation, this is going to have abenefit to CIL’s bottom line. So this is a positiveactually from a financial perspective. And this willhave a benefit about 10 - 11 crores to the bottom lineper year. So that’s one thing that needs to beunderstood. So we are trying to move it as quickly aspractical. So by some time July-August timeframe, we

hopefully will be done with that operational action. And then subsequently we will start marketing theproperty which is the land and the building that weown. And yes, there should be a good, a better Iwould say gain on the sale of that particular property.

Again, I don’t have any estimates for you because wer eally haven’t engaged our brokers yet and so on. Soit’s based in Pirangut which is just outside of Pune. Soyou think that the valuation would be better there ascompared to Daman. And it’s also a larger property.So that’s my response to your question.

Sandeep: Sir, my last question is on, of course, one of thefacilities was mentioned in the presentation that hasbeen moving from Seymour Engine Plant to PHP inPhaltan. There’s another factory of Cummins Inc. inKent, UK, part of which productions was alsoexpected to move to India Phaltan facility. So whichrange of engines are being manufactured? Does it fallunder CIL entity or Cummins Inc. entity in India, if youcould just elaborate on that.

Anant: So Seymour Plant, the line that we are talking aboutis the 19-litre product. So we call it the K19 or theelectronic version is referred to as the QSK19. Andthat’s what under consideration. So the decisions withmade to move it out. We’re still in the final discussionswhether it should move to India, China, etc. So it’s nota completely done deal yet, but obviously we areputting our best foot forward. It is not going to be into


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CIL though. Let me make that very clear. In terms ofmanufacturing, again, as we market those productsinto India, CIL will be the only outfit that does that.But to the extent that there’s an exports opportunity,that will be done through CTIL out of Phaltan. So,

that’s the situation on the 19 litre from Seymour.

Now, what will happen is aside from… one thing wehave to consider is if we get that business which weare hopeful for, it will essentially double the volumesin a country of being manufactured. So, the 19 litreproduct that CIL manufactures is at about 10 a day,10 engines per day. And if we transfer all of whatSeymour has, that will be another 10 or so a day. So,as we do that, obviously we’ll be sitting down with allour suppliers and re-negotiating all the contracts. And

to that extent certainly it should help CIL’s coststructure. So, that will be a certain benefit that CIL willcertainly see. Then, to your question on the Kentplant, so what we are doing is a portion of thatgenerator manufacturing which is on the highhorsepower side, these would be high horsepowergenerators. That production will be shifted to Indiaagain into the India Phaltan high horsepower engineplant. So, today it’s manuf acturing a 23-litre engine, itwill continue to do that but we’ll add some generatorsassembly operations to that same plant and we willstart exporting those generator sets to certaincountries where it makes sense from a logisticsperspective, because these are large volumeproducts when you have a generator of that size, soyou’re moving a lot of volumes. So, it has to makesense from a total cost of ownership perspective.

So, again, CIL legal entity will not see theimpact of that Kent production moving into India.

Sandeep: Okay. Got it, sir. Thanks for verifying my queries.That’s it from my side.

Anant: Thank you.

Moderator: Thank you very much. We have the next questionfrom Mr. Ravi Swaminathan from Spark Capital. Theline is un-muted. You may please go ahead and askyour question.


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Ravi Swaminathan: Good afternoon, sir. Thanks for taking my question.

Anant: Good afternoon. You’re welcome

Ravi Swaminathan: Sir, just wanted to know in the export market which

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

Anant: Yeah, yeah, absolutely. I will share the numbers withyou, but again I’ll share it with a couple of caveats.You should not look at the changes in these salesnumbers as necessarily market changes. So, that’smy caution to you because it could be an impact ofour supply chain, whether let’s say we had some

delivery issues in the prior quarter, we caught up alittle bit this quarter, or there might have been excessstocks sitting in those receiving countries andtherefore the demand on us was down and now it’scatching up

