Cummins India Limited (500480) Earnings Call Transcript & Summary

So good afternoon, everybody. This is Ashwath. I'm the Managing Director of Cummins India, and I'm going to update you on how Cummins India is dealing with the COVID-19 pandemic. So as most of you would have seen these charts which come out on a daily basis, pretty much every country around the world is impacted, and the growth forecast for all countries is pretty much impacted, and especially India has been dropping quite significantly based on the more and more number of days of lockdown that we are seeing. Cummins, of course, as you know, has a presence in over 140 countries around the world, and we are certainly impacted around the world. United States being our headquarters, is most significantly impacted. You can see there are already 850,000 cases in the U.S., almost 1/3 of the 2.7 million or so cases that are there worldwide. We also have a pretty large presence in China. But China now, we are happy to report, is fully back at work and is -- ramp-ups are going on in that country. And as far as India is concerned, we have been under lockdown for the last 31 or so days, and we've been working at home for a few days before that. And as you can see, the cases in India are now getting close to 22,000 with about 700 deaths already having occurred, and we think this situation is probably going to get a little bit worse before it gets better. We've top 3 priorities for us as a company. The first one, of course, is the health and safety of our employees. The second one is that we continue to serve our customers who are providing critical elements to the economy, which means that we are running critical parts of our business. Our distribution business is supporting -- generating sets and engines in critical locations around the country. We have already supported over -- pretty close to 2,000-plus calls, 90% of which have been attended to in person and resolved. So we continue to serve our customers. In this -- at this stage, though, most of our customers are still not fully operational. And -- but as and when they are operational, we will ensure that they are being served. The third most important aspect in this time is that our company continues into the future, which means we take every measure that we know in our part to ensure that the long-term sustainability of the company is maintained. As most of you would know, Cummins is already globally a 100-year-old company, and we have been in India for close to 60 years. So we do believe in long-term sustainability. We don't think in short term measures, we think in long-term measures, and those are some of the reasons why we have been successful to date. So our top 3 priorities today. Looking at our top 3 priorities and looking at it and classifying it into what's important now, what are we going to do next and what are we going to focus on a little bit later. So now is that we are proactively responding to emerging economic scenario, which means we are dealing with what's happening in the economy; what's happening with the shutdowns; what's happening with the start-up approvals; how do we manage for the short-term scenario, which is continue with prudent cost management, rationalize all our capital expenditure and make sure that we are continuing to have plenty of cash available and cash available -- generating cash so that we conserve cash and remain strong during this crisis situation. The second, of course, in the now is to deliver on the operational pandemic response. As you know, we have over -- in India, Cummins has close to 20 factories spread around different parts of the country. The whole idea is to keep the supply chain moving as and when we get the necessary approvals from the government; navigate the pandemic wave, which means ensure that all our people stay safe, have been well indoctrinated in the right pandemic safety practices, that all our sites and facilities have all the precautionary PPEs and necessary mechanisms, the experience for which we have gotten from all parts of the world. We have multiple factories in China, in America, in Europe, which have all gone through or are going through the pandemic crisis and have started up or are starting up. And so we have got well-documented, well-practiced, well-versed response system to deal with the pandemic condition, accelerate and elevate our quality. We are launching or have launched products and to ensure that when we are running with limited staff, we're running with limited supply chain conditions that we continue to focus on the base product and ensure that it's of the highest quality and focus on starting back as many operations as possible as quickly as possible. So as of this week, we are again slowly starting to get permission to open up some factories. So how do we start up, how do we get the whole supply chain moving, how do we get everyone in a safe manner, starting to get working and get back to a regular productive cycle is what we are focusing on. Next, once -- and we don't anticipate that there will be a cliff event and immediately on May 3 everything will be wonderful and things will be back to 100% production. No, we anticipate a prolonged period whereby which business will gradually pick up, approvals will gradually start coming in, the supply chain will take time to mobilize as medium and small industries struggle to come up as hotspots continue to increase and people from hotspots are slowly freed up to come into work. So this whole cycle is expected to take some time. In China, it took 10 to 12 weeks, that is about 3 months for things to get back to normal. India have only been through right now about a month of shutdown. So we don't anticipate that this will be an easy return back to full production, that it will be a gradual return to full production. And while we are doing that, the next thing that we will plan on or we are working on is to anticipate and leverage the pandemic opportunity, which means how do we leverage our strengths in products, our strengths in technology, our strengths with customer relationships, our global scale, our global connect, our strong balance sheet to actually do better in a crisis situation. And for that, we are working on strengthening our relationships, we are attaching pockets -- or we will attach pockets of weakness where we have either lost market share or our market share is under threat. We will look to strengthen our market share to grow, and we will continue with our critical product investments because Cummins is a product company. We survive because we have the best products in the market. And so this will be an opportunity while others are constrained to continue to make critical product investments and use this opportunity to increase the lead on competition. And later, and by later we mean in the 6- to 12- to 15-month time frame, we will be, of course, focusing on leveraging our scale, both domestically and internationally, to ensure that this advantage of the currency weakening, of lower capacity utilization, et cetera, we -- the opportunities presented to us by countries looking to balance out the supply chains around the world, we use our scale and our capabilities to leverage that and become stronger, stay on course with our strategic plan and our strategic vision, ensure that we plan for CPCB-4+ and the CEV-BSIV readiness because we consider those as transformational events in the industry, which will allow us to build on our share on pricing and do better and execute all the strategic growth initiatives. We have been through many cycles as Cummins, and we are very confident that together with all our stakeholders, that is our customers, our own people, our suppliers, the community where -- which we serve and we work in that we will get through this in a stronger manner than what we are today as we have gone into this. So what is Cummins India's approach to this? Work as safely as we can as long as we can to support our employees, support our customers, protect the company, follow the advice of local bodies and their guidelines on health and work. As many of you may have already heard that even though there are national guidelines, the implementation is highly local, which means each district collectorate -- each zone