Cummins India Limited (500480) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. I'm [indiscernible], the moderator of this call. Welcome to the Cummins India Limited Analyst Call for Q4 2021. Today, on this call, we have with us our leadership team, Mr. Steven Chapman, Chairman, Cummins India Limited; [indiscernible], Cummins India; and Mr. Ajay Patil, Chief Finance Officer, Cummins India. [Operator Instructions] I would like to now hand over the floor to Mr. Ashwath Ram. Thank you, and over to you, sir.

Good morning, ladies and gentlemen. This is Ashwath Ram. I'm the Managing Director of Cummins India Limited. I hope you and your family are all doing well, everyone is safe and staying healthy. All of last year has been quite a momentous year with a huge set of downs and ups. And I feel we have come out of this crisis only headed into a new one this year. But I also feel that we have come out very strongly out of this crisis. We finished the year with sales of INR 4,256 crores, which were 16% below last year. We ended up with EBIT of 19.4%, which was 357 basis points better than last year. And so our EBIT improved by 357 basis points despite 16% drop in revenue. We continue to manage down our discretionary spend by over INR 62 crores. We improved our free cash flow. And now I will share with you the financial results of Q4 financial year '21 and full year financial year '21 through this call. For the quarter ended March 31, 2021 with respect to the last year same quarter, our sales at INR 1,231 crores were higher by 19% compared to INR 1,022 crores recorded in the same quarter last year. Domestic sales at INR 976 crores increased by 26%. Exports at INR 255 crores declined by 1%. Profit before tax and exceptional items at INR 245 crores is 109% higher as compared to INR 117 crores recorded in the same quarter last year. For the quarter ended March 31, 2021, with respect to the sequential quarter. Our sales at INR 1,231 crore, declined by 12% compared to INR 1,400 crores recorded in the preceding quarter. Domestic sales at INR 976 crores declined by 5%. Exports at INR 255 crores declined by 32%. Profit before tax and exceptional items at INR 245 crores declined by 19% compared to INR 304 crores recorded in the preceding quarter. Segment-wise breakup for the quarter ended March 31, 2021. The sales breakup segment-wise is as follows. Domestic industrial business sales were at INR 268 crores, 10% higher than last year. Power generation business domestic sales were INR 355 crore, 34% increase over last year. Distribution business sales were INR 337 crores, 33% increase over last year. Exports. High Horsepower export sales were INR 135 crores, 8% drop over last year. LHP export sales were INR 95 crores, 2% increase over last year. For the year ended March 31, 2021, with respect to financial year '20. Our sales at INR 4,256 crores declined by 16% compared to INR 5,062 crores recorded in the same period last year. Domestic sales at INR 3,103 crores declined by 18%. Exports at INR 1,153 crores declined by 11%. Profit before tax and exceptional items at INR 808 crores is 400 basis points higher when compared to INR 759 crores recorded during the same period last year. The segment-wise breakup for the year ended March 31, 2021 is as follows. Domestic industrial. Domestic business sales were at INR 743 crores, 21% drop over last year. Power generation domestic business was INR 1,108 crores or 22% drop over last year. Distribution business sales were at INR 1,202 crores or an 11% drop over last year. Export. High horsepower export sales were INR 606 crores or 17% drop over last year. And low horsepower export sales were INR 451 crores or 5% drop over last year. Some additional commentary for you regarding the quarter. Quarter 4 in the exports business is typically lower than quarter 3, mainly because global customers gradually start ramping up and we are starting to see trends that global demand is continuing to improve pretty strongly. Domestic demand in power gen is strong and inventories are at all-time lows. Supply chain issues, especially in electronic chips and sensors, turbochargers and radiators from the global as well as local supply chains were the primary reasons for not being able to meet all the demand. Markets like rail continue to be sluggish and are further impacted by COVID. The company continues to focus on cost management and improving our efficiency and profitability. The company expects gradual recovery of demand in upcoming months. However, market conditions due to the second wave of COVID continue to remain uncertain and visibility of end market recovery is still somewhat limited. The company is, therefore, not providing full year revenue guidance for FY 2022. With this, I would like to open the session for questions. Thank you.

[Operator Instructions] The first question of the day we have from Mr. Ravi Swaminathan from Spark Capital.

My first question is with respect to exports. Yes, yes, I heard your commentary that usually fourth quarter is relatively weaker than the other quarters in terms of exports. But say, a couple of years ago, we used to do a run rate of INR 300 crores and above, sometimes even INR 350 crores. And the current quarter is almost like INR 2 crores to INR 3 crores. And wouldn't that have some of the pent-up demand also? So on a normalized run rate might have -- it might have been even lower. So why is this below average, say, compared to, say, a couple of years ago? In spite of the fact that certain countries like end markets like U.S., et cetera, are doing very well.

