Cummins India Limited (500480) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. First of all, thank you for taking your valuable time to attend this call. I'm Ashwath Ram, Managing Director of Cummins India Limited. I hope you and your family are doing well and are staying safe and healthy. Also joining me on the call today is Ajay Patil, our CFO for Cummins India Limited; and Steve Chapman, our Chairman, has also joined us and is also available. Before we get into the details of Q2 results, I'm happy to inform you that CIL witnessed a record quarter, well supported by the economic recovery, good demand and improved supply chain. Our priority continues to be the safety and wellbeing of our employees, serving our customers and communities, continuing to work on improving margins while managing costs and the company's continuity in the future. I would now like to share the financial results of Q2 FY '22 through this call. For the quarter ended 30th September 2021 with respect to the last year same quarter, our sales, at INR 1,689 crores, is higher by 48% compared to INR 1,141 crores recorded in the same quarter last year. Domestic sales, at INR 1,250 crores, increased by 68%. Exports, at INR 439 crores, increased by 10%. Profit before tax and exceptional items, at INR 293 crores, is 55% higher as compared to INR 189 crores recorded in the same quarter last year. For the quarter ended 30th September 2021 with respect to the sequential or last quarter, our sales, at INR 1,689 crores, is higher by 45% compared to INR 1,157 crores recorded in the last quarter. Domestic sales, at INR 1,250 crores, increased by 46%. Exports, at INR 439 crores, increased by 43%. Profit before tax and exceptional items, at INR 293 crores, increased by 71% compared to INR 171 crores recorded in the last quarter. Segment-wise breakup for the quarter ended 30th September 2021. The segment-wise breakup for domestic first. Power Generation domestic sales were INR 637 crores, an 81% increase over last quarter. Distribution business sales were INR 365 crores, a 20% increase over last quarter. Industrial domestic business sales were INR 228 crores, 21% higher than last quarter. Exports, the high horsepower export sales were INR 242 crores, a 42% increase over the last quarter. And low horsepower export sales were INR 163 crores or 40% increase over last quarter. From a Cummins India financial guidance perspective, the company is quite hopeful of sustained improvement in economic recovery across industries and sectors. However, potential wave 3 of COVID as well as forecasted supply chain disruption make it difficult at this time to give a steady or stable outlook. The company continues to work on stabilizing supply chain and parts supplies. Demand outlook from various end markets continue to be positive. Visibility to full market recovery is somewhat limited considering the variables of wave 3 of COVID and supply chain instability. Thus, the company is not providing a full year guidance for revenue for FY 2022. With this, I now open the session for questions. Thank you.

[Operator Instructions] [indiscernible]

Sir, are you able to hear me?

I can hear you clearly.

Yes. Sir, congrats on a good set of numbers. So basically, just wanted your sense. We had registered a significant growth in the Powergen business of around, say, more than 100% year-on-year and revenue of around INR 620 crores there. What were the factors which had driven the growth in this? Was there any one-off large order which we had seen? If you can give more clarity on that, that would be great.

Yes. Certainly, we had one large project business order, which was a big data center order. That's a onetime kind of order which contributed to nearly close to a little lower than $20 million in top line revenue. So that was one big segment there. So data center continues to remain really strong. Health care has picked up also in a strong manner. And the residential realty is beginning to pick up. The sectors which are lagging behind, of course, because of the monsoon rains, et cetera, were infrastructure, all the power consumption required for [ strong ] pressure, those kinds of infrastructure. That activity is starting to pick up but has not yet fully picked up. But across most of the other segments, the demand is pretty strong.

Got it, sir. And this data center, so how big was the data center in megawatt terms, if you can give a broad thought process? And to get an idea, how sustainable are the orders over the coming quarters or the years?

Yes, this was pretty large from a megawatt perspective. I would say in the range of 100-plus megawatts. And these kinds of orders are going to be increasing. As we move towards 5G, as we move towards greater cloud-based data storage and more telecommunication, more people working from home, et cetera, this is only going to keep increasing as we move forward.