in-charge has the authorities to interpret those central guidelines and then implement them in those local areas. So we have to work very closely with many of those bodies and their guidelines to get the business started up and running again. We are protecting and supporting our employees by working from home. Most of our exempt employees as of today are working from home. We have complete travel embargoes. We have 24/7 a Cummins Response Center with employee assistance programs. We are providing a safe, secure and socially distant operating facility. We are rolling out wellness, temperature checks on all employees, guests entering our facilities. We have set up a globally approved list, which is plus-plus beyond what WHO or CII or the Ministry of Health has advocated. We have gone way beyond that based on our experiences in other countries and set-up standard operating plans for operating all our plants and our offices. There is a global MRG. There's a local MRG. There is a huge amount of material that is collated, dry runs, mockup runs, et cetera, that are done to ensure that we have the best processes to start-up and run our facilities safely during the lockup period, of course, and like I mentioned, we think this will continue for some time and as the economy gradually opens up, follow the advice of the local bodies and their guidelines on health and work, conduct mock drills, scenario planning to ensure the smooth function of operations as we gradually start up operations, utilize the lockdown time to ensure basic up-keep and maintain of our facilities. All of that has been continuing during this entire lockdown period. And as far as fully starting up our plants, these are the focus areas we are working on over there. Employee's safety and health, supplier engagement and support. There is continuous -- almost bi-weekly calls with all suppliers and critical suppliers to make sure to understand their health, to see where they are in the chain, to the [indiscernible] with financial support if necessary. So we are continuously monitoring all of those situations on an ongoing basis. Prioritizing, planning and acting. So trying to figure out what's most important to do, if we are going to cut down on some CapEx, et cetera, to cut down on cost, what is the priority? What's nice to do versus what is critical to do? Plan on all of those things, prioritize and act on that. Of course, focus on product quality. I mentioned to you that at a time when you're working partially, it's even more important that you pay very close attention to product quality. So we're ensuring we're doing that. Maintaining plant hygiene in our protocols that I spoke about earlier. Communicate more, connect more. So we are in constant touch with all of our employees. Pretty much 3 or 4 times a week, we are communicating with them, sending out notices, sending out WhatsApp messages, communicating with them on what's happening, what's going to happen, basically keep people connected and motivated at this time. As far as COVID Community Support is concerned, our purpose is to provide support and relief through interventions that will directly impact frontline COVID workers. These are the people who are directly fighting the pandemic. For example, we are working on supplying medical equipment to hospitals, PPEs, gloves, masks, et cetera, medical gowns, goggles, et cetera, for health and sanitation workers. Domestically and economically disadvantaged, those who are most affected by the economic impacts of the pandemic, we are providing them ration kits for daily wage earners, migrant laborers, slum dwellers, SHGs, so a whole bunch of people who are impacted, we are trying to provide them support. Resource scarce-communities. So as you know, so as a practice, Cummins adopted many villages as model villages. So these are scarce communities in remote areas with limited resources. We continue to support the model villages and slums where sanitation of [ areas, ] awareness related to hygiene, social distancing and corona facts are critical. We continue to educate and provide resources to -- for them to be safe. Most of these efforts are channelized through the Cummins India Foundations, and we are working very closely by -- with partnerships with the state, central, local government bodies to provide relief to those in need, working with organizations on the ground with a plan and structure in place to give immediate relief. We're partnering with large industry associations like CII and SIAM to amplify and channelize resources to quickly provide support directly to the hospitals and people working on the front lines. And we are leveraging internal and partner organizations, technical expertise to manufacture scarce medical equipments. So we have -- our engineering teams have been working with DRDO and other folks to help in the design of some ventilator and other equipment. We are looking at manufacturing masks using our specialized materials, and we're looking at many other options by which we can participate in making some of these critical resources available to the people who need them the most. So here are the areas where we've already done some interventions in the corporate responsibility area. For frontline workers, we are providing equipment and material to doctors, nurses, paramedics. The sanitation workers who are involved in collecting transport and disposable of waste, we are supporting it by distribution of PPEs. Daily wage earners, we are providing them dry basic ration kits of rice [indiscernible] oil, sugar, et cetera. We are also providing cooked meals for migrate workers who have no income. And we are partnering with MCCI and the CII as well as SIAM to contribute to the central funds to distribute critical equipment to hospitals. This has already happened and more is being provided with these partnerships. These -- through this effort, we'll be providing kits, ventilators, PPEs, sanitizers, et cetera, for medical professionals in hospitals and other areas where they are running out of this protective equipment. We have already kicked off the donation match program for all of our employees. So every rupee donated by our employees will also be matched by the Cummins India Foundation to support local needs. And of course, the EEEC efforts are restricted to remote and online because people are quarantined at their homes and they can't -- they're not allowed out. As far as village sanitation is concerned, we are funding and involved in the spraying of sodium hypochlorite solutions across our model villages using adaptive sanitizer spraying tanks. This is looked at being expanded to some of the other slum areas. We are talking to some of our Board members who, in some of the companies they are associated with, have also been doing this in a large scale. We are providing awareness in the model villages and slums on emphasizing [ overstaying, ] hygiene, distancing, busting myths around the coronavirus because there are all kinds of rumors and fear mongering going on in some of these remote locations. We are working to provide some of the economically disadvantaged people information about relief packages from the government, direct bank transfer, industry loans, loan moratoriums, et cetera. We are providing support to the police through our local self-help groups. We are -- in the Phaltan area, we have engaged our own security force, a big chunk of it to help with local governance of the Phaltan City. We are providing police on duty near our facilities with cooked meals. We are requisitioning the women self-help groups to produce masks. Our company globally has tied up with 3M who is a global leader in producing masks for using technology developed by Cummins in filtration media, which is used in industrial applications to transform that media into masks which can be used for -- to protect against the coronavirus. So this has already begun globally, and we are looking to see how this can also be brought to India. And we are leveraging our technical expertise. So many of our internal engineering teams have been working with Department of Defense; the CCEW, the Cummins College of Engineering; ITI Phaltan to design as well as manufacture medical equipments. I'd now like to throw it open for questions.