Yes, so the market is gradually beginning to recover. So we have started off slow, but we remain optimistic that this year should pick up as the quarters go along. We remain optimistic. When we look at order trends from global markets around the world, as we said, the markets are -- have already started to improve, and some are gradually catching up.

So exports, what kind of growth can we see in financial year '22, given the fact that many markets are coming back? Can we expect double-digit kind of a growth in exports?

It's very difficult to predict at this time. All we can say is that demand as of now is coming back pretty strongly. So we expect to do better than we did earlier.

Got it, sir. And with respect to the domestic market in power gen, when do we expect the CPCB4 norms to be implemented? Do you expect any prebuy next 12 months due to that? And what kind of price increase do you expect at the engine level, at a genset level? If you can share, that would be great, sir.

Yes, so these are multiple questions. So what I'll try to do is try to answer each of them. Certainly, we now expect too much delay in introduction of CPCB4 norms. And the reason we believe that is that U.S. has also signed back onto the Paris agreement. So there is going to be a lot of global pressure on ensuring that emission norms are progressing at the right frame rate. So we don't anticipate any further delays on CPCB4. We do expect a small amount of prebuy. We are not sure exactly how much the prebuy there is. Typically prebuy will happen when you are migrating from one level of technology to another, but they're very difficult to predict how much of a prebuy will happen. And as far as pricing is concerned, I'm afraid we won't be able to share that at this time. But we do -- our past history globally has been that every emission change cycle, we are able to improve our margin.

Got it, sir. And my last question is with respect to other income this time have been quite high. Any -- what is the component in that? And if you can give the breakup of Powergen and the industrial business, or Powergen with respect to LHP, MHP, HD, HHP? And industrial, if you can bring it a little with respect to compares to construction, mining -- rail and maining.

Other income has been higher mainly because of dividend from the company's [indiscernible].

And the breakup, sir?

Yes, breakup of the powergen.

Yes, powergen industry.

So in powergen, do you want it for this quarter or for you want it for...

This quarter, this quarter, yes.

Okay. For this quarter, the High Horsepower was INR 185 crores. Medium Horsepower was INR 70 crores. Low Horsepower was INR 88 crores and -- for a total of about INR 355 crores.

Okay, HD is there in it, sir?

Yes, if you break it up by -- maybe by the growth segments. You have Low Horsepower of INR 38 crores, mid-range of INR 75 crores, Heavy-duty of INR 45 crores, High Horsepower of INR 185 crores and miscellaneous of projects of about INR 12 crores.

Okay, and industrial, sir, compressor, construction?

So for the previous quarter, compressor was about INR 40 crores, construction was INR 145 crore, mining was 16 crores, rail was INR 48 crores, marine was -- marine and others was about INR 19 crores.

Next, we have Sandeep Tulsiyan from GM Financial.

My first question is, again, pertaining to the exports. If you can highlight a bit more in terms of regional mix, how that has changed in the past financial year? And if, for the whole year, you can share broad mix between different geographies and how that has contrasted versus financial year '20.

Sure. So then you -- when you look at exports as compared to last year, what we saw was that Asia Pacific was at INR 329 crores, which was slightly higher than what it was in the previous year, mainly because areas like China and some parts of Asia recovered faster. Latin America was lower mainly because those areas continue to be COVID impacted and are recovering a lot more slowly. Middle East was flat. Europe was significantly lower. Africa was significantly lower, and Miscellaneous spare parts and other things were higher. And when we look at this year, we are seeing that China has -- had now almost a full year of recovery. So they continue to be strong. Parts of North America and Europe are beginning to come back, North America faster than Europe. And -- but Latin America, Africa and Middle East continue to lag and are coming back at a lot more gradual level.

Okay. Sir, if you can share the broad numbers, as you mentioned, INR 329 crores for Asia Pacific. How that would be for the Lat Am, Middle East, Europe and the African [ middle ] markets?

Unfortunately, we don't have that breakup available at the moment. But I can tell you that it is relatively Latin America and Africa were our worst-performing regions from an overall global perspective.

Understood. Second question is pertaining to the comment that you made in the previous conference call on the venture out of Cummins on the hydrogen side. Since given a lot of government announcement and initiatives have been given in the last quarter, do we intend to form a separate entity for this so that we can map out what kind of investments are going in and what kind of returns we'll generate? And again, just to follow up on that is what percentage of business would remain within the listed entity and what business in hydrogen would be outside of the listed entity's purview?