Okay. And my next question is with respect to the industrial segment. Which are the sectors which are seeing traction with kind of new participants, if you can give a broad thought process?

Sure. I can tell you there that construction is starting to come out, which means with wave 2, construction activity has come to nearly a stop. And road construction, as you know, had dropped to below 15 kilometers per day. Now with the monsoon getting over, we have started to see road construction activity beginning to ramp up. And the government's ambitions are to go to greater than 60 kilometers a day. They are actually aiming for 100 kilometers a day. But we are likely to see that beginning to bounce back. We saw some of it start to come back in the -- towards the end of this quarter. Rail is the one which is recovering the most slowly. So rail is not up and running. Freight, from a rail perspective, is back to full force. But as you know, the commercial rail is still not running full force as it used to in the past. So that is going to take a little more time to recover. We are expecting in the next 2 quarters to see that also come back. And we are seeing mining continue to be strong. We all heard about the coal shortage and commodity prices all going up. So mining is going to keep increasing. And so that demand is already reasonably strong in the previous quarter, and that is likely to sustain. Marine typically drops a little bit during the monsoon season. Also as recent contracts, et cetera, start to get awarded, that business is likely to start picking up towards the end of this year. And so growth can sustain.

Got it, sir. And other expenses has kind of been flattish year-on-year. Was there any onetime gain or something in the currency gain or something equivalent which is there? Is there any one-off there? Or the other expense trend is likely to remain the same?

Other expense, just give me a second here. So other expense, it was flattish, but a lot of it is that we have been able to actually give you based on a percentage perspective, it's actually quite an improvement. Even though there are a little bit of increases from the volume base. And last year, we had an advantage that we had to take an impairment of some old testers, et cetera. And this year, we've also had some increased warranty as the volume picks up and we have some new products, et cetera, have come in. But overall, we continue to manage that pretty tightly. And we think that's what given us leverage from a profitability perspective.

Okay. And my final question is with respect to the Ministry of Power notification. Any views on that, sir? So basically, they are asking states, et cetera, to shift towards battery-based backup.

Yes. So actually, it's more a guidance to say that, a, this is something we are advising you 5 years from now, you should be ready to move, et cetera. So we have been working very closely with all of the government. And we have a very clear strategy from a Cummins perspective on how to deal with this because we are dealing with this in multiple countries around the world. And so Cummins' very clear strategy here is that it's okay to talk about something 5 years from now, what's going to happen in 2030, what's going to happen in 2050. And we have a 4-pronged strategy, and that is as follows. The first one is what are we doing to lower emissions today. And so our biggest focus is not to talk about what we will do in the future but what are we doing today. And towards that, we are pushing to get the CPCB-4+ implemented. I was able to talk to MoEF, and the draft is already there, it's getting ready to get announced earlier themes of the paper's date and time line respects. So that itself will cause a huge reduction in the emission. Second is we are seeking to say that, okay, if we are worried about emissions, then why don't we introduce some incentives like crafting policy for some of these kinds of technologies. We have committed that by 2050, we will achieve 0 emission footprint. And we have already published and committed publicly that, that is what we are going to do. The fault is that technology will only get adopted if you have wide-scale implementation. So you can't do just say batteries. But then okay, what is the batteries strategy? As of today, 100% of all the batteries raw materials are getting imported from China. So how does that make us independent or where does [indiscernible] fit into that study? Second is you need a game plan and a white paper. So we are talking to the ministries to say this is our view on how a white paper should work here, how you can drive wide-scale adoption. Here is the transition plan. Here is how diesel becomes [ cheaper ] today, and we can migrate away from using less and less diesel going to gas, going to other technologies over the next 20 years, not abruptly, where nobody has an answer of how to do that immediately. And the fourth is we have to look at reducing relative [ EV ] emission, not just look at it in isolation and say that, hey, I'll give you electricity. But 70% of electricity comes from coal. So how am I following my commitment to the Paris Accord or how am I following the current problems for the world just by moving from diesel to burning coal. So we are talking to the government on all of those 4 things. We are making representations to the different organizations like CII, IDEMA, et cetera. We are also going in and the government listens to us because