[Operator Instructions] We have the first question from Sujit Jain from ASK Investments.

I hope everybody is safe. Sir, our exports have decelerated and have come to a base. In your early assessment, this episode that is happening now, where would that annual run rate would go to? And with your experience of past cycles, how long you think it would take to come back?

Obviously, it will depend on many variables. So it's pretty difficult to predict especially on the export side because different countries are coming back at a different rate. To give you an example; China, for example, is back in an accelerated manner. And so we have a pipeline of orders coming in from a place like China, which it will take us some time to even fulfill those orders because we need to ramp up over here. Whereas other markets, such as markets in Europe are -- as of now, they are pretty tightly shutdown, but they are slowly beginning to ramp up. So it will take some time. My own opinion on this is, this is likely to take a minimum of 6 to 12 months before it recovers back to a strong level.

And there were media reports that you supplied certain critical engine components to China when their plants were shut down, could this open up a new opportunity when supply chains across the globe actually deviate away from China?

As of now, when we look at the demand from other markets, that's a ray of hope that we have that, yes, we will get incremental opportunities to leverage because we have the capacity, we have the scale and we have the variety of products available in India to be able to do that.

The next question is from Mr. Abhishek. Mr. Puri?

Just wanted to understand a couple of things in terms of the fixed costs that we have at this point in time, the manpower availability that is there, especially for the workforce, we've been hearing from other companies that some of the workforce has gone back, and hence, it will be difficult to ramp up. What is your take on that? What is the position for Cummins there? And secondly, in terms of the CPCB opportunity that you mentioned, so do we continue to do this INR 300 crore to INR 400 crore CapEx that we had earlier mentioned?

So you have 2 questions. One is, in my perspective, I think the rest of the supply chain ramping up is a bigger concern from a ramp-up perspective than availability of labor, primarily because a large portion of the labor that is wanted by us comes from surrounding areas and so we were not that dependent on migrant labor. So we don't foresee labor as such a big issue as we foresee the rest of the supply chain because many of our suppliers fall into red zones within the [indiscernible] and the powertrain and the engines being very complex products, if you don't get one bolt or one small [indiscernible] it can impact the sale of an entire large product. So from our perspective, that's a much bigger challenge. And sorry, what was your second question?

The second one was on the opportunity due to the CPCB4 norms and the CapEx that you had earlier planned, would that continue to be on track or we will put that on hold for some time?

We will -- we are not putting that on hold. We are continuing to -- we will continue to make those investments, except most of our engineering is also on work from home, that whole development cycle has got delayed a little bit. And so whatever we were anticipating to spend in this -- any way the investments were to be spread over from now all the way till when the products are launched. So we were expecting to spread those investments. Likely that in the short term, they will get deferred a little bit only because people are not there in to be able to do the work. But we don't intend to delay any of those projects because it takes x amount of time to really develop some of these complicated products and develop. There is no advantage to delaying that time.

And one additional question, if I may. Given that our business is less of an order book business, your conversation with the clients or customers, when do you think the demand could actually pick up? I mean you mentioned rightly that 6 to 12 months it will take to come back to normalcy. But from a market perspective, how soon do you think that can be ready, if things get better and lockdown does not continue beyond May 3?

See, most of our customers are in the space of the government or construction or manufacturing. And as that economy picks up, only then will people start buying [ capital goods ]. So at least from my perspective, it's likely to take some time because the lockdown is only likely to ease gradually and as that eases up and then people come back into work, they start doing things, the government starts spending money on infrastructure, things get mobilized, I think all those cycles are going to take anywhere from, I would say, being very optimistic, between 3 to 6 months at least.

The next question is from Mr. [ Sandeep ].

Sir, first question is pertaining to some of the guidance that management had given a few months back, where you had stated [Audio Gap] which was expected to bring in savings of anywhere between INR 40 crores to INR 45 crores in the next financial year. And it was also mentioned that this will be followed by subsequent more steps to curtail costs on the employee front as well as on the other [ things ] outside. If you could highlight -- I mean, are you accelerating some of these measures? And what additional savings are we looking forward to in the next 1 to 2 years?

So I won't highlight exact numbers, but what I can tell you is we continue to take all necessary steps to rationalize our cost structure as a response to [indiscernible]. As you can see now, we were amongst the few people who took these decisions early. At the time when we took those decisions, I got lot of feedback that we were being [indiscernible] what other industry is being and we were going before but we [indiscernible] in the market, and which is why we already took some [indiscernible] we are looking at [ different ] aspect of cost at present. We were trying to figure out what all -- where all we can attack. So certainly, that's the key focus area for management, and we will be rolling out many measures as we see the situation unfold over next couple of months.

Understood. And sir, second question that I have is primarily more in terms of trade, how they are likely to change [indiscernible] over the next 3 to 6 months in a post-COVID environment wherein most of the other companies are talking about a new normalcy levels? Will your supply chain need more financial support? Will we see companies with stronger balance sheets taking on more working capital to support these MSMEs [indiscernible] if you could highlight some points on that?

