Cummins India Limited
Quarter Two Earnings Conference Call, Financial Year 2010
October 30, 2009
Moderator:
Good afternoon Ladies and Gentlemen. I am Manjula, the
moderator for this conference. Welcome to the Cummins
Conference Call. For the duration of the presentation, all
participants' lines will be in the listen-only mode. I will be
standing by for the question and answer session. Now, I
would like to handover to Mr. Anant Talaulicar. Thank you
and over to you sir.
Mr. Anant Talaulicar:
Thank you Ms. Manjula, and good afternoon Ladies and
Gentlemen. I am very pleased to announce the CIL
financial results for the July through September 09 quarter.
Let me first speak to the numbers excluding Cummins
sales and services, so that we can draw an apples to
apples comparison versus a year ago. Of course, you
have seen the numbers including CSS also, and so let me
first talk to the numbers without CSS. We achieved a
sales level in the quarter of 480 crores, which was a 39%
decline in sales as compared to a year ago, which by the
way was a historic peak quarter for us of 790 crores of
sales. Also, quarter on quarter we declined 5% and here
we had a special factor taking place, where I would like to
remind you that our largest plant at Kothrud Pune had
experienced an illegal strike and was not operational as of
15th of September. Were it not for this strike, sales would
have been to flat to growing slightly, despite a 20% decline
quarter on quarter in exports, which should tell you some
story about the domestic comeback. As of October, we
are back in production at Kothrud, although the illegal
strike continues, we have been operating with a
nonunionized work force and are achieving practically the
same run rates as prior to the strike. Hence, I do not
anticipate that special factor playing out this quarter. Our
PBT was down 34% to 85 crores driven by the sale decline
and that too on the export side. However, I would like to
point out that we have been able to improve our
profitability by slightly over 1% point, and I would largely
attribute this to our 6 sigma based cost reduction and
based elimination activity plus some tailwind coming from
commodity reduction. The CIL results have been primarily
negatively impacted by a very steep decline in exports of
80% compared to last year. So, exports in the quarter was
72 crores as compared to 345 crores during the same
period last year. I would announce that we believe that
exports are now near bottom although not as bottom, I do
expect a slight decline even in the current quarter, but that
should be the, I would say the bottom, and from there I
expect exports to gradually improve through the year.
Currently we are projecting somewhere in the ballpark of
10% improvement in exports in the next calendar year. I
am particularly pleased with the way we have leaned the
company and strengthened ourselves, and therefore I think
we are well positioned to take full advantage once the
global economy comes back. With that, I will pause now,
and turn it over to your questions.
Moderator:
Thank you very much sir. We will now begin the Q&A
interactive session.
Participants who wish to ask
questions, please press *1 on your telephone keypad. On
pressing *1, participants will get a chance to present their
questions on a first in line basis.
Participants are
requested to use only handsets while asking a question.
To ask a question, kindly press *1 now. First in line, we
have Mr. Manish Goel from Enam Holdings. Please go
ahead.
Mr. Manish Goel:
Good afternoon. Sir, can you give us revenues from
spares and services for the quarter and the first half?
Mr. Anant Talaulicar:
The sales for our spares were approximately 100 crores.
Mr. Manish Goel:
For the quarter?
Mr. Anant Talaulicar:
For the quarter.
Mr. Manish Goel:
For the first half? You mean to say only spares, right?
Mr. Anant Talaulicar:
Yeah, only spares.
Mr. Manish Goel:
Okay.
Mr. Anant Talaulicar:
I mean this is now CSS, right, which is part of CIL.
Mr. Manish Goel:
Okay.
Mr. Anant Talaulicar:
That is what we are talking about. We are at a run-rate of
about 100 crores per quarter.
Mr. Manish Goel:
Okay, and can you give us revenue breakup in terms of
powergen, industrial, auto?
Mr. Anant Talaulicar:
Okay, so as I look at it, just tell you that roughly 50% of
sales in this quarter was power gen.
Mr. Manish Goel:
30?
Mr. Anant Talaulicar:
50.
Mr. Manish Goel:
Sure.
Mr. Anant Talaulicar:
I think let me remind you, few quarters ago you will recall
Manish that exports had almost grown to 50% of our
portfolio.
Mr. Manish Goel:
Right, right.
Mr. Anant Talaulicar:
That has tanked 80% now, and so exports now only
comprises 15% of the portfolio.
Mr. Manish Goel:
Yeah.
Mr. Anant Talaulicar:
So, this is largely domestic 85% and powergen 50%, our
industrial business is about 15%, and auto is about 10%.
Rest is spares.
Mr. Manish Goel:
Okay, and how are we seeing recovery in industrial space,
say in mining, in construction, railways?
Mr. Anant Talaulicar:
I would say that all of our industrial segments, the ones
you mean, never really saw a slowdown. All through this
overall GDP slowdown, these particular segments were
very robust because they are driven by infrastructure. The
only segment that really got impacted, the only industrial
segment that got impacted was construction.
Mr. Manish Goel:
Right.
Mr. Anant Talaulicar:
And that continues to be soft, although I would say
improving.
Mr. Manish Goel:
Okay, but are we seeing any revival in the construction
space?
Mr. Anant Talaulicar:
Yeah. In fact, there was, I would say, back in the OctoberDecember quarter of last year, we practically saw no sales
in the construction segment, you know, and that obviously
was a correction, the channel correction that you might
say, but still now we are back seeing fairly good level of
sales. Our construction portfolio, out of the industrial tends
to be in the ballpark of about 15%.
Mr. Manish Goel:
Okay, and sir, as far as your margin improvement is
concerned, no doubt on basically including CSS, the
margin improvement looks fairly high from say 15 odd
percent to 18% largely due to improvement in raw material
price, but if you probably look at excluding CSS the
margins have improved by 1%, so this is largely due to
only cost cutting or you have seen raw material price
benefit in the engines business also?
Mr. Anant Talaulicar:
Both factors, 50:50.
Mr. Manish Goel:
50:50?
Mr. Anant Talaulicar:
Yeah.