So, all of that noise is baked into these numbers, myonly caution to you. But having said that, when youlook at our high horsepower exports, we saw in theUS the exports dipped down by 22%. The Chinaexports actually grew by 27%, Middle East droppedby 40%, Europe dropped by almost 50%, and Brazilgrew by a 1000% on a very low base being almostnegligible in the earlier quarter. Okay. Very smallnumbers but that’s why you’re seeing these kind ofwild swings. Africa was down by 26% and rest of Asiawas up by 13%.So, again what I’ve just told you is completelymeaningless by the way. So, but if you ask me to stepback and say what’s going on out here, right, what isreally going on, then I would say that the US market isabout flat. China market is down. Again, when I saythese things, I’m trying to say those in a slightly longerterm horizon, not quarter by quarter. So, I would takethese by the base line being something like almostabout six months kind of a picture. So, if you look at itsix months back to six months the most recent USwas about flat, China is down, Middle East is aboutflat, Europe is about flat, Brazil is down significantly,

Africa is down, rest of Asia is down. That’s my best


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attempt to give you some guidance on markets versuslooking at our sales numbers. Does that help?

Ravi Swaminathan: Yeah. And you had mentioned in earlier calls that ourshare roughly in the export market is roughly around

5%, something of that sort. Given this low base thatwe have, if the say market sees and improvementfrom here, in all these markets that you hadmentioned, do we see significant growth that ispossible for us from here?

Anant: Okay. So, the number that I quoted you earlier aboutpurely high horsepower exports. When you look at ourlow horsepower, then the picture looks like Africa wasdown 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.

Now, to your real question, yes there is upside. Thereis clearly upside because once these markets comeback, I think the fundamental issue right now is the oilprices and commodity prices. So, as those startrecovering, that is when the demand for theseproducts will start improving is our hypothesis. Andthere is share gain to be made and certainly more likemore potential is the low horsepower side where yes,we do have a lower share position as compared to thehigh horsepower.

Ravi Swaminathan: Okay, understood, understood. And typically theseproducts will go into all the end customers related tocommodity and oil and gas is what you’re saying?

Anant: No. What I was trying to say was these countrieseconomies are depressed because a lot of them aredependent on oil and other commodities. So, forexample, Nigeria or Russia or Brazil, I mean theseare all, you know, their economies are more basedupon the fundamental petrol chemical and steel andcopper and those kinds of commodities businesses.

And then, the other issue of course is China, right,what’s going on in China, which has been the majorconsumer of these commodities globally; and thateconomy is adjusting right now. You’ve got these twothings playing out there.

Ravi Swaminathan: Okay, understood, understood. And sir, regardingshifting of this K19 engine from Seymour facility to


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Phaltan, given that we already manufacture K19 inKothrud facility, won’t it make more sense to addmore volumes to the same line than shift it toPhaltan? I mean, what is the rationale behind this?

Anant: The rationale is simple. The line in Kothrud is now a

fairly old line, it does not have any more capacity. Soyou’d have to really substantially make an investmentinto Kothrud, which we don’t believe is as cost-effective as making an investment in Phaltan. So, Ithink we even have to look at should we evenconsider moving the line out of Kothrud into Phaltan.I’m not saying that’s the decision, but we even look atthat and make sure that whatever we do leads to thebest possible cost structure and best marginopportunities for CIL as well as CMI.

Ravi Swaminathan: Okay, got it. But, I mean effectively CIL won’t bebenefiting from this, that’s why from that point I wasasking?

Anant: CIL, even if we manufactured it, let’s say, withinKothrud, right now it does not make any sense fromthe exports perspective. So, because when you lookat it from the exports perspective, that is not abusiness that CIL has ever had. These products whilethey are of the same family are completely differentshop orders. So, this is not a business that CIL hashad in the past. So, we are not taking anything awayfrom CIL in terms of the export side. And certainlyfrom a CMI perspective, it makes sense to put in a100% Cummins entity.

Ravi Swaminathan: Okay. And for the full year, can you give the breakupfor power gen between 0 to 160, 160 to 380, 380 to640 and 640 and high horsepower?

Anant: Okay. For the full year, when you look at our range inpower gen less than 160kVA, we saw a 28% growthand the number in the latest fiscal year improved to325 crores. When you look at the 160 to 380kVArange, our sales grew by 40%. So, the new numbernow is 270 crores. The 420 to 640kVA, we improvedby 15%, and so the new number was 180 crores. Andabove 750kVA, we grew by 5% up to 460 crores.


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Ravi Swaminathan: So, this 750kVA and above we have seen a dipcompared to last year?

Anant: No, a growth of 5%.

Ravi Swaminathan: Growth of 5%, because last year you had mentioned550 crores in this.