As of now, there are no clearly defined thoughts on this. This is an evolving space, and the technologies are also evolving in this space. But Cummins India continues to -- through its different business units. So let's say, rail or infrastructure, wherever those opportunities come up, those particular segments continue to bid for those projects and participate in those kinds of tenders. The company is still working on the best way to capitalize on the emerging technologies and figure out the path in the future. There is no plans as of today on how -- what that route will be, but we are working out all scenarios and all options to figure out what would be the best. Businesses which have been in Cummins India will continue to remain in Cummins India, and we continue to work on growing those businesses, like I said.

And lastly, sir, it was heartening to see that we have curtailed the CapEx in past financial year. And assuming bulk of the CapEx for CPCB4 would also be behind us, what would be the annual CapEx run rate that we intend to pursue going forward? If you can give some more clarity? And what's the thought process on these cash flows that the company is generating, where we intend to divert that?

Yes, so I won't give you an exact number. But all I can tell you is that the big infrastructure CapEx which we had undergone in the previous year is behind us. Most of our new CapEx is focused on growth, that is product upgrades and product technology, and on supplement CapEx for what have already been invested in. So yes, we do see that the CapEx cycle is going to be a lot -- the CapEx we intend to spend is going to be a lot lower than what we have spent in the past.

Next we have Renjith Sivaram from ICICI Securities.

Sir, we have seen that commodity prices have been going up and that is also impacting our overall gross margins this quarter. So what kind of pricing status that we have taken or when will that get likely reflected in the first quarter? Or was it in the fourth quarter, there was some option of [ net ] price increases? And what is your overall strategy to minimize the impact of the commodity price increase?

Yes, so you are right in stating that commodities have gone up significantly. Pretty much all the major commodities that this business worked on has all increased substantially. And our way to combat this kind of increase is twofold. One is certainly, we continue to focus on cost reduction, which means we are looking internally to say what all can we do to reduce the cost structure or the material cost of the product. That is one. The second, of course, is to pass on prices, commodity increases to customers, those customers where commodity late agreements are already in place. That happens automatically based on a periodicity that is defined. For those that doesn't happen, that would happen through negotiations and price increases which are typically lagging, I would say, by about a quarter or so, at least. So we do intend to catch that up. I can't give you specifics on exactly how much we are planning to increase, but to say that we will increase enough to make sure that we are offsetting more or most of these agreements.

Okay, and what -- the [ contigency ] of debt, that, obviously, angle of CPCB. So the previous date was -- the notification was expected in July. So should we believe that the July notification date can be adhered to? Do you feel there can be some delays with that announcement?

As of now, there is only a draft notification, but when we talk to the ministry, they keep telling us that they don't anticipate any delays and that we should be completely prepared and ready for the timing they have announced in the draft itself. So as of now, that's what we are planning on. And based on the pressure the government is facing to make sure environmental laws are implemented and aligned to global environmental ruling, we do not think there should be too much of a delay, even if there is.

Next, we have Renu Baid from IIFL.

I have few questions. First would be if we look at, broadly, as in CPCB4, it is expected that the overall cost of ownership of the gen set could go up anywhere between 30%, 40% to the end consumer. Do you think the steep jump will likely cause to drive transition to alternate fuels, gas or others? And how is the company's preparedness to offer alternate products in the market?

So very good question. Certainly, we have seen in certain market segments, if the cost increase is too much, alternate technologies become easier to adopt. I don't think that the amount of increase that will happen going between CPCB II and 4 will prompt that much of a change because the alternative, as of now, to diesel is natural gas. And the products with natural gas are even more expensive to make, meet the same emissions standards. That being said, Cummins already have products with those technologies as well, and is the market leader in those alternative technologies like gas as well. So should some amount of availability of fuels like natural gas become available in places in the big cities, we will be ready with products to be able to capitalize on that. So in any of the scenarios of tightening emission norms and moving to alternate energy ideas, Cummins benefits because we already have implemented and demonstrated these technologies in other parts of the world.

Sure, and also, can you help us quantify what could be the rough quantum of revenues which would have slipped because of the supply chain issues and orders getting delayed in shipments because of the COVID second wave in the domestic market has been outside? During the fourth quarter.