Mr. Manish Goel:
Okay, and as far as your entry into lower range is
concerned, last call you mentioned you have introduced
7.5 KVA generator.
Mr. Anant Talaulicar:
Yes.
Mr. Manish Goel:
So, how has been the response, and how is the
competition shaping up?
Mr. Anant Talaulicar:
I had actually mentioned that we were going to launch the
7.5 and 10 KVA diesel generators, so that is this quarter,
the current quarter, so there was no impact on the
numbers that you are seeing. However, as we speak, we
are taking orders for that product, and shipping product.
Mr. Manish Goel:
So, these are largely sales in the domestic or you are
looking at exports also?
Mr. Anant Talaulicar:
Both. We are looking at both, and we are very excited
about the product because it will be the most compact
product in the country in this range. It will also be the
quietest product and of course certainly very dependable
as Cummins typically is.
Mr. Manish Goel:
And these engines which are required for gensets are
manufactured by Cummins or they have been outsourced?
Mr. Anant Talaulicar:
This has been outsourced to Simpson.
Mr. Manish Goel:
Okay, but you are not looking to set up a manufacturing
facility for small engines?
Mr. Anant Talaulicar:
No, not for this range.
Mr. Manish Goel:
And what kind of volumes you are expecting, and what is
the price point for this genset?
Mr. Anant Talaulicar:
Price point is close to 2 lakhs per unit, and the volumes
would be in the first year, probably, somewhere in the
5,000 to 10,000 range.
Mr. Manish Goel:
Sorry, 2 lakh rupees per unit, you said.
Mr. Anant Talaulicar:
Correct.
Mr. Manish Goel:
And volumes you said?
Mr. Anant Talaulicar:
Is 5,000 to 10,000.
Mr. Manish Goel:
In the current year?
Mr. Anant Talaulicar:
I would say in the next calendar year.
Mr. Manish Goel:
Okay, and sir, as far as your 525 KV range is concerned,
one of the domestic players have launched engine in that
space, so how are you seeing competition, and are you
seeing any pricing pressure.
Mr. Anant Talaulicar:
No, not really. We are really concerned about the
domestic competition for that rate.
Mr. Manish Goel:
Sure, fine, thanks a lot sir. I will get back to you.
Mr. Anant Talaulicar:
Thank you.
Moderator:
Thank you very much sir. Next in line, we have Mr. Umesh
Gupta from Dalal & Broacha. Please go ahead.
Mr. Umesh Gupta:
Hello?
Mr. Anant Talaulicar:
Yeah.
Mr. Umesh Gupta:
Just one question on your exports. You mentioned
this may be the bottoming off the exports, so could
elaborate this and tell us what makes you think like
and whether the markets or your parent is giving you
indication on this thing.
Mr. Anant Talaulicar:
Yeah, absolutely, those are the indications that we are
getting from the parent and the market. Essentially, most
of our exports are into the power generation market.
These are generator sets in all the way up to 2000 KVA
and also the smaller units. There, we have seen over the
last year now correction happening in our channel and
currently those inventories are fairly low, and I think as you
are aware most of the international markets, the western
markets, have kind of bottomed out. It is not getting much
worse, and in fact there are some signs of hitting bottom to
slight improvement. So, based upon on that, we expect
also that we have hit bottom. It can't get much worse
anyway, we are down to 72 crores, right. It can't go much
worse than that.
that
you
this
any
Mr. Umesh Gupta:
Okay, and for the Q3, you are saying it could be about 80
to 85 crores, right, 10% sequential growth?
Mr. Anant Talaulicar:
What are you quoting here?
Mr. Umesh Gupta:
The exports that you mentioned that in Q3….
Mr. Anant Talaulicar:
I am sorry, let me correct. I miscommunicated. I was
saying that for the next fiscal year, we expect the 10%
growth in exports.
Mr. Umesh Gupta:
And for the rest of the year, how do you see the exports?
Mr. Anant Talaulicar:
I would say that for this quarter we are talking about,
exports will continue to decline some but marginal, okay,
so the 72 crores may come down to about 60 or so, and
then from thereon we expect a growth trend.
Mr. Umesh Gupta:
And for domestic also if you could take us through the
business outlook?
Mr. Anant Talaulicar:
I would say that domestically if you look at this fiscal year
as compared to last fiscal year, we should see about
anywhere from 10% to 15% growth rate.
Mr. Umesh Gupta:
Okay, thank you.
Mr. Anant Talaulicar:
Thank you.
Moderator:
Thank you very much sir. Next in line, we have Mr. Sanjay
from DSP Merrill Lynch. Please go ahead with the
questions.
Mr. Sanjay:
Good afternoon sir. My question is relating to the profit
margin. I understand that you have explained it possibly
once. If you can quantify again for us how much of this
margin is because of raw material cost and how much of it
is sustainable going forward that we will get sir?
Mr. Anant Talaulicar:
I would say it is 50:50, so we said about 1% improvement
in margin, so you know half point would be sustainable. It
depends upon what happens to commodities. We are
seeing indications of some increase in commodity pricing
already, but I guess time will tell, you know, depending on
the demand supply situation overall in the global market
place. Because commodities are globally driven.
Mr. Sanjay:
You might be having some kind of inventory or something.
There must be some kind of lag impact or something like
between commodity prices and your margin, so what do
you think and where do you think, I mean, by what time do
you think commodity prices will start hitting to margin sir.
Mr. Anant Talaulicar:
One quarter lag.
Mr. Sanjay:
Okay, okay, and sir, can you give some sense of your
individual businesses, powergen, and industrials, how the
segments grew during this quarter, and what is the
prospect going into next quarter in the domestic market?
Mr. Anant Talaulicar:
I would say that we are seeing very good recovery. We
are seeing improvement in sentiments in the market place
across the board. Power generation, industrial, and auto,
and in this of course industrial was largely not impacted as
I mentioned earlier. So, these are largely government
based spending, so they were not impacted by the
slowdown in India. Auto of course saw a very sharp fall,
but now we are seeing an extremely robust growth in auto.