Anant : I’m sure we are talking about different ranges then.

Ravi Swaminathan: Okay.

Anant: I stand by the ranges I’m talking about and the growthrates that I have just given you. We’ve grown acrossthe board.

Ravi Swaminathan: Okay, understood. And for the industrial, betweencompressors, railways, and for the full year, can yougive me the breakup?

Anant: The compressors grew by 33% to 130-odd crores,construction grew by 11% to 180 crores, mining wasflattish I would say at about 60 crores. Then firepumps, which is a small business, actually declinedalmost 40% to 13 to 15 crores, rail grew by 25% to114 or so crores, marine declined by 10% to 45crores and then there are some other miscellaneousapplications of approximately 15 crores.

Ravi Swaminathan: Got it, sir. Thanks a lot.

Anant: You’re welcome.

Moderator: Thank you very much. We have the next questionfrom Mr. Bhavin from Axis Capital. The line is un-muted, you may please go ahead and ask yourquestion.

Bhavin Vithlani: Afternoon, gentlemen.


Bhavin: My question is, again back to the same thing, theK19. You said 10 engines a day is currently beingmanufactured at the Kothrud facility. If you could helpus, what is the ballpark realization that we should be


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considering and what is the domestic export breakupof that?

Anant: Okay. So, approximate realization, again there is a lotof variation in realization because it all depends on

the applications, the applications are proliferated, buta ballpark number I would give you is about 15 lakhsper unit.

Bhavin: Okay. And the utilisation you said 10 engines a dayand 100% which is like we should say 10 engines into365. Would that be a fair way to calculate?

Anant: Yes, yes, absolutely. For the year I would say youshould 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 forthis product?

Anant: It’s all domestic. As I mentioned earlier, there are noexports from CIL on this range.

Bhavin: Okay. And as you said that in future, if the costeconomics does permit, the entire thing could beshifted to Phaltan, so in that case, would there be anyloss to CIL or it’ll be just arm’s length sourcing fromthe CTIL?

Anant: We would not do it if there was any loss to CIL. I thinkyou need to understand that Cummins operates onlyon the basis of gains, win-win. So, we’d only do it if itlowers CIL’s cost structure and helps it improve itsmargins domestically.

Bhavin: Okay. And what would be the total... with Kothrud, weunderstand is 20 engines a day. So, what would bethe utilisation of Kothrud currently, and is it at two-shiftor three-shift basis?

Anant: Well, today the utilisation, I mean, all over the map... ifyou look at it from a total factory perspective, I wouldsay the average utilisation right now in the quarterwhich has come down because of exports is about45% to 50%.


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Bhavin: At Kothrud?

Anant: Yes, at Kothrud.

Bhavin: Okay. You’re saying 45%, is that two-shift or three-shift 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 that’s how we calculatethe hours and see what the utilisation is. That’s theway we do our utilisation calculations. Machiningthree 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 quarterbreakup of power gen, like you used to give it earlierin terms of greater than 500kVA, 320 to 380 which isthe HP, MHP, which is 82.5 to 250 and less than62.5?

Anant: Yes. So if you look at the latest quarter, the 15through 62.5kVA range, what we call LHP, in thiscategorisation anyway, was about 33 crores.

Bhavin: Okay.

Anant: Then the 82.5 through 250kVA is kind of the mid-range, let’s say, was about 80 crores. The heavy dutyor the 320 through 380kVA was about 20 crores andthe high horse power, which is greater than 500kVAwas about 160 crores.

Bhavin: Okay. So this high horsepower is more or less flattish.What do you expect as a growth going, because wesee a lot of your competitors entering? So what wouldbe our strategy here, would we be defending ourmarket share or would we be protecting our marginsand we’ll let go some share?

Anant: No. We are looking to grow our share. So we are onthe offence.


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Bhavin: Okay. And what would be the pricing action if youcould give across on a ballpark basis for the quarteror for the year as a whole?

Anant: Well, I mean, you see that’s already behind us now

pretty much. What we are doing now is doing it very,very product-specific. And it is a headwind no doubtfinancially. Right now the intensity continues to bestrong in the market. So, usually the pricing pressureis in the downward range in power generation. So inthe quarter also we saw bit of an impact on pricing, Iwould say somewhere in the 0.2 points of marginssort of a range.