It's -- it's really early to put a real number to it, but I can say that -- honestly, I don't have a very good, good feel, but it's a combination of so many variables. The supply chain, the specific path within the supply chain and also, different regions of the country being shut for COVID lockdowns and such kind of variables. So I would say that supply chain is a problem right now. We are seeing no demand loss because we are seeing inventory levels at most of the OEMs, as well as the dealers and distributors continue to keep regular [ sales ].

Okay. Probably with the initial comments, can you help us understand what was the impact of the COVID second wave and lockdown that you've seen April onwards, on the business, and the expectation of recovery in the domestic demand outlook going forward in the second half of the year?

I can just tell you what I expect it to be for this quarter because we've already seen the month of April and seen most of May. We were at roughly about 50% utilization in the last month and this month as well. 50% by means of people being able to come in to work, supply availability, disruptions in the supply chain, all of that. All of that leads to roughly about 50% of our efficiency being utilized. Prior to that, we were at close to 70% levels of utilization. So we were in the mode of ramping up from the previous cycle to go beyond 70%, to 80%, 90% kind of percent. And with this, we are back to about 50%. So that's where we are right now. And it's very difficult right now to predict whether it will bounce back in June or July or August. It all depends on how well we are able to contain the second wave across the country.

Sure. And sir, one last question, if I can ask. Globally, the way we are seeing the energy transition towards alternate technologies and product lines, from a medium to long-term perspective, is it fair enough to say that the global supply chain, especially for IT products, has a higher [indiscernible] as it to moves to India? And to what extent, if that happens, can Cummins India leverage this opportunity and drive exports for the global supply chain and for domestic competitiveness?

So again, great question. As you know, our comment as a global company with presence in over 100 countries. But if you look at our supply chain footprint, we have 3 major regions, which account for a majority of our supply chain. The first one being the home ground of North America, the second is China and the third, of course, is India. And when you look at the variables of cost, quality and delivery, India happens to lead in all of those variables. So I remain highly optimistic that as the global economy recovers and as there is consolidation of manufacturing and technologies that India will get more and more opportunities to produce products for the world.

Sure. Any number that you want to quantify? Or it's too early for that?

It's too early for that. But I can confirm that every quarter, we get more and more business. So it's great. It's not just hypothesis, it's reality, we see more business coming.

Next, we have Parikshit from HDFC Securities.

The first question was you touched upon the gas technologies with us, which required pending [ notice ]. So this will be done in the CIL and BD only, right, if at all, there is a change in the technology, from diesel to natural gas?

Diesel to natural gas, yes, for all the products is those -- if the transition happens from diesel to natural gas [indiscernible] propane [indiscernible] continue to remain in the [indiscernible].

Okay. Sir, second question was on the overall [indiscernible] technology and the yield infrastructure being set up slowly picking up in India. So what we have seen in some instances that there is a backup in [indiscernible] which has been provided, despite getting the regular supply of power from the utility. So do you think, over a period of time, this could be also one of the big opportunities of us in next 5 to 10 years with CIL?

I couldn't hear your question very well. Could you repeat just the last portion of that? What were you asking from an opportunity perspective, sorry?

Sir, I was asking from the [ engine ] infrastructure on the charging side, which we are seeing gradually getting rolled out in India in some cases, so there is also a backup genset, which is being given as a backup, so that the power continuity remains in case of outages. Would you think that the overall piece of the infrastructure will have some role to play, maybe provide the special powergen in some -- yes, sir, if you would.

Yes, yes, I understood the question, I got it. Yes, yes, we do have a role to play in that. And we are playing a role pretty much every infrastructure project which happens, we have some kind of involvement, whether it be from an industrial segment for building roads when the -- earth moving and creating digging tunnels, digging ditches to -- all of those user industrial side products. And we have to produce power, our power and remote location provide a backup to clean power because, as you know, the clean power works only in certain hours during the day or under certain conditions. So typically, when -- as the percentage of clean power in any economy increases, our business also goes up because you want reliable power to be supplied. The other trend you would typically see is one would think that as the nation becomes more efficient in grid power, the demand for backup power would go away. But that is not the true reality here. As people get used to having electricity 24/7, every small disruption, they find uncomfortable. So they want backup power. So that tends as a means for growth and that's why we've seen growth over decades, even in countries like in North America or Europe or even countries like Japan and China, who have pretty much solved their power supply problems.

Okay. Sir, just my last question would be on the last call, you had mentioned that the price hike, given the commodity impact, you will not take a peanut butter kind of an approach. So here, the price hike will become and create result around raw material increases. So first question -- the first point on was -- that was just assuming you had a gross margin rate. So have you accounted already for the current or the entire impact of raw materials? Or will it still continue in the next quarter? And when the market demand is so strong that they will be able to absorb the price hike until such a point?