In fact, our auto business has more than doubled as
compared to last year, and that is on the back of this
JNNURM, the urban renewal scheme, which is a stimulus
based scheme in the country, where all these government
run bus fleets are being renewed, so that has been a very
positive impact, plus I think you know we are seeing that
Tata Motors share is improving in the market place, and
they tend to work very closely with us, and our share in
their portfolio has also increased, so as a result, auto
certainly has been a good new story for us. Although I
would say in the quarter, the overall heavy commercial
segment is still about 5% down as compared to the same
quarter last year, although I expect that this quarter will be
better than lat year of the same quarter. Now, as far as
power generation goes, telecom has been a robust
segment all along. It did slowdown some, but that was
only a slowdown in the rate of growth, so telecom has
continued to grow all through this period. Those are the
smaller generators, typically powering up the cell-phone
towers. Aside from that, we are seeing a pick-up in
manufacturing sector. We are seeing in the IT sector, so
pretty much across the board, we are seeing now recovery
in power generation.
Mr. Sanjay:
Okay, but still is it declining almost 5% to 10% year on year
basis?
Mr. Anant Talaulicar:
Correct.
Mr. Sanjay:
Okay, and you would say that power generation while it is
declining 5% to 10%, probably in the quarter or so, one will
start seeing some kind of 20% growth because of the base
effect as well as the sequential recovery.
Mr. Anant Talaulicar:
Correct.
Mr. Sanjay:
Okay, and industrial is growing at about 10% to 15%.
Mr. Anant Talaulicar:
Correct.
Mr. Sanjay:
Okay sir. On this JNNURM, which has boosted your auto
sales and it has doubled in the current year, do you really
expect the same thing to come in, in the next year as well,
so do you think the auto segment may come off quite
substantially in subsequent years?
Mr. Anant Talaulicar:
Yes.
Mr. Sanjay:
So, it may decline going into next year?
Mr. Anant Talaulicar:
No, I don't expect that because you see this JNNURM
scheme will continue into next year. What we are seeing
now is only phase I.
Mr. Sanjay:
Okay.
Mr. Anant Talaulicar:
Yeah.
Mr. Sanjay:
I mean, even in fiscal 2011 also the benefits of JNNURM
will continue?
Mr. Anant Talaulicar:
Correct.
Mr. Sanjay:
Okay, and sir, are you seeing some more customers like
Eicher or something like that buying engines from you
directly and that is why your direct, I mean, non-CNG
business is also picking up in some way?
Mr. Anant Talaulicar:
Correct, absolutely. We are in fact Asia Motor Works
which actually you know is a new entrant is exclusively
using our engines, and so we are seeing recovery in their
demand. Eicher is using Volvo, Eicher is using our
engines in certain ranges, and Ashok Leyland is using our
engines. So, pretty much all the major OEMs are using
Cummins Engines.
Mr. Sanjay:
Sir, is it possible for you to give us some sense like out of
the total auto revenue, how much would be CNG engines
and how much would be other engines sir?
Mr. Anant Talaulicar:
Well, as you look at the CIL portfolio, currently the majority
is CNG.
Mr. Sanjay:
Okay, how much would it be still, is it something like 80%?
Mr. Anant Talaulicar:
70:30.
Mr. Sanjay:
Okay.
Mr. Anant Talaulicar:
70% CNG, 30% diesel.
Mr. Sanjay:
Okay sir, understood sir.
questions.
Mr. Anant Talaulicar:
Welcome, thank you.
Moderator:
Thank you very much sir. Next in line, we have Mr.
Askshen Thakkar from Enam Securities. Please go ahead.
Mr. Akshen Thakkar:
Sir, first if you could just share some working capital and
cash and debt on balance sheet?
Mr. Anant Talaulicar:
Okay, actually, the working capital has been a very good
new story for us, lot of good work taking place in that area.
Our days sales outstanding has come down significantly,
so just to give you a sense of it, just about a year ago, our
day sales outstanding was in the 80s, okay, and currently,
we are running in the 40s, so it has almost halved, days
sales outstanding, so therefore even in a slowing scenario
relatively speaking, we have been very proactive in terms
of collection. That has certainly helped cash flow.
Mr. Akshen Thakkar:
Okay.
Mr. Anant Talaulicar:
Same story holds true for inventories. Our inventories
have come down quarter on quarter, okay, and have hit
now a low point so far at least in the last 4 or 5 quarters.
Cash, we continue to generate positive cash flow, and we
have actually, the cash position has almost reached about
700 crores, almost close to 700 crores.
Mr. Akshen Thakkar:
Okay.
Mr. Anant Talaulicar:
So, we are in a very good shape. The balance sheet is
looking excellent.
Mr. Akshen Thakkar:
Sir, the second question is that you mentioned that for year
as a whole domestic business should grow at about 10%
to 15%, and given that you are now introducing some new
products plus some of your key segments have started to
revive, any guess, any ballpark as to how much next year
should we grow by?
Mr. Anant Talaulicar:
About the same, I would say.
sustain that growth trend.
Thanks a lot for taking my
We should be able to
Mr. Akshen Thakkar:
Actually, do you think we will be probably be able to reach
our high teen sort of a growth that we used to see a few
years back again in the domestic business.
Mr. Anant Talaulicar:
Yes, optimistically yes, yes.
Mr. Akshen Thakkar:
Okay, and on the export front sir. Just wanted to
understand, in this quarter we have seen a 23% sequential
decline.
Mr. Anant Talaulicar:
Yeah.
Mr. Akshen Thakkar:
So, as we understand in Kothrud, we would have also
catered to the exports markets, right?
Mr. Anant Talaulicar:
Absolutely.
Mr. Akshen Thakkar:
So, just I am not very certain because if Kothrud is
stabilized, why would the next quarter sales be down sir?
Mr. Anant Talaulicar:
Demand based.
Mr. Akshen Thakkar:
Okay, so demand is not there, and you are saying FY '11
should see another 10% growth?
Mr. Anant Talaulicar:
Correct.
Mr. Akshen Thakkar:
Okay, sir then, just one question if your cash flow is so
good. Last year we have seen your dividend payout, etc.,
being increased, this year, if our cash flows are so good,
any such plans being contemplated?