I certainly think that MSMEs are in a lot of trouble. Their cost of borrowing is high and in a time where if we're are enforcing 100% payment to people, there's no income coming in, you can be assured that the smaller companies with weaker balance sheets are going to be in a significant amount of trouble. And certainly, we are working with the industry organizations such as CII, et cetera, to request the government to intervene and government to provide funding of packages to support medium and small industries in the form of -- with safety support [indiscernible] moratorium on interest, lower interest loans for a longer period, better incentives on income tax, a bunch of things that are needed to support those industries. Now after taking all things into account, we still feel that, as large responsible company, we will have to payout [indiscernible] other agents even on how to make sure some of these suppliers may continue to keep their businesses going and maintain -- and remain strong. So as and when required, with lot of due diligence, we will probably [indiscernible] and we are planning on doing that.

The next question is from PhillipCapital.

Jonas here. Just a couple of questions. Sir, if one were to plot the recovery like you mentioned could take anywhere close to 3 months to 12 months and plot the 4 operational segments that we have, which, in your opinion, would be likely to recover faster than the other just qualitatively and based on your experience what happens post crisis, so out of the 4 segments of Powergen, Industrial, Distribution and Exports?

Right. So my view is that distribution will recover the fastest mainly because -- even if you don't buy new equipment, you still need to maintain equipment that you already have. And so that recovers fastest and [indiscernible] income that we get in that is from maintenance contracts and those kinds of arrangements which already exists. And if you are not buying new capital equipment and you're maintaining older equipment, you need spare parts. And so the distribution business is the one which is likely to recover the fastest. The second area, of course, is -- it's a tossup between industrial and exports. It depends on how the global economy recovers post this. So if like what governments have announced, like the government in the U.S. has announced a revival scheme to boost their economy and similarly, countries like Germany, United Kingdom and many countries around the world, they announce packages to boost their economies, that could drive an upturn in exports and especially with the currency having weakened, it has actually strengthened our position a little bit better. So that could revive mix, but that's a tossup between that and industrial because industrial is where we supply to the -- basically to the Indian market which is very heavily dependent on the government like rail, like mining, like defense and marine, like road construction which is dependent on the government pumping money into infrastructure. So if the government really does pump in money into the economy to revive it because this will be one of the worst hits the economy has taken in -- probably in the last 40 or 50 years, it could very well spur on demand in the industrial sector a little bit faster than even the what, I think, will happen in exports. I think of all the 4 sectors, the Powergen domestic market will be lagging because it had already started a down cycle with the economy. And this has dealt it a even bigger blow, but focus areas within that market segment like data centers, areas like telecom, where after having had the experience of working from home and with 5G and other things coming in, those areas of the economy could be tightened up faster and so they may represent some pockets of growth, but the overall rest of that segment will probably take some time to recover. So that's roughly the sequence in which I see the -- our 4 segments as coming back.

Sure. That's helpful. My second question, sir, is on the implementation time lines for the CPCB-4+ norms, which as of now stand as mid-2021. Given that the industry is going to see a weak demand cycle leading up to that time line, do you think that implementation of these norms could get pushed out just as industry sort of request the nodal agencies?

Yes, probably. Yes, there is likelihood of that. But I wouldn't say significantly, I would say, like what they did in some of the other areas when they were faced with similar issues like instead of October of '21 maybe April of '22 or July of '22. Some of those things, there is a likelihood of that happening.

Sure. And lastly, if I can squeeze in 1 more because you alluded to the fact of the FX impact positively impacting the Indian operations. So how does this impact in the near term? Because as far as we remember, most of your resets with the parent happened in the first quarter of the calendar year. So would this move that has happened from INR 71 to INR 75 be captured in 1Q CY or will that take time to reflect?

I mean we are a net exporter. So we will always expect to see a favorable impact and -- but we follow a consistent and conservative hedging policy to mitigate all the exchange-related [indiscernible]. So the trade flow post lockdown and how the industrial activity comes back to pre-COVID level of functioning, that will determine the direction of the rupee. And the rupee will also follow some global cues. And we think that we will have some advantages with at least in the -- at least for a couple of quarters with the depreciation pattern.

The next question is from Mr. Renjith from ICICI Securities.

Sir, I just wanted to understand just reiterating on the CPCB4+, are you seeing -- what are you hearing from the government bodies? If there is any conversions [indiscernible], right? Is there any chance of a postponement of this date or is the [indiscernible] for this? And also with CapEx, can you elaborate like how much is the CapEx we are planning for this year?

I can't give you details exactly what we are planning on CapEx this year because some of those plans have gotten changed because of this slowdown period. But most of the discussions which are happening with the government so far have been on technical nature of the regulation. What is the regulation? How it is to be implemented? What are the technical guidelines of how we will control and monitor some of these things? I think those have been the nature and the timing, the time needed to develop products and introduce them, et cetera. So as of now, there is no discussion which has happened which says that things are going to get postponed or not. But it is certainly the industry will -- which is understressed will probably request that there be some level of postponement to be able to meet the time lines.

Okay. And sir, we have seen most of the commodity prices have softened. So will there be -- what is our strategy? Will we try to pass this on or will we try to contain the cost and improve our margins because given the hits we have to take on the top line, given the slowdown and shutdown impact? So what's our strategy there in terms of commodity price cost here?

It depends on what kind of agreements we already have. So in those cases where we have agreements where these commodity agreements are there, there is no discussion, it gets pass-through. But in those cases where we don't have such agreement, certainly, we would try to utilize the opportunity in the best way to improve on our margin so that we can move with some of these difficult situations we are in.

Okay. And sir, lastly, if I can, what will be our likely fixed cost per year or per quarter given the scenario? What are the levers we have out there in the fixed cost?