Bhavin: Okay. And what kind of pricing action you have donein specifically in HHP over the last year or so?

Anant: Again, it’s been very much targeted. I would say if youlook at it from a full year basis, it’s probably had animpact of about 0.3 points, 0.4 points.

Bhavin: Okay, fine. So, on a pricing basis, will it be like 2% to3%, would that be a fair way to...

Anant: I would say probably more like 5%.

Bhavin: Okay, fine. Yeah.

Anant: More like 5%.

Bhavin: Thank you so much, sir.


Moderator: Thank you very much. We have the next questionfrom Mr. Kishan Gupta from CD Equisearch. You’reline is un-muted, you may please go ahead and askyour questions.

Kishan Gupta: Yeah, hi. Good afternoon, sir.


Kishan Gupta: Yeah. Just want to understand like unlike in the past,why it’s becoming so difficult to gauge the medium-term trends in exports?

Anant: I think this is a question really for the economists toanswer. I would say, again, when you look at what’s


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happening in the world today, you have the secondlargest...

Kishan Gupta: I’m talking about CIL’s exports.

Anant: Yes, because CIL’s exports are entirely based uponwhat’s happening in the global economy, entirely.

Kishan Gupta: Yes. Like when we are estimating like for the quarteror for half year, a lot of times there are misses on thatfront. So, just want to understand why it’s becomingso difficult to estimate or project growth trajectories?

Anant: Because of the volatility that we’re seeing in themarketplace. Our ability to forecast these changes isnot good enough. It’s just not good enough.

Kishan Gupta: And which markets do you think would remain underpressure for this year, as you said that exports wouldbarely grow this year? So, which markets?

Anant: I would say China, Africa, Latin America, Australia,Indonesia, Russia. These would be ones that willcontinue to be under pressure at least through thisyear.

Kishan Gupta: And what about telecom orders from Africa where youdid well couple of years back? So how that is fairingnow?

Anant: Badly, for the same reason. Again, those economiesare struggling right now. Most of those economies arecommodity-based. So, we don’t expect to seesubstantial recoveries there.

Kishan Gupta: Okay. Okay, thank you so much.


Moderator: Thank you very much. We have the next questionfrom Chockalingam, from Deutsche Bank. The line isun-muted, you may please go ahead and ask yourquestion.

Chockalingam: Yeah, hi. I think most of my questions have been weanswered. The one thing that I wanted to understandwas on this scrapping policy. Is there any potential in


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the automobile sector, any potential for CIL as anentity to participate or it’s entirely under the TataCummins that that will be getting it?

Anant: No. You know, there’s not going to be any material

impact to CIL legal entity as a result of the scrappingwhatever policies that Kerala has recently broughtout. By the way, I would have to say, since I doparticipate in the auto side as well as Society ofIndian Automotive Manufactures, that we have beenpromoting some kind of a policy to scrap old vehiclesfor a very long period of time, because the oldvehicles are the ones that have the, I would say,obsolete diesel technology which causes higheremission. So, that is where India can get the biggestbang in terms of cleaning up the air by actually

scrapping old vehicles, but not impacting the newvehicles like are happening for example NCR,because the new vehicles meet all our standards ofvery low emissions in fact.

Chockalingam: Okay. And second thing was on the tax rate, giventhat exports has been a lower proportion this quarter,ideally one would have expected the tax rate to beslightly higher. How should we understand this?

Anant: Yeah. So we did see our tax rate, effective tax ratenotch-up in the quarter because of lower exports fromour SEZ. And so, it went up by about one point. Itwent 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 it’s possible to provide forfull year the key geographies, at least the top five byrevenues, absolute numbers?

Anant: Yes. Okay. So, when you look at the top five, then Iwould say, the US would be one of them. And I’mreferring to our high horse power exports, not thepower gen exports. So, these are engines. US wasabout 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 up4%.

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. It’s just a lot of othercountries which is about 170 crores, and that wasdown 17%.

Chockalingam: And if you were to look at the overall exports, bothpower gen and engines put together, then how wouldthat number look like?

Anant: So let me get to power gen specifically. So there, thetop exporting areas are Africa. Then you haveEurope, 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 115crores, Middle East was up 125% to 200 crores andrest of Asia was down 18% to 154 crores. So, theseset of numbers probably give you a little betterindication of what is happening in the markets. Buthaving said that, we need to remember that in the lasttwo years, we’ve also introduced new platforms. Sothat is going to cloud the numbers to some extent.