Mr. Anant Talaulicar:
Yes.
Mr. Akshen Thakkar:
Okay, so we could probably see another one time
dividend.
Mr. Anant Talaulicar:
One time or whatever, we will certainly maximize dividend.
Mr. Akshen Thakkar:
Maximize dividend, alright.
Mr. Anant Talaulicar:
We are also looking to increase our capex investments.
To fight the slowdown, I would say, we would sustain about
100 crores of capital investment. Next year, we are
looking to practically double that.
Mr. Akshen Thakkar:
Okay.
Mr. Anant Talaulicar:
As you know, we have announced our mega site in
Phaltan.
Mr. Akshen Thakkar:
Sure.
Mr. Anant Talaulicar:
That project is in a bit, we slowed it down some, although
never stopped it, but now we plan to accelerate it based
upon what the strength you are seeing in the domestic
economy.
Mr. Akshen Thakkar:
Okay, and one last question sir, this impact of this strike,
worst case what could be the impact on Cummins
because…
Mr. Anant Talaulicar:
The worst case is already behind us, that was what you
saw in the last quarter. It was about 70-crore topline
impact, about 20 crores bottomline. Now, just so I am
clear it was not loss sales and loss profits, so it is a timing
issue, so we will catch up with it this quarter.
Mr. Akshen Thakkar:
Okay.
Mr. Anant Talaulicar:
And as far as impact to Cummins, I would say this is a very
positive impact because I think in my view anyway we are
going to change some negative behaviors which will only
help the company long-term.
Mr. Akshen Thakkar:
Okay, but you don’t foresee any wage renegotiation
happening, which will increase your salary cost going
forward?
Mr. Anant Talaulicar:
No, absolutely not, it might go the other way.
Mr. Akshen Thakkar:
Okay, and sir, just observing that the tax rates for the last
two quarters have been sub 30% for the traditional
Cummins business plus CASL, what should be the
effective tax rate for the full year, roughly?
Mr. Anant Talaulicar:
About 32% to 33%.
Mr. Akshen Thakkar:
Well, first half has been about 27%.
Mr. Anant Talaulicar:
I think it is a function also of mix, exports mix.
Mr. Akshen Thakkar:
But exports have been low in this quarter, so we pay
higher tax.
Mr. Anant Talaulicar:
Yeah, so now we are going to see higher tax coming
forward.
Mr. Akshen Thakkar:
Okay, alright sir. Thank you sir. That is it from my side.
Mr. Anant Talaulicar:
Thank you.
Moderator:
Thank you very much sir. Next in line, we have Madhu
Chanda from Kotak. Please go ahead.
Ms. Madhu Chanda:
Yeah, I have two questions. First is in the last conference
call, you said that there is a distinct improvement in the
domestic business whereas export continues to be
lackluster. Between last quarter and this quarter, is there
any noticeable change either in any pocket of your
business?
Mr. Anant Talaulicar:
I would not say there is a noticeable change. We are
continuing to see a positive trend in terms of domestic
pickup and a continuing slightly negative trend on the
exports front.
Ms. Madhu Chanda:
I mean the exports have gone down compared what you
had expected at the end of Q1.
Mr. Anant Talaulicar:
We had expected this, but this has gone down.
Ms. Madhu Chanda:
What has been the positive surprises, I may just rephrase
my question in the last one quarter, in the environment that
you operate in?
Mr. Anant Talaulicar:
I would not say that we have been positively surprised at
anything, you know, mostly things have been anticipated.
Ms. Madhu Chanda:
Okay, any particular sector which is really coming out
smartly, some color if you could throw on that. Other than
auto, which you have already talked about.
Mr. Anant Talaulicar:
No, I think, I would say manufacturing in general, we are
seeing now strengthening. There is more optimism and
therefore more willingness to invest in capacity. This is
what we are seeing currently. The telecom sector has
continued to strengthen and the realty sector is the only
one that is most sluggish. I think there has been more
correction will happen there, both commercial realty as well
as residential realty, and in the auto, now we are seeing
more strengthening at the upper end of the horse power
range, so people are now starting to invest, are investing in
the larger trucks, larger tractor trailers, so we are seeing a
lot of strength in the 180 horse power segment, which I see
as a very positive sign. It just shows that sentiments now
are more wide in the country.
Ms. Madhu Chanda:
On the export, is there any enquiry for the new products or
you had planned to get into the low KV range also in
exports at one point in time. Is there any progress on that,
once the dust clears, and if the parent also starts sourcing
more?
Mr. Anant Talaulicar:
Yes, absolutely. So, you know, I think we touched upon
one example earlier which is the 7-1/2 and the 10 KVA
generators. These are also targeted to export markets. In
fact, we have designed the world product, which is the
same product specification, we will serve India as well as
the other countries, and we are very optimistic about it. It
is a very cost effective package compared to all the
competitors globally. Cummins has low market position at
that particular range since we had not offered that low size
of product, so there is tremendous upside opportunity in
my view. Aside from that, we have launched a 5.9 liter
engine based generator at the 160 KVA range, which until
recently was being covered by much larger engine, an 8.3
liter engine, so it makes it a much more compact, cost
effective, and higher power density package. We are very
excited about that one also. So, those are a couple of
examples on how we see exports, you know, how we see
growth in exports despite the overall let us say slowdown.
Ms. Madhu Chanda:
Product basket basically is going to expand from FY '11,
that is very likely?
Mr. Anant Talaulicar:
That is right.
Ms. Madhu Chanda:
What will be the impact on margin. Basically, you earn a
much lower margin on exports compared to the domestic
sales, right, any sense on the margin as a result of this?
Mr. Anant Talaulicar:
As you go down in the product range, your margin typically
declines.
Ms. Madhu Chanda:
Yeah.
Mr. Anant Talaulicar:
However, it is more of a volume game there. So, it has a
good positive impact on the PBIT line, and I would not say
that our exports margins are substantially worse than the
domestic. They may be so at the gross margin level, but
then we don't have all the marketing expenses associated
with the domestic.
Ms. Madhu Chanda:
Right, right, right.