So we are looking at every aspect of cost. In my view, fixed or variable, everything is a lever as of now. And so we are -- we have already been working on this for the last 4 to 6 months. And we will continue the work, looking at the demand outlook, looking at the most conservative demand scenario and then realigning our cost structure to be in line with that. That's the way we're thinking about it.

Any numbers which you can throw?

Not at this time.

Next, we have Mr. Ravi Swaminathan from Spark Capital.

A couple of questions. If you can reiterate what is the kind of growth guidance that you'd be giving for FY '21, sir, for exports and domestic?

It's still fluid at this stage. So we will not be able to give a guidance at this stage. We are working out multiple scenarios and maybe once we are out of the -- out of this period, we'll be able to provide some more guidance.

But obviously, it will be -- I mean, somewhere in double-digit negative, somewhere around that?

I won't comment on that at this stage, but it's not -- it's certainly -- we are seeing multiple impacts, both on demand and the fact that we have not been producing anything for the last month or so and plus like you have limited production at least for a couple of months going forward.

Okay. And from a supply chain issue side, so basically, how much of -- we import from other countries? And do we have some impact from imports from China, U.S. and other European countries?

Yes. We -- it depends on the product, but we import a lot less than the export. But certainly, we do import quite a few critical components. We do import some things from China, some things from Europe and America. And we are working very closely with the global Cummins supply chain to make sure that, that doesn't impact our business here. As a matter of fact, some of our plants in many of those countries have continued to work during -- while India was locked down. As a matter of fact, we will be looking to them for more help once we start back up.

Okay. Got it. Got it. And in terms of cost cutting, so basically, any employee pay cuts or downsizing anything is likely this year?

Again, I won't comment on what all we will do with employees this year. But looking back at the kinds of decisions we have taken in the past, we will do whatever is necessary to make sure that ample interest of all stakeholders is provided for.

Next question is from Mr. Priyankar Biswas from Nomura.

This is Priyankar from Nomura. So my question was regarding this CPCB norms. So how much would your costs be going up, let's say, on a per engine basis on a rough ballpark figure once it's implemented?

See, one is it can't -- it's not a generic number or percentage. It all depends on the size of the product, the -- where in the technology curve the product currently exists. There are products there which are already electronics, there are some products which are mechanical, there are some products which are derivatives of other products which exist. So it all depends on what base frame they are starting from. That's one metric. The second is it depends -- the regulations are different depending on the [ KPA ] size of the products. And so different forms of investments are required based on the complexity of technology we have to implement. There's certainly going to be an increase, but it will be different for different products. But I can tell you that we have done this in multiple market segments in our other businesses and we are the market leader in that. So we expect this to come out as an advantage for us.

Sir, and my next question regarding exports. So during this time, like your factories were shut due to the lockdown. So for your export commitments, let's say, in Middle East or even Europe, so were these met from other Cummins locations globally? So that's first. And if that be the case, then could it so happen that going forward, like if the lockdown persists, there is a possibility that some of the exports that we are doing through the India division may not return back?

So one is, it has not yet happened because all of those markets had inventory, and we are only the one being supplying for the last 30 days or so. But suppose we have a scenario where for a prolonged period we are not allowed to export, which I don't see that as a problem because we already have some approvals to start exporting our products. But let's take a hypothetical situation where after opening up, again we are forced to shut down for a long period, yes, there is likelihood that Cummins will move products from other areas. But it's not an easy thing to do. One is because there are many products which are uniquely produced within India. Second, moving supply chain from one country to another country is very, very, very complex and it's very expensive. And third is India has many advantages which is why it is chosen as the region from where to export these products, such as sale, product cost, quality, et cetera. So I don't see that happening for many products, but there are certain products which are made in India as well as in, let's say, in the United Kingdom. And if India continues to remain shut, certainly, the company would not lose those customers, but take product from another plant. But I don't see that as the sustainable for the company to do from a long-term perspective. So I'm not really worried about this. I'm -- I worry more about, here is an opportunity to do more and we could lose that opportunity, that would only be the worry I would have.

And sir, just last question from my side here. Since you said that the distribution may probably recovering earlier, but what I was thinking was like during this phase of the lockdown and when, let's say, the infrastructure players take a lot of time to come back to normal execution, then there is likely to be a lot of idling of equipment there as well. So lower run times. So in that case, at least for the industrial segments, aren't your services revenue going to get impacted because of that on a full year basis, I meant?

Yes. Certainly, it does get impacted, but what I meant was a relative comeback rate, which means even equipment which is idle, you need to maintain it and you need to service it. So some portion of revenue continues even in a situation where something is completely shut down. But compare it to a scenario where you're not even running equipment you already have, will you be buying new equipment? So on a relative basis, yes, it will do better. But if there is no economic activity of any form, every piece of our business is impacted, including distribution.

The next question is from Atul Tiwari.

Yes. Sir, my question is on, how was the demand in the domestic segment, both Powergen and Industrial, in the fourth quarter before lockdown happened?

So it was different for -- it to -- and the results are not yet published. So I won't give you all the details over there. But as we had indicated earlier, the overall market in India [ are ] beginning to slow down, especially for the Power Generation segment. But that is not the case with all segments. There are some segments still growing and some segments are slowing down.

Okay. And sir, just the partial relaxation of lockdown on 20th April, it has not led to any of our manufacturing facilities restarting completely. Is that a fair understanding or not?