Like you rightly said, it doesn't happen in a peanut butter approach, and it happens based on the type of product and the content there, and it happens over a period of time. So yes, the impact is typically, market doesn't react too negatively to this. And we think there is a lot of pent-up demand in the market right now. So we see a minimal impact of commodities on overall demand as of today.

And we have accounted for the commodity impact already in this quarter, the entire impact on our order book?

Yes. That's correct.

Next we have Bhavin Vithlani from SBI Mutual Funds.

Sir, a few questions. First is, in fiscal year '19, you had a very strong order -- BD product launch. I mean, you had QSK19, QSK50, the [ Anderson ], et cetera. And at the AGM day when you were selected as the MD CEO, it was guided that there could be another 11, 12 products, which are in the pipeline. So it will be useful to understand where are we in that, and if you could also highlight the products that were launched during fiscal year '21.

Sure, I won't give you the list of all the products we have launched here. We will be publishing that soon. But yes, we continue to innovate, we continue to launch new products, we continue to develop new products for the export market, we continue to work on fit-for-market products for quite a few markets, which means earlier, we used to supply one product type for every market globally. And over the last year or 2, we have been working continuously to create fit-for-market products for each region and certain market segments. So certainly, a lot of products are being launched. You should see announcements coming out pretty much every quarter. And we are very excited about our new portfolio. And we certainly believe that being a product company, that's where we excel at, and we are pretty optimistic about our opportunities in the future.

That's helpful. The second question is on exports. So when we look at the CMI results, and especially, we saw Powergen was the star performer in the March quarter. But our exports actually seem to be off the trend. If you could help us understand -- on the trend line, you mentioned that you are pretty optimistic. And we saw around INR 400 crores a quarter run rate in second quarter and third quarter. So just some granular understanding will be useful. Can we expect INR 400 crores as a steady-state run rate and that might come back as normalcy restores?

I won't give you exact numbers, but all I can tell you is that Powergen which was for -- for the last, I would say, almost 3 or 4 years, has been globally a declining kind of market. The decline has been arrested last year, and we are starting to see upward trends from this year. So while certain segments are doing significantly better, like data centers and telecom are doing significantly better than the powergen space as compared to other segments, we are seeing optimism, and we are seeing opportunities start to emerge there. So whether that will immediately translate to INR 400 crores or more or what that number is, I don't have a good feel for it right now. All I can say is that the -- it appears optimistic from what we are seeing trends around the world.

That's helpful. Another just data point, MEIS impact, what could be that in the March quarter? And any outlook that you are seeing on the RoDTEP?

Yes, so certainly, we have taken an impact of MEIS in the whole year. I would say that -- just a second, I'm just looking up some numbers here. Give me a second.

Sure.

Yes. So from an export incentive perspective with MEIS, we have seen a loss of roughly somewhere between INR 30 crores to INR 40 crores is the impact on our bottom line. And RoDTEP is still not implemented and still awaiting a lot of clearance and guidance on that. So we haven't factored that in. So there is no impact in the March quarter.

So just continuing on that, have you factored that in our export pricing? And will we -- subsequently, the pricing could be revised? Or we are now continuing with the old prices only assuming that the incentives can come back?

That is all factored into the pricing.

Sure, sure. And just the last question from my side, on the alternative technology. Being around the world and specifically fuel cells, do you see that this could actually become a good substitute for the backup gen sets or these are actually primarily being used for prime power applications? Sir, outlook will be useful on this.

When we talk about new energy, we are really talking about electric-driven -- really, we're talking about fuel cells, and we are talking about hydrogen and we are -- we are not talking about wind, solar and those typically. Cummins doesn't have any play in solar or wind. But certainly, Cummins has a very strong play in the hydrogen and the battery electric economy. We don't see that playing a major role in the powergen market, at least for the next 15 or so years. And we are also looking at ways by which existing equipment and technology can be used in conjunction with some of these new and alternate fuels. So there is a path we are continuously working on. We've also made significant investments as Cummins, globally, in the hydrogen economy. So when that transition happens, Cummins will be very well placed in that space as well. So I would say that's where we are right now. But in the in the short to medium term, which I am classifying as up to 15 years, we don't see too much impact of some of these new fuels. As a matter of fact, we see demand for diesel rising pretty significantly before it starts to taper.

Next we have Charanjit Singh from DSP Mutual Fund.