Mr. Anant Talaulicar:
So, on the net bottom line basis, they are comparable.
Ms. Madhu Chanda:
Okay, thanks and all the best.
Mr. Anant Talaulicar:
Thank you.
Moderator:
Thank you very much ma'am. Next in line, we have Mr.
Nayanesh from Tata Mutual Fund. Please go ahead.
Mr. Nayanesh:
My questions have been answered. Thanks a lot.
Mr. Anant Talaulicar:
Thank you.
Moderator:
Thank you very much sir. Next in line, we have Mr.
Jasdeep Walia from Kotak Securities. Please go ahead.
Mr. Jasdeep Walia:
Hi, my first question is you talked about your supply of
engines to OE customers as far as CVs are concerned,
could you tell us any other company which supplies
engines to OEs?
Mr. Anant Talaulicar:
As you look at the auto market, the medium and heavy
commercial vehicles market, I believe we are the only
independent engine manufacturer in India.
Mr. Jasdeep Walia:
Okay, so there is no other company with the capability to
manufacture?
Mr. Anant Talaulicar:
No.
Mr. Jasdeep Walia:
Why do you think it is so difficult to enter this market?
Mr. Anant Talaulicar:
It is highly capital intensive.
Mr. Jasdeep Walia:
Could you elaborate?
Mr. Anant Talaulicar:
To set up a plant for example, we are looking
approximately at an investment of 400 crores. Then, to
develop an engine we are probably talking two or three
amounts that amount. So, it is a highly capital intensive
industry and it is highly technology intensive, okay?
Mr. Jasdeep Walia:
Okay.
Mr. Anant Talaulicar:
So, therefore, that is why Cummins has such a strength in
the global market place because of the kind of scale we
have and the core competence that we have developed
over the last 90 years. In our range, we are the largest
independent engine manufacturers in the world. In good
times, we have made as many as close to million engines
a year. There is no other player who can claim to do that.
Mr. Jasdeep Walia:
Understood. My second question is if you consider the
domestic engine market, could you segment the market in
terms of various product categories, as in low horse power,
mid horse power, heavy duty, very high horse power
engines, and could talk about the competition in the market
in terms of market shares of each of the players in these
markets?
Mr. Anant Talaulicar:
Okay. As you look at the different sort of horse power or
KVA ranges, I would say that our low horse power, but just
let me give you a broad number, I don't have the facts in
front of me right now.
Mr. Jasdeep Walia:
Yeah, you could give me broad numbers, not a problem.
Mr. Anant Talaulicar:
Broad numbers are that our low horse power end, which
would be about let us say 200 horse power and below.
Mr. Jasdeep Walia:
Less than 200 horse power.
Mr. Anant Talaulicar:
Yeah, less than 200 horse power would be approximately
25% of the portfolio.
Mr. Jasdeep Walia:
Your portfolio?
Mr. Anant Talaulicar:
Yes, our portfolio.
Mr. Jasdeep Walia:
No, I am talking about the market as such, like in low horse
power segment, what is your market share, and where are
other competitors of yours.
Mr. Anant Talaulicar:
Oh I see, so if you look at the power gen market place, and
at the low horse power end, we probably have about 10%
market share, so we are the No.1 player there.
Mr. Jasdeep Walia:
Who is the No.1?
Mr. Anant Talaulicar:
I would say probably Kirloskar in the organized sector,
somewhere between Kirloskar and Mahindra, that is where
we have the numbers in the lowest end, and then as you
look at the mid range, this is where, mid range as well as
the higher horse power, we are clear No.1 player.
Mr. Jasdeep Walia:
Okay.
Mr. Anant Talaulicar:
So, we continue to be stronger as you go up in the horse
power range.
Mr. Jasdeep Walia:
What would be your market share here?
Mr. Anant Talaulicar:
In the mid range, I would share our market share would be
somewhere 40% area, and in the higher horse power, we
should be somewhere in the 60% to 70% area.
Mr. Jasdeep Walia:
And who is the second in competition in mid range?
Mr. Anant Talaulicar:
Again in the power gen industry, it is probably Kirloskar.
Mr. Jasdeep Walia:
How much market share would he have?
Mr. Anant Talaulicar:
I don’t know, easy to check with them.
Mr. Jasdeep Walia:
Okay, understood, and what about the presence of
unorganized sector or the fragmentation low horse power
sector?
Mr. Anant Talaulicar:
That is there only in the low horse power end, you have
the fragmented players in Rajkot, etc., and you know they
have also a significant share of the pie. I would say
roughly in the 20 odd percent range.
Mr. Jasdeep Walia:
And they are not present in the mid and high.
Mr. Anant Talaulicar:
No, they are not.
Mr. Jasdeep Walia:
Okay, that is about it, thanks.
Mr. Anant Talaulicar:
I think what happens there you know once you get into
slightly the mid and high end, those are emissions
regulated segments, so they require a certain technology
investment, which the unregulated players are not able to
bring.
Mr. Jasdeep Walia:
Understood. There is this player called in Sudhir in power
gensets.
Mr. Anant Talaulicar:
Yes.
Mr. Jasdeep Walia:
Does he manufacture his own engines or they buy engines
from somewhere?
Mr. Anant Talaulicar:
No, Sudhir is Cummins, okay, you think of Sudhir as
Cummins. They are our partners.
Mr. Jasdeep Walia:
Okay, okay.
Mr. Anant Talaulicar:
They use our engines. Our alternators, our controls. We
jointly design the product, and we jointly market the
product.
Mr. Jasdeep Walia:
Oh, I understood, I understood.
Mr. Anant Talaulicar:
Yeah.
Mr. Jasdeep Walia:
Thanks a lot.
Moderator:
Thank you very much sir. Next in line, we have Mr. Manish
Jain from Axis Holdings. Please go ahead with the
questions.
Mr. Manish Jain:
Yeah, I just want to know in exports, when are we likely to
see, I know it is a little long-term question. When do we
aspire to see exports coming back on track of roughly, you
know, 200 to 250 crores per quarter?
Mr. Anant Talaulicar:
That is very good question. If you ask me for my best
estimate.