Chockalingam: Sure. Sure, sir. Thanks a lot.

Anant: You’re welcome. Moderator: Thank you very much. We have the question from Mr.

Harish from Kotak Securities. You’re 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 thebreakup 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 about490 crores, which grew by 40%. And again this is areflection of some new platforms added to theexports, so it’s not all market-based. Heavy-duty was112 crores, down 30%, high horse power was 595crores, down 15%. And then the remainder, which isabout 70 crores is spare parts, which grew by about50%.

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

export thought process, whenever Cummins, Inc. andCummins India decides to shift some of themanufacturing from overseas to India or to China andother places. What is the thought process, which legalentity typically we look at, because the last couple ofinstances we have seen that most of the engines orpower gen manufacturing is getting shifted to theunlisted entities. Which, in some cases, like a K19although it seems that we may not kind of have acontradiction but it is creating some of the issues. Andclearly in the mind of investors Cummins has kind ofperformed with higher dividend payout, best of thereturn ratios and operating cash, so which is great.Nonetheless, on the export side, this particular policyis something which is kind of worrying us a bit?

Anant: Okay. So the way to think of it, I guess, mostsimplistically is that whatever today CIL has in itsportfolio for domestic will continue. We will add newplatforms from a manufacturing perspective in the100% Cummins-owned entity, and CIL will continue tomarket it for the domestic economy. And any newplatforms, new technologies that are not in CIL’sscope will fall in the 100% entity for exports. So again,domestic is all CIL, from a market perspective, anddomestic manufacturing is all CIL in terms of theportfolio that it already has and the capacities that italready has. So I don’t know if that helps you? So, again, that kind of a strategy essentially makessure that CIL continues to be a profitably growing


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entity for good. And then of course, things that areoutside its scope are brought in through with CTILCummins 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 agreethat this has been done and a decision has beentaken at the top management level, but given that weall are playing for the long-term, we’re looking at five years, seven years outlook for Cummins India, whichis where some of the exports opportunity which couldhave been catered through real estate arm and theshareholders could have benefited, that is clearly kindof missing out, which is one concern that we keephearing from investors and like to convey it to you onthis. So, yeah.

Anant: Okay, I hear you. But again, the shareholders hadinvested in CIL. Given CIL’s portfolio of offerings andits growth potential, so to expect that now newopportunities that were not even in scope, I don’tknow if that’s a fair expectation. But anyway, that’s amatter of debate I guess, we can continue to have it.

Harish: Sure, sure. Sir, on the export LHP, you indicatedquarter back that we have about a 5% market shareglobally. And what we understood is that even with amarket which is stagnating to a slight decline,Cummins should continue to gain market share. Howis the progress on that? What is the growth outlook onthe LHP side over the next three to five years?

Anant: I don’t have that answer for you. I’m not empoweredto have that answer really. And this is something thatyou should query the global power generation or nowthe power systems business of CMI. And I say thatbecause the people that are closest to it in terms ofunderstanding how distributors’ capabilities areimproving in these various countries, I don’t havevisibility to that. So I’m not well placed to answer thatquestion.

Harish: Okay, okay. And on the..

Anant: I mean all I can tell you is that we have a productoffering that is highly cost-competitive and the quality


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levels on it, now based upon all our data, shows that ithas the best quality levels compared to any otherCummins plant globally. So we are on a very strongfooting from a supply chain perspective, which is whatwe control from India. But all of the marketing efforts

in terms of the distributors we have in place in variouscountries is not something we control at all. So to giveyou a projection on that, I don’t think it would be fairthing to do.

Harish: Sure, sir. Last question is on the fiscal year 2017outlook for the power gen segment in terms of thevarious nodes that we have. On the lower horsepower nodes, below 380kVA, how is the outlook likeand the competitive intensity? And on the high horsepower 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, I’m notseeing any material change in the intensity ofcompetition across the board. So, I can’t differentiatebelow or above. Sometimes the players change. Soyou may have a Perkins and its GOEM combinationsplay more at the upper end and someone likeKirloskar or Mahindra play at the lower etc. Butdespite that, I think overall the intensity continues tobe intense and I don’t see that stopping in the nextfiscal year.