So my first question is on the domestic powergen. If you can give us an understanding for FY '21 full year, how different end markets would have looked like maybe over the proportion of deals from real estate, data centers or in [indiscernible]. And going forward, as these lockdowns open up, how do you see some of these end markets behaving? And do you see manufacturing as a segment coming back in a big way for the domestic power? That's the first question.

Yes, so from a segment perspective, as far as the domestic market was concerned last year, I'll start off with the worst-performing sector because those are very clear and easy to talk about. The #1 worst performing sector, of course, was hospitality. So hotels were pretty much shut throughout the year, or were starting up for a very small period... [Technical Difficulty] So as I was saying, hospitality, residential and commercial real estate were the worst impacted last year. Other segments were impacted for, I would say, for a couple of quarters, like manufacturing and infrastructure. But in the latter half of the year, as the government began pumping in more money, those -- all those segments began recovering. The segments which performed the best were, of course, data center, telecom, IT, pharmaceuticals, health care and hospitals, et cetera. So there was a very distinct performance difference between the well-performing sectors versus the badly performing sectors. Whereas for the current year, we are seeing pretty much, other than hospitality and some parts of commercial realty, almost everything -- all other segments have started to recover pretty strongly.

Okay. And sir, on the industrial side, most of the categories are definitely bound to show good growth. So within that, if you can highlight to us the trends, especially in railways or construction and mining, how do you see the second half picking up as the project activity starts picking up much more faster in those markets?

So construction certainly was on track, before the second wave, to be at a record level. And at Cummins, we certainly feel the emphasis the government has placed on infrastructure, building roads, ports, highways. All of that will lead to a multiyear growth in construction like we have never seen before. And so we are very, very optimistic on the construction market, and we have the leading market share and have great products in that space. So we continue to remain optimistic about that bouncing back once things start to open up. As far as rail is concerned, the rail is the most significantly impacted because trains have not been running at capacity since the lockdown last year. So it's been almost a full year where rail has not been running at capacity, and it is likely to take even more time, a few more quarters before rail starts to bounce back up. So rail is the segment where -- even though we have great share and we have great products, the segment itself is likely to take some time to recover. Mining was not at all impacted due to COVID because mines continue to run and production continues to be at record levels, and we continue to see that grow very well. And segments like marine and pumps, et cetera, also, we are starting to see a strong revival. And once we are out of this second wave, we think they will bounce back pretty strongly.

Last question from my side on our market share currently. And in the [indiscernible] purpose segment, are you seeing that we can see incremental gains in market share?

As of now, we are pretty much holding market share across most segments. We haven't seen real gains across any of the segments as of now. But we remain focused on improving market share.

Next we have Nilesh Shetty from Quantum Mutual Fund.

Just to understand, since you run a global business. In countries where you operate, say, Europe and U.S., what was the demand like post the second wave? Was it sort of much stronger than what you thought the supplies on the upside? And how did -- sorry, your product that you operate in Cummins India, how do these end markets behave by the end of the second wave?

Certainly, the markets, especially North America and Europe and China, bounced back quite aggressively. China didn't even have a very strong second wave. So they just kept going after the first wave. As far as North America and Europe is concerned, North America bounced back faster than what was anticipated, and Europe is starting to bounce back as of now. So as a matter of fact, at the end of the first -- the first wave, India surprisingly bounced back faster than almost every other market. So -- and we are better prepared now from a manufacturing and supply chain perspective than we were when we were hit with the first wave. So my hypothesis is that India should be able to bounce back quite well.

Okay, and does the global chip shortage, which is impacting the auto industry, does it have any impact on your production or...

It has more of an impact on our automotive side of the business, which is much lower inside CIL. So it has a very strong impact over there. In the CIL business, all the electronic engines that we produce are impacted. We are able to supply roughly at 50% of demand in some of those markets because of the shortages, chip shortages. And those are those -- some segments are getting slowly met. But in other segments, we are still continuing to struggle with that.

Okay, and just one sort of bookkeeping question. There's a line item called purchase of traded goods in your P&L. And in some quarters, it jumped sharply. Is it probably linked to your low-cost power business that you source engines from Simpson and sort of other players? Or what drives that number, please?

Yes, that is the -- you're exactly right in what you stated, that is the purchase of engines from Simpson.

Next, we have Priyankar Biswas from Goldman Sachs.

Sorry, this is Priyankar Biswas from Nomura. There was some miscommunication. So my first question, sir, is like you seem to be reasonably confident that both the emission changes, the margins probably may be maintained by pass-through of the costs. But if we look at the past emission changes, let say from CPCB I to CPCB II and even in the U.S., for example, in 2016, we have seen that the EBITDA margin typically tends to contract. So why -- how are we getting the confidence now that this will not be the case again?