Mr. Manish Jain:
Just rough, your personal guesstimate, it is good enough.
Mr. Anant Talaulicar:
I would say optimistically, it will be two years out, okay,
optimistically, and more realistically, three years out.
Mr. Manish Jain:
Thanks.
Moderator:
Thank you very much sir. Next in line, we have Ms.
Aparna Shankar from SBI Mutual Fund. Please go ahead.
Ms. Aparna Shankar:
Good afternoon sir.
Mr. Anant Talaulicar:
Good afternoon.
Ms. Aparna Shankar:
Just a small question, I mean, how much has been
currency benefit for us during this quarter for this export?
Mr. Anant Talaulicar:
No real benefit. I think in fact in this quarter, we have been
net importers.
Ms. Aparna Shankar:
Okay, okay, thanks a lot sir.
Mr. Anant Talaulicar:
Welcome.
Moderator:
Thank you very much ma'am. Next in line, we have Anoop
Maheshwari from AK Stock Market. Please go ahead.
Mr. Anup Maheshwari:
Hello sir.
Mr. Anant Talaulicar:
Hello?
Mr. Anup Maheshwari:
I have a couple of questions. One of them is prior to the
consolidation of CSS and CSLA into Cummins India, what
was the parent company of these?
Mr. Anant Talaulicar:
CIL.
Mr. Anup Maheshwari:
I mean, CIL is still, I mean the same Cummins India only.
Mr. Anant Talaulicar:
Correct. These two were 100% subsidiaries of CIL, and all
we have done is now we have essentially merged them
into that legal entity.
Mr. Anup Maheshwari:
Okay, okay, fine, and can you just say the performance of
these two companies.
Mr. Anant Talaulicar:
CASL has been merged into CSS, that has happened
some time back.
Mr. Anup Maheshwari:
Yeah.
Mr. Anant Talaulicar:
CSS results have been excellent. They have a grown at a
topline of 17%, so they never really were impacted by the
slowdown in India, and the bottomline has far outstripped
that number, 77% growth in the bottomline.
Mr. Anup Maheshwari:
Okay, okay, and like what is the share of overall these two
subsidiaries, like the total revenue of say Cummins India.
The contribution from these two subsidiaries to that total
overall revenue. Well, I think we have announced the
results both including and excluding it, I think that is very
clear spelt out.
Mr. Anup Maheshwari:
Okay, okay fine. My next question is like from the orders
which we have got from the DC, basically 2500 buses, so
out of the same, what is the margin basically we are
getting from this segment for the CNG?
Mr. Anant Talaulicar:
I would, you know, we have not been announcing
individual product margins for competitive reasons, but I
would say they are very healthy margins.
Mr. Anup Maheshwari:
Okay, and like, as far as execution of the same is
concerned, probably any, you can just say like how much
would be this year and like the next year?
Mr. Anant Talaulicar:
I think this phase I part of it is approximately 3,000 to 4,000
engines.
Mr. Anup Maheshwari:
Okay.
Mr. Anant Talaulicar:
And then, we expect another phase to come into the next
fiscal year, similar amount.
Mr. Anup Maheshwari:
Okay, okay. Okay fine, I will come in a followup question.
Mr. Anant Talaulicar:
Thank you.
Mr. Anup Maheshwari:
Thank you.
Moderator:
Thank you very much sir. Next in line, we have Mr. Misal
Singh from Edelweiss Securities. Please go ahead sir.
Mr. Misal Singh:
Good afternoon sir.
Mr. Anant Talaulicar:
Good afternoon.
Mr. Misal Singh:
I just wanted a breakup of your portfolio in terms of you
know the horse power, low, mid, and high.
Mr. Anant Talaulicar:
Okay.
Mr. Misal Singh:
Broadly.
Mr. Anant Talaulicar:
Yeah, broadly speaking, the low horse
somewhere in the 15% to 20% ballpark, okay?
Mr. Misal Singh:
Okay.
Mr. Anant Talaulicar:
Then the mid range is somewhere in the 20% ballpark, and
the mid range we classify as between let us say 200 to
about 350 horse power, and then we have a heavy duty
segment which is somewhere in the 350 to 450 kind of
horse power range, that tends to be about 10%, and then
the rest is high horse power, which is anywhere from 40
odd percent.
Mr. Misal Singh:
Okay, and in terms of the capacity expansion at Phaltan,
can you just detail as to you know where exactly are you
adding capacity, in which range exactly, that is the only
capacity expansion that is going on right now right?
Mr. Anant Talaulicar:
That is correct, and this is going to be a multi-year
expansion, you know, so currently what we are looking
there is expanding our 5.9-liter engine which goes primarily
into medium and heavy commercial trucks.
Mr. Misal Singh:
Okay.
Mr. Anant Talaulicar:
So, we are getting ready to establish another incremental
capacity of 60,000 of those engines. That should be in
place by roughly October-December quarter of next year.
Aside from that, we are investing in our rebuild center,
basically this is through CSS, which is part of the CIL now,
where we take engines that are already being used by
customers and need overall the repairs, upgrades, we
bring them to our shop, do that value add and send them
back, so the currently facility is already at capacity, so we
are expanding that now. We are moving and expanding it
at Phaltan.
power
is
Mr. Misal Singh:
Okay.
Mr. Anant Talaulicar:
Aside from that, we are also investing in a reconditioning
operation, reconditioning both engines as well as
generators as well as components, engine components.
This is where essentially, you know, some components of
your engine have worn out, rather than buying a new part,
we sell a reconditioned part at a lower price, but at the
same kind of warranty. So, this is kind of a new concept
and it is going to be an emerging business for us, which we
are investing in, and then the other project that we are now
envisaging and we are implementing is the parts
distribution center. This is existing center, but we are
looking at expanding it and making it a lot more of a
productive operation. So, those are the initial projects that
we are looking at, at Phaltan.
Mr. Misal Singh:
Okay, and you are saying this will involve the capex of
about 100 crores in fiscal 10, and about 200 crores in fiscal
11, right?
Mr. Anant Talaulicar:
Not all related to this mega site. We are of course
investing in our existing plants or let us say new products.