Harish: And sir, if I can squeeze in one more, is that some ofthe competitors try and offer five year service, likeMahindra is offering right now along with the powergen package, other competitors, Perkins is for higherkVA offering, higher services and warranty, is thatsomething which we should really worry about or howdoes Cummins deal with that?

Anant: No. I mean these are all various marketing tactics thatwe all engage in, including Cummins. So, I don’t thinkthis is a matter of worry. I’m not worried about it. Infact the opposite, I feel like we are on a position ofgreat strength here as Cummins with the kind oftechnology that we offer, the kind of cost base that wehave established in the country, the scale that wehave and the kind of relationships that we have withour customers and the distribution support that we


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offer, the service support that we do offer. So frankly,no, I don’t worry about these things. It’s not to say thatwe should continue to improve our offering, which iswhat we are committed to doing.

Harish: Great, sir. Thank you so much, and all the very best. Anant: I think with this we can probably take one lastquestion.

Moderator: Sure, sir. We have the next question from Mr. GirishNair from BNP Paribas. The line is un-muted, youmay please go ahead and ask your question.

Girish Nair: Thanks for taking my question. Now, you have saidfor the sales guidance, the domestic sales guidancegrowth is about 8% to 12% for FY17, and flat for

exports. Now in the previous call, I recollect that youhad said that domestic sales would grow by about 10-15%. So, effectively you have reduced the guidance.But if you look at the overall commentary, you havesaid that the domestic market is clearly picking up andCapex is picking up in various sectors. So why is itthat your expectations have become more mutedcompared to what it was last quarter? This isspecifically for domestic.

Anant: Yeah, yeah. No. Absolutely. So, what we’ve beenseeing is we’ve come in the last year -and-a-half fromthe back of a slowing down economy in India and ithad kind of flattened out and then with all the efforts,the right efforts that the government is trying to take,we’re starting to see the pickup now. And so as Istood a year ago, I was feeling somewhat optimisticthat given the low base at which we have settled thatnow we should be able to grow in that 10-15% range.

And as it turned out, we ended up almost in the midpart of that guidance, which is about 13%, right?Now, the thing what I’m seeing is now the economyhas picked up in our sector, let’s say, but a lot of theactivity is being driven by government spend rightnow. The majority is still government-spend, not tosay that is zero in the private sector, but majority isstill government and some in the private. And nowthat we have come up to a certain level, from hereincremental growth is what I’m guiding of this 8-12%.So you could look at it that way. Since we’ve already


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improved to a certain range, now can we still sustainthe 10 to 15? I was thinking perhaps not, but I hopeI’m wrong, because you could always conjure adifferent scenario which says that now that there’sbeen an enough priming of the pump, all the other

sectors should start kicking in and India’s GDP shouldstart going to that 8-9% range in the next fiscal year.That’s a possibility, but I don’t think we can count onthat. I mean there still are pretty good headwinds, theinterest rates are still very, very high I would say. Thekind of the bad projects that are stuck are still verylarge right now. There are certain bottlenecks, privateindustry still has substantial overcapacity. So theseare all the headwinds that we are going to have tomaneuver through them, but we’ll get out of it,because the fundamentals still are, I would say, the

tailwinds are still stronger than the headwinds, but thisis where my caution is coming from. Does that help?Girish Nair: Yeah, very helpful. Thanks a lot for that.

Anant: Okay, all right. So with that, we’ll close this session. And again, thank you very much for your interests inCummins India Limited. We feel really good about theresults. I think in a tough time when the globaleconomy has been declining in fact in terms of itsgrowth, and at a time when India’s growth rate yet hasnot quite taken off in our sector, in the capital goodssector, I think we have done rather well. And I’m veryconfident and the data would indicate that we’ve donebetter than any of our peers in our industry.

And again, I stay confident that despite whatever mayhappen in the global economy or in the domesticeconomy, you will see that Cummins India Limited willoutperform our peers. So, I think that commitmentremains, and that rests upon the fact that we do havegreat products, great technology, you know, very,very diverse and strong capable workforce that is verymature now, the scale that we have, distributionssystem along with the kind of support capabilities thatit can offer. So with this, I think you can count onCummins to deliver the best possible returns that yousee in the industry. Thank you very much.

transcript may 26 2016 q4 analyst call

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