No. As a matter of fact, some of our facilities have got an approval to start some work. But it's taking a little bit of time because a lot of clarifications from the government are still coming in, a lot of rules and regulation of how to move people, how to house them, how to move material. So there's a lot of confusion at a local district level. So that's going to take a couple of weeks to all iron out. So whether many small suppliers have not gotten some of these approvals. So we have some limited inventory inside our factories. We'll be able to do some production. But at a certain point, maybe in a couple of weeks, if those are still not opened up and material doesn't start to flow, even if we have approval, we will not be able to produce much. So to answer your question, we have gotten certain approvals, we have started the ramp-up work, but it's likely to not -- it's not like a skip event or a switch on-off event that we -- it's on, so now we are back fully working. It was going to be a fairly gradual ramp-up as we're very dependent on multiple parts of the country, multiple suppliers, multiple things with economy opening up for us to be able to work smoothly.

Next, we have Ms. Renu Baid from IIFL.

Sir, my first question is to understand a bit more on the export side. If you remember the last financial year across some of the key markets, we have already seen exports declining by nearly 40% to 50% in those particular end markets, demand being weak. So now during this COVID environment of post the pandemic, do we anticipate that volumes in those markets could significantly shrink further or probably we were anywhere close to the bottom of the market with respect to the demand from the export portfolios concern?

So it's a very difficult question to answer because it's completely different in each of those countries. So it depends on how significantly those economies are impacted by the virus. It's going to be different for different countries. But we anticipate that it is going to have a further negative impact rather than that with no impact at all. Because when people just stop going into work and stop producing things, even if you had or so you had come to a low level, I think we would see further deterioration before it starts getting better once those economies start reviving again.

Or if I may put it across alternately as in, we might see a short-term blip in the market because of these global short-term events. In your view, how much time it might take for those end markets to be back to last year's level?

So it's again, it's a difficult question to answer. First, I'll give you an example from one country. So our factories in China in the automotive space, they were down for 3 months, okay? And they're pretty much produced and even in those 3 months, they were partially working. They never went into a situation like in India when it was 100% shutdown. So they were working at 10%, 15%. In that period, their demand had dropped by about 50% or 60%, okay? Today, the demand for them for the next quarter is 150% of their normal level and that is because their country has pumped in about 5% to 6% of the GDP into a stimulus package and so people are just going around buying things like crazy. But that is still in that country. But I don't know how true is it going to be in other countries, how is it going to be in India, how is it going to be in Middle East. It all depends on each economy, how much money is pumped into those economies to revive those economies. So I'm not -- I think the China case is an anomaly. And it will be -- there will be negative impact before things stabilize for a while and start reviving in 2021.

Right. Sir, from a calendar year from your perspective, I would say, last year, we've -- you had guided to decline nearly by 20% on the export side. And if the situation is extremely fluid globally for the next 6 to 12 months, do you perceive a scenario where probably we could see further decline of nearly 40%, 50% in the export portfolio in the short term? Or probably, you think it's more of an aberration in terms of the numbers which we are thinking at this point of time?

See, at this time, we are producing nothing. So this quarter, in my view, is a complete drive -- it is a difficult situation to predict anything. But I don't think I can give you exact numbers of 40%, 50% of products. I think there is going to be a decline. What percentage we will know in the next couple of months. But there will be some opportunities as well.

Sure. Sir, just one -- a little more on this side for the benefit of investors, can you briefly share with us what is a broad geographic mix of our exports currently in terms of the key regions, U.S., Europe, China, Middle East, Africa? How does the mix look like currently?

Well, the biggest market for us is Europe and Middle East, followed by Africa, followed by Asia and Southeast Asia, followed by Latin America.

And the top 2 markets should be contributing nearly 40%, 50% of the mix, EU and Middle East?

I don't have those numbers in front of me, but...

Indicatively, just broadly?

Yes. Yes, I would say so.

Okay. And just one last thing. Within your facilities, factories which you mentioned we have got partial approvals, what would be the status for a Kothrud plant which is the export figure plant and also on the Phaltan facility? Do we have the approvals in place? Has the manufacturing -- has something at the plant been in action or it's absolutely at standstill?

Yes. So both of those -- all our plants were at standstill till the 20th. And we have gotten approval to start the SEZs. And Kothrud, we have got some limited approval to start some work. So it's every week we get more approval based on demonstrating that we are able to do it in a clean and proper manner, but it's a wait-and-watch situation.

All the best during these uncertain times.

Thank you.

Next question is from Nitin Arora from Axis MF. Mr. Arora?

Hello?

Yes, we can hear you.

Yes. So my first question is on the demand side, as you were mentioning here, Powergen is going to impact more distribution relatively should come back fast. When we look at -- is it possible -- I know you must have done these numbers by now, when we look at PowerGen, which is still a INR 1,500 crores, INR 1,600 crores business for us the similar number of 2013. How much is actually your base business out of that? Is it possible to quantify? That's my first question. Second, with respect to the fixed cost part, though you are not quantifying how much is a monthly cash burn on a fixed cost for you, but do you have a scope here to reduce your fixed cost because we've been running a lot of programs from the last 5 years, despite that you've been running on margins on lower side? That's my second question. My third question is, when we spoke about the supply chain suddenly changing because from China things are going to come to India. Why would that happen in your view, considering our business and our segments which is majorly customer focus is to get more of backup and power and all not really going towards each and every unit of consumption and considering China is up and running within 12 weeks, and given the capacity utilization itself is very high for your subsidiaries now. Just need your take, why would a customer want -- or how does it interfere suddenly that, "Look, I don't want a product from China because they were shut down for 3 months and I want a product from India," in your business per se? You must have analyzed by now, I think, these things. And these are my basic 3 questions. And just lastly, on export. In Africa, a lot of the -- when we speak to your competitors, the global competitors, even the consumers or the end customer is not even getting an LC because of the oil crisis and all. How does you are seeing that your current existing customer? Has there been some cancellations? And if you can show how much inventory all these exports geographies have been? And there are so many questions, but just to sum it up.