So, if you strictly looked at the mega site, we are probably
talking about 100 crores, out of that 200 that you quoted.
Mr. Misal Singh:
Okay, okay sir, thank you.
Mr. Anant Talaulicar:
You are welcome, thank you.
Mr. Misal Singh:
Yeah.
Moderator:
Thank you very much sir. Next in line, we have Ms. K. P.
from Enam AMC. Please go ahead.
Ms. K. P.:
Good afternoon sir.
Mr. Anant Talaulicar:
Good afternoon.
Ms. K. P.:
Yeah, could you just give us capex details for FY '10 as a
company as a whole and for the next year?
Mr. Anant Talaulicar:
For fiscal year 10, it is roughly 100 crores.
Ms. K. P.:
Okay.
Mr. Anant Talaulicar:
Next year, we want to step it up to 200 crores.
Ms. K. P.:
Okay, and sir, you did mention that our domestic business
next year can grow into high teens, probably say 15% to
18%, and same as exports by 10% in CY 10.
Mr. Anant Talaulicar:
Correct.
Ms. K. P.:
So, that would be more driven by our volumes or you think
this is the value growth which will drive more?
Mr. Anant Talaulicar:
Largely volume.
Ms. K. P.:
So, do we see any, I mean, rather volumes would be
higher than our value, I mean, what I am asking is do you
see any realization correction or something?
Mr. Anant Talaulicar:
No, I don't.
Ms. K. P.:
So, primarily, it will be driven by volume still.
Mr. Anant Talaulicar:
Volume.
Ms. K. P.:
Okay, and current mix of our sales includes low horse
power range is something 15% to 20%, say next year 11 or
probably say 12, do we see that this low horse power
products going to be on a higher side?
Mr. Anant Talaulicar:
Yeah, yeah.
Ms. K. P.:
So, do we foresee any kind of margin impact because
generally our low horse power commands a little bit lower
margin than our higher horsepower.
Mr. Anant Talaulicar:
Not material.
Ms. K. P.:
Okay, and what is our current capacity utilization across
our various facilities including Kothrud.
Mr. Anant Talaulicar:
Pretty low. Kothrud is at about 40% to 50%.
Ms. K. P.:
Okay.
Mr. Anant Talaulicar:
I would say in fact as probably SEBI used the number
across the board.
Ms. K. P.:
So, across the board 40% to 50%?
Mr. Anant Talaulicar:
Yeah.
Ms. K. P.:
Okay fine, thank you very much sir, and wish you good
luck.
Mr. Anant Talaulicar:
Thanks.
Moderator:
Thank you very much ma'am. I repeat again participants
who wish to ask questions, may kindly press * followed by
1 on your telephone keypad. Next, we have a followup
question from Mr. Gagan of BNK Securities. Please go
ahead.
Mr. Gagan:
Good afternoon sir.
Mr. Anant Talaulicar:
Good afternoon.
Mr. Gagan:
Sir, I would first like to know what has been the reason for
CSS bottom line growth being as aggressive as it was?
Mr. Anant Talaulicar:
Just a great management team, I would say.
Mr. Gagan:
Could you basically, I mean, elaborate more on the nature
of the business. It is not manufacturing, it is essentially
sales and services?
Mr. Anant Talaulicar:
That is right. Let me just build upon that. So, CSS
essentially sells our parts, right, for all the products that
need to be repaired in the field, it provides services. Also,
there are large customers. We call net worked customers,
you know, people like HDFC or Reliance that have assets
all of the country. Let us say 1,000 generator all over the
country that we take contracts for maintenance.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
So, this is done by CSS. We also talked about the sole
engine repair work that is done. All of that is done through
CSS.
Mr. Gagan:
Great sir. You have given an outlook for your, I mean, CIS
business domestically growing at 10 to 15% next year,
would you say CSS business would grow at the same rate
or at a higher rate?
Mr. Anant Talaulicar:
I would say CSS is different from a product type business,
so less cyclical, but not as high growth because in good
times as you know, our product businesses have grown
30% even, but this tends to be much more steady in the
10% to 15% ballpark.
Mr. Gagan:
Okay, you mentioned the first phase of JNNURM had
around 3,000 to 4,000 buses going in for replacements.
What would be the total scope and over what time does
this program play out sir?
Mr. Anant Talaulicar:
If you look at the number of buses in India, that rightfully
need to be jumped, I would say 40,000.
Mr. Gagan:
Okay, and does the program itself envisage this much?
Mr. Anant Talaulicar:
It does, but the question is you know whether that will
actually get implemented.
Mr. Gagan:
What would your understanding of that be sir?
Mr. Anant Talaulicar:
I would say probably half of it.
Mr. Gagan:
Half of it, and over what timeframe?
Mr. Anant Talaulicar:
Over two to three years.
Mr. Gagan:
From now?
Mr. Anant Talaulicar:
Including the current year.
Mr. Gagan:
Okay, and at your mega site, would that facility be treated
as a mega project under the Maharashtra Government's
norms?
Mr. Anant Talaulicar:
Yes.
Mr. Gagan:
Okay, so you would be getting the same benefits that are
applicable to mega projects at Phaltan?
Mr. Anant Talaulicar:
Yes.
Mr. Gagan:
Okay. Sir, is it possible to know and understood, out of
your genset business, how much is dependent upon on
construction and how much on telecom?
Mr. Anant Talaulicar:
I don't have a number for construction. Telecom tends to
give out 30%.
Mr. Gagan:
30%?
Mr. Anant Talaulicar:
Yeah.
Mr. Gagan:
And industrial?
Mr. Anant Talaulicar:
Well, industrial is, a whole different segment that we look
at outside of power generation.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
So, when we say industrial, these are engines, not
generators.
Mr. Gagan:
Yeah, I get your point sir. What I am trying to ask is could
you sort of give out the breakup of sub-segments of your
industrial business?
Mr. Anant Talaulicar:
Yeah, that tends to be, you know, basically compressors.
Compressors that are used on a portable application for
road building or on water well rigs, you do your bore drilling
right into the ground. That if you look at the portable side,
it tends to be around 10% of the portfolio of industrial.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
Water well tends to be somewhere in the 15% to 20% if it
is a very cyclical market, so somewhere 15% to 20% it
keeps bouncing back and forth.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
Construction tends to be about 15%.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
Mining is about 25%.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
Marine is about 10%, even 15% in good times.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
And oil and gas is about 5% to 10% and rail is about 10%
to 12%, so that should give you a ballpark of all these
different…
Mr. Gagan:
Right sir, right. Sir, considering the fact that there is a
slowdown in the bulk of the developed world, and there is
a fair number of very competitive Indian manufacturers
there, and considering that we have got the NHAI
programs coming up and various other infrastructure
programs, how do you see that in terms of competitive
pressure in terms of capacity creation by host of other
companies in India?
Mr. Anant Talaulicar:
My view is that there will be growing interest in the Indian
market on the part of the global players, and so you know
you already are seeing it, you know, Daimler, you know,
trying to look gain more of an entry. Volvo is tied up with
Eicher aside from their own bus operation. Man has tied
up with Force. International has tied up with Mahindra.
So, you are going to continue to see that kind of a trend.
Mr. Gagan:
Would that, you know, let us say in a year or two's time
materially impact your position in the market?
Mr. Anant Talaulicar:
No, we don't think so.
Mr. Gagan:
Okay, and sir, just last question. This is something. This
is an offshoot of what I asked the last time also. With the
changing norms, I think you clarified to me. With the
change in norms, the dollar value or the rupee value of a
DG set increases by 50% to 70%. Does that mean that
with similar volumes next year, you will be able to derive a
50% increment on the topline?
Mr. Anant Talaulicar:
No. Next year, the only market that is going to see an
emissions tightening is the automotive market. So, you
know, a smaller proportion of our portfolio, and also you
know I probably miscommunicated if I said 50%, I probably
meant 15% earlier.
Mr. Gagan:
Okay, but would your exports not be affected by EPA
norms being changed in the US?
Mr. Anant Talaulicar:
The EPA norms impact our heavy duty and mid-range
engines, which are used on on-highway applications in the
US.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
CIL does not participate in that export.
Mr. Gagan:
Okay, and sir, if you could tell me when do CPCB norms
change for DG sets in India?
Mr. Anant Talaulicar:
That is still under discussion. Tentatively 2012 but is not a
firm number?
Mr. Gagan:
Okay, and sir, do you feel that the power deficit in India
which is being between 8% to 12% at peak load 15%, you
know, over the next decade or so, will come down, does
that imply that your revenue mix will change with less
coming from power generation and more coming from
industrial?
Mr. Anant Talaulicar:
No. I don't think so. On one hand, unless something
dramatically changes in our environment, this power deficit
is likely to stay, so while of course additional capacities are
being put in place, the demand is also continuing to grow
as India grows, so that is one factor. So, I foresee that,
yeah, there might be some reduction in the deficit but the
deficit as such will continue over the next 10 years.
Mr. Gagan:
Okay.
Mr. Anant Talaulicar:
Right, so that is one factor. Even if the deficit is totally
eliminated, what typically happens in developed
economies is you start having mandates to have standby
generators in all facilities, whether it is a factory or a
building or a hotel or a hospital, these are mandated by
standards, safety standards for example, because no
matter even if you have no power deficit in our country, the
grid is never 100% reliable.
You know, you have
thunderstorms, you have monsoons, you have whatever,
snowstorms in the Western world, so it is very common to
have generators in every facilities as an insurance policy
you might say, so we do not see sales of generators being
impacted by this phenomenon. Yes, the running hours
might decline. You know, that might impact CSS in terms
of its service revenues, but product revenue should not get
impacted.
Mr. Gagan:
Am I correct when I say that your business is not going to
be impacted because what you lose due to pure deficit
narrowing out, you gain because backup demand
increases.
Mr. Anant Talaulicar:
Absolutely.
Mr. Gagan:
Okay, thank you sir.
Mr. Anant Talaulicar:
Thank you. Let us take one last question please.
Moderator:
Sure sir. Thank you very much. The final question comes
from Mr. Faizal Kumar from Quantum Asset Management.
Please go ahead.
Mr. Faizal Kumar:
Yes sir, there are couple of questions. First thing is during
the H2, what is the targeted cost saving under this H2?
Mr. Anant Talaulicar:
About I would say 20 to 30 crores.
Mr. Faizal Kumar:
This will be an annual recurring saving sir?
Mr. Anant Talaulicar:
No, accrued.
Mr. Faizal Kumar:
Okay, and sir, just last question is, can you just give us the
breakup of your order book?
Mr. Anant Talaulicar:
No, I cannot, I am sorry, for competitive reasons.
Mr. Faizal Kumar:
No, in terms of quality, like earlier you used to give some
qualitative nature of the order book.
Mr. Anant Talaulicar:
Approximately 1 month.
Mr. Faizal Kumar:
Pardon sir?
Mr. Anant Talaulicar:
Approximately 1 month.
Mr. Faizal Kumar:
Okay, thank you very much.
Mr. Anant Talaulicar:
Okay, with that, let me just summarize that obviously the
sales decline has been disappointing, although I think it
has been due to factors that are outside of this
management team's control. I think the management team
has done a very good job of doing what it could with the
factors that it does control and actually improve the
profitability of this company. We are continuing to invest in
terms of new product development and in terms of new
service offerings. We have a very strong and stable team
at the top. We have an extremely diverse and talented
work force. Our technology definitely is unmatched and
backed by the global Cummins Corporation.
Our
distribution system also in India is unmatched. Based
upon all of these factors, we have leading market positions
in all of these areas of automotive, power generation, and
industrial, and most importantly we are value based
institution, and based upon that, I feel very positively about
our prospects as the external environment gradually
improves. So, thank you very much for your interest and
involvement with Cummins.
Moderator:
Thank you very much sir. Ladies and Gentlemen, thank
you for choosing WebEx's Conferencing Service. That
concludes this conference call. Thank you for your
participation. You may now disconnect your lines. Thank
you.