Yes, so very good question. The -- usually, you don't see too much of pricing advantage if the technology change is gradual. So for example, the example you mentioned in North America, for example, the product was going from 1 emission level to another with a single jump. And it was going -- moving from an electronic product to a similar electronic product with just tighter emission control. So the change was not as significant as the change we are seeing in India. So in India, we are going from CPCB II to CPCB4+, which is 2 emission jumps, which makes the product equal to Euro 6 and even tighter. To achieve that level of emissions compliance, the technology change is drastic. So we are going from 100% mechanical portfolio to a 100% electronic portfolio with 100% after treatment. So whenever we have done that kind of change in any other market segment, let it be in the automotive segment, which has gone from BS IV to BS VI in India or when that kind of change took place even in North America or China or any of the other markets, the margin, the price, the end user price, everything changed significantly. And our -- we took a bigger share of the pie, and we were able to improve margins during that kind of technology change.

So sir, related on this, so since we are highlighting export opportunities as well once this technology change happens, and we are, let's say, far or better than the other parts of the world. But what I understand is, like in China, they recently went at it with their emission changes. So they went with NS VI, if I am not wrong. And even Cummins, China is a big player in that technology. And what I see from their comments is they have scaled up production massively. So if they already have the scale and the technology, so wouldn't it make much more sense from a parent level to source from there because they already have the scale? And maybe because of the scale, their cost competitiveness will be higher? Whereas our [indiscernible]? So is it better risk to the export scenario?

I think you're mixing up 2 norms. The China going to NS VI will be going into India going to BS VI. So that's an automotive norm. We are going to CPCB4+ which is equal to Tier 4 final of North America, which no other market in the world is going to before us. So we will be the first there. The second point, of course, is, of course, India and China, we compete with each other as we supply to the rest of the world. And as I mentioned in one of my earlier comments, Cummins has 3 major manufacturing hubs around the world, North America, China and India. And there are certain products being made in China for the world, certain products being made in India, and there are certain products being made in North America and continuously -- we need to build more entitlement. So we have to be better on cost quality and delivery. Otherwise, certainly, customers will go to markets -- to markets and areas which provide better performance. And -- but we remain confident that we have advantages in all those spaces.

So, sir, the last question from my side. This is linked to the new technologies, especially like hydrogen and fuel cells. So you are highlighting that the potential for, let's say, hydrogen in rail projects that you were highlighting maybe in the future. But I was just wondering, isn't it more cost-effective for Indian railways that they have kind of already electrified by the main route, so electrified the main routes. And so rather than that, going for an increased solarization of the grid would actually be like a more cost-saving proposition then going by the fuel cell route? Because isn't there to produce green hydrogen, you require a renewable energy source? So how does the general hydrogen theme play here? I mean in the railways, for India...

It's pretty complex, the whole path to new energy. What happens in any grid, as the percentage of renewable energy increases beyond 15% to 20% of an economy, the electricity production. There is a whole bunch of grid imbalance, which takes place because the clean energy, let's say, solar, for example, can only be produced during the day. So then what do you do during the night? So during the day, whatever you produce, you've got to figure out a way to store it, right? And so to store it means you have to now invest in batteries and other technologies, which are also very, very expensive. Wind, for example, is only available at certain times during the day. So what happens is then you get surges of electricity, it is not a 100% reliable, steady source. And one of the reasons why options like hydrogen become important is you can use that surplus green energy during the day and use that energy to create hydrogen, which can then either be burned as a fuel or be used as a storer of energy to convert back into electricity. So that's certainly one part. The other part is what you mentioned. We have electrified all the main paths. But there are hundreds and hundreds and thousands of little towns, villages, paths in the mountain hills, et cetera, which are not electrified. And though also eventually need to move to clean sources of energy. And that is why many countries around the world, including Germany and China and Europe, et cetera, are moving to using the clean hydrogen in some part of their rail network. And we expect similar kinds of applications in India as well.

Next, we have Kirthi Jain from Sundaram Mutual Fund.

Sir, with regard to further pricing, are we contemplating to take further price hikes in the coming times?

The answer is, yes, to meet up with the commodity cost increases, what -- we are planning price increases in the future.

So with regard to competitive intensity in the market, is this because of the demand momentum improving? Is the competitive intensity coming off a bit? Or how do you see it in a year, sir?