Right. So I'll start from the numbers. So as far as inventory is concerned, I think the inventory since we haven't been supplying for the last 30 days, inventories have stability. The second question is that [ if we get ample ] of inventory. The second question is that are we struggling with anything that has declined in some of those countries. Certainly, we were struggling in some of those countries, especially to get everything LCs, but the advantage we have is that we have local presence in many of those markets. So that helps us a little bit in that. Your second question was why would anybody come to India [indiscernible] when they could get products from China? It's not that everybody would come to India in place of China, it is just that if there are other products [indiscernible] there is no backup to China, [indiscernible] they will create some backups inside this market because from a cost, quality, delivery perspective, India has been able, in our market segments, produce product better than in all 3 of those metrics. So that's an advantage, so we feel that this will increase the huge opportunities there. And as we have seen even in China, [ I think the ] demand is coming in from China itself mainly because there we are facing some capacity issues as well as some supply chain issues within those markets and India has been able to demonstrate very high-quality product, which earlier they used to be dependent on getting from America or from Europe. Now they have also started to look to India as a viable alternate source. So combination of all of these factors increases the business opportunity for India, not just because it's you pick India versus China, and it's certainly true that China has many advantages compared to India. But in our space, we have a few advantages over China, which we are starting to now exploit. Did I answer all your questions? Did I miss anything?

Yes. Just on the fixed cost reduction and the Powergen based business numbers.

Yes. Fixed cost reduction is a constant battle. So if you look at the actions we took earlier in the year, and those were because of that, that we see year-on-year that margins are under pressure, wherein the -- in a market which is declining that your past -- your price increase [indiscernible]. The ability of keep the prices high is not [indiscernible] much flexibility there. And so the only option is to keep trying to cut down fixed costs. We have multiple ways that we are trying to do that. We did that in the earlier part of the year through actually headcount reduction swing, and we will keep looking at more opportunities to look at every line item of fixed cost, trying to look at what should be done within our business and what should get [indiscernible]. So there are many levers we have been looking at. And we are looking at differences now considering this kind of crisis situation [indiscernible] in the past. And I think there's going to be continued pressure on the power generation business because of offset.

Yes. So Powergen base business would be in the -- is it possible to quantify what would be the base business for Powergen?

I don't have those exactly with me right now, so I won't quantify it right now, but Sandeep will call after we have -- this quarter results will be given [indiscernible].

The next question is from Venugopal from Bernstein.

You know on exports, I just wanted to understand if you could give your perspective in a different way, rather than the geographies, if you could just highlight what percentage of exports actually broadly for you goes towards these oil-producing economies or economies linked to oil?

I'll have to study that and get back, but I wouldn't think it is very, very significant. Middle East is a good market for us and Nigeria. But other than that, it's not such a big market for us. As -- you can find out and get back to me, but it's -- I know the cost of this oil and those relative costs is going to have too much of a significant impact on the power generation business. It could have an impact on our oil and gas business.

Okay. No, I get it. My contention is more about the potential ability of those countries to actually even move through -- the state of the economies of those countries and the ability to do CapEx, et cetera. So which -- it's not just about pure oil and gas. So it's about ability to spend on construction, on activities around that, et cetera. So I'll probably take that off-line on this question. The second question I have is, given that we've seen very -- as a business, you would have seen a lot of these shock-based issues, especially GFC, where there will be shocks which come in and suddenly demand plummets, et cetera. In a recovery phase, what I have observed is, given that a lot of competition of yours also would have low capacity utilization and it is a fixed cost-based business. Everybody would want to, of course, produce and sell their product as quickly as possible. So do you normally see pricing pressure in the initial phase of a recovery?

Not necessarily because usually, we see that -- the reverse, which means because we are usually coming out of a recovery, balance sheets are very badly shaped. And so to -- on top of having a bad balance sheet to also discount the product and sell it is like a double whammy from a hit. So usually, we have seen competitors behave better when they're coming out of a recession than when they are at a peak demand kind of scenario where everyone is trying to grab as much market share as possible. And so they are just cutting prices in the hope that volume will make up for somehow for not having as much market.

Got it. Got it. One question on India. I just wanted to understand, given that the sort of COVID shutdown was fairly quick, things were normal and then suddenly the production had to be stalled, et cetera. So 2 points here. One is that you would have probably delivered products to some of the customers where you may have yet to receive or get the receivables. And so more importantly, given the financial situation of the customer base itself is not known until now, is there any such risk that you envisage? And number two, on the inventory side, I'm assuming since your products are largely standard products, even if there were some orders that may have -- haven't got canceled, you can still sell it. So I'm assuming inventory side risk might be lower and receivables side, if at all, there could be risk. So if you could just clarify both?

Yes. So suddenly, receivables have gone up and when receivable has gone up receivable risk has gone up. But most of our customers are all long-term, long-standing reputable kind of customers. So the bad risk kind of customer percentage is a very small percentage. And our teams have been working even during the shutdown period very closely to try to make sure that, that is as low as possible. And we have set some very tight targets on inventory correction once we're back. And so that isn't, like you also said, we are not so right about. There is some receivable risk, of course, and our people are working very closely with all our customers to try to minimize that.

Sir, if I may, one last question. You mentioned about fixed cost side, of course, headcount reduction, et cetera, was a normal process. But at this juncture, have you announced any salary cuts?

We did -- we have announced some salary cuts for the future. Yes, we've already announced that, and we will be making those public soon. Yes.

The next question is from Charanjit Singh.

Sir, you mentioned about -- hello?

One second. Yes, please go ahead.

Yes, we can hear you.

So I just wanted to understand in the domestic Powergen, we had dependence on small hospitality business. Now these businesses could take a beating and plus a resident -- real estate side could take a beating for longer duration. So the domestic margin, you mentioned that, okay, it will take longer than expected to come back. But how significant the deterioration could be in the domestic Powergen as a market? And the data centers itself, as one segment could not be the driver of the market to come back. So maybe it could be longer decline in the markets than what we could have anticipated earlier.

Certainly, it is going to be worse than what we had anticipated earlier. As of now, no one is buying anything. So it's going to take a little bit of time to really understand which segments are most impacted. And I think, as you mentioned, some of those segments like hospitality are going to take quite a bit more time to come back. And we cannot be dependent on 1 or 2 segments in the whole business. So certainly, we'll be focused on that. So the team is working on different strategies to try to see in this kind of scenario how one can do better with market share or emphasize other opportunities by which we can grow the business.

Okay. And sir, in the services business, so we have the split-off, maybe if you can correct me if I'm wrong, so 50% coming from Powergen and remaining coming from the rigid duty cycle businesses. So how is that split right now? And definitely, as usage of the generator sets reduced, so our services business could take a beating because of that? And have you been able to shift it to those rigid duty cycle businesses or it is still a work in progress?

It's still a work in progress. But if you meant that 50% of our distribution business sales comes from Powergen, that -- I don't think that is accurate. It's a much smaller percentage.

Okay. Okay. And lastly, sir, you also mentioned that Europe and Middle East are now almost 50% of our exports. Earlier, we used to talk about Africa and Middle East as the key markets. So in Europe, which are the key products which we are supplying in these markets? And do we see sustainability of these products being in demand from European markets because they continuously tend to be more oversupplied on the energy front? Yes, that's all from my side.

Yes. See, most of our products get used as backup power generators. So irrespective, as a matter of fact, in -- the sales in countries which have good steady power generation is actually more than at many times are countries which have poor power generation situation. So the entire range of products, all the way from 15 kVA all the way to founding 1,000-plus kVA is all manufactured in India and sold into Europe and all of these markets, including Africa, and there is steady demand in all of those markets.

The next question is from Bhavin Vithlani from SBI.

I hope everyone is safe and healthy at Cummins. Ashwath, I had a question more on the exports as you had enough questions. But on a longer-term perspective, if you assume, I mean, take FY '21 out on a 3- to 5-year basis, if you can give us a view, you did mention about new emissions that can be an opportunity, but will you -- are you more bullish that exports can be a larger volume over a 3- to 5-year basis? And what, in your view, could be drivers for the exports on a longer-term basis?

See, the India is a critical portion of the Cummins global supply chain. So there are only 3 main supply chain manufacturing locations for Powergen around the world, well 4. But the first one being China, the largest one being India, the third one being the United Kingdom and the fourth one being the United States. United States' products are mainly made and sold only in the United States. So there is not much exports happening there. Between the rest of the world and most of China product is sold only in China. United Kingdom makes very few very large generating sets, which means the primary supply source for the whole world for Cummins is India. And as we move forward, we are introducing many more products, we are aggressively pursuing more markets and our cost base is getting more efficient as we would become the rigor. So all of these -- and we have the scale which nobody else has in the world of the supply base. So all of these factors are very positive that in the long-term Cummins will continue to depend more and more on India and exports will become a larger portion of the business.

Sure. Fair enough. So the second question is on the distribution side. So you mentioned Powergen is a much smaller number and the industrial is much larger. Would that number be more like a 65-35 from Industrial and Powergen?

I couldn't give you that split right now. But I will -- we can send you an e-mail or something once the right people who know about the details can look at an intermediate.

Sure. But if you take the numbers out, and when I'm actually speaking with the other industrial majors, maybe, let's say, an Atlas Copco, they are seeing that their service in the spare income dip for the year as a whole, they believe, will be like plus/minus couple of percentage, would you also be in a similar camp like that the service income is more like base and steady which will be like...

Yes, which is why I mentioned even earlier that I don't see -- I see that business as recovering faster than any other business segment because irrespective of [ never expecting ] new product gets bought or not, old product has to be serviced and continued.

For sure. And lastly, so you mentioned -- so on the cost side, while the focus on the call has been on the employee end, did you see levers on the cost on the raw material front, on the design engineering front that you can take cost out and that can lead to some advantage? So...

Yes. The answer is, yes, we've been doing that over the years, and we are going to do more of it. We are looking at every lever possible, including looking, relooking at what is made within our factory versus what should be out first, what should be made by our people versus given to suppliers. We are looking at every angle of cost to make sure that only those things which are adding the most value and even overall generating and contributing to better margins for the business.

Sure. And just one clarification on what you -- on the first question on the export. The new products that you mentioned that would be part of CIL entity, just as a clarification?

Yes. As a matter of fact, when I was referring to that, as you know, we are upgrading all of these products to CPCB4. And CPCB4 is also equivalent to what is called Tier 4 primary in Europe and in North America. And many of these products, again, will not exist in those markets. India will be the only place where those products are developed and made. So yes, and CIL is responsible for those products. So they will be part of CIL.

This was our last question. Any concluding remarks from Ashwath for the call today?

No, thank you. Thank you, everyone. I hope all of you are staying safe. This is a difficult time. In my entire life, I have never seen this kind of scenario. So we are all going through it, and we are learning from it. All I can tell you is that Cummins is an old company. We have been through many difficult cycles. We have a strong and committed leadership team. We have great products. We have great customers, great suppliers and we are in it for the long term. So yes, we look at -- the way we look at it is, we have a blip in the cycle, but we are very focused on our goals and objectives, and we are very confident that in the long term we will continue to win. Thank you.

Ladies and gentlemen, with this, we will end the call. On behalf of the Cummins India leadership team of Ashwath Ram and Ajay Patil, thank you for joining us this afternoon. Stay safe, stay healthy.