Competitive intensity continues at this stage. And -- but over a period of time, as people are migrating towards new technologies, we see a greater consolidation happening. And we certainly see that we have an advantage in that consolidation as the leading technology provider. So as of now, our competition is pretty intense. Moving forward, as the technology causes differentiation, we expect to be able to differentiate from competition and move ahead.

Sure, sir. The last question from my side is, in terms of the non-power gen engines exports, how do you see the trajectory? And what are the growth triggers in the non-power gen Indian exports?

So those are for markets such as mining, construction, and we are seeing quite a positive trend in that as well. The reason some of that doesn't get counted as export for us is what many of the global OEMs have done, companies like Hyundai or [ Sunny ], JCB and even companies like Hitachi, they use India as a base to produce the entire equipment for exports. So we don't then get credit for some of those exports as exports because they are purchased and built locally and export. But they are indirect exports. And we do see a lot of opportunities in the upcoming future for those segments and those areas to continue to give us strong growth.

The last question of the day we have from Mr. Deepesh Agarwal from UTI Mutual Fund.

Sir, my first question is when commodity cycle was weak, we're used to your Cummins commentary that end market for low to medium kVA in geographies like Latin America, Africa, are down by almost 40%, 50%. Now with the commodity cycle being on a strong footing, do you expect this market to bounce back where they were 3, 4 years ago?

I certainly expect markets to come back stronger than they have been in the past. Like I was mentioning earlier, power generation global markets have seen almost 5 or 6 years of steady decline from the mid 2015 kind of time frame. We are starting to see that bottom out and start to gradually improve. So yes, I certainly believe that we should start seeing demand grow globally in some of those markets as well.

Okay, and sir, my second question is continuation of a previous question. With the consolidation in the industry over a longer term, do you expect the pricing discipline to come and easing of the pressure on the margin?

Certainly, as more consolidation happens and as we continue to gain market share, we have -- we are continuously striving to improve margins. So we see that as a positive trend towards improving margins.

Okay, okay. And sir, also in last couple of con calls, you have been highlighting the CPCB4, our opportunity in the developed markets like U.S. and all will increase as our product will become more advanced. Both the domestic products be straight away marketable in this geography or there would be a long gestation period for us to develop specific product and market it and before we start capturing revenues there?

It won't just be automatic because India works at 50 hertz and those markets work at 60 hertz. So there are some product modifications which are needed. And when you make product modifications because the emissions are so tight. You need to do quite a bit of work to fine-tune the product. But it's not something which Cummins is not capable of doing or is difficult for Cummins to do. So certainly, we have -- when we're developing these products, we are looking at those options as well.

Okay, and sir, lastly, if I can squeeze, what extent of our domestic sales are dependent on private manufacturing? And are you seeing an increase in inquiries out there?

I didn't understand the question. Could you repeat it?

Sir, what extent of our domestic sales or you can talk about power gen sales also, which are dependent on the private manufacturing? And are you seeing an increase in inquiries out there?

So manufacturing as a segment is a pretty large segment in power generation because factories need power generators to drive them. They can't be 100% dependent on the grid, they want to work 24/7, et cetera. And yes, we had -- we had a strong order board at the end of the year. And manufacturing was beginning to ramp up very, very, very strongly. It has taken a hit right now because of all the lockdowns, et cetera. But yes, I remain optimistic that once things get back to normal, there will be pent-up demand, and it will start to bounce back again.

So I'd like to now hand over the floor back to Ashwath, sir, for his final remarks. Over to you, sir.

So thank you. It seems like we have been in a constant state of crisis for the last 12 to 15 months. I remain confident that we have done all the right things. We are focused on the safety and health of our employees and their families. We have done everything to ensure that our company remains strong by focusing on costs, focusing on cash, focusing on making the company more lean and more efficient. We continue to -- in this complete crisis continues to focus on developing our products and introduce newer and better products into the market. So I remain really confident that once the economy starts to bounce back and pick up again, we should get back to the trajectory of strong growth. We are still not out of the crisis yet. We don't think vaccination will be completely available to all the people until -- for the next couple of quarters. And so we will gradually come back. But I'm urging all of you to also continue to remain safe and be confident that this is a company which has been in business for over 100 years. We've been in India for over close to 60 years now. And we will continue to do everything that is right to make sure the company remains strong and continues to grow profitably. Thank you.

Thank you so much, sir, for addressing the session. Thank you, everyone, for taking out time and join the call. That does conclude our analyst call for Q4 2021. You may all disconnect now. Thank you, and have a great day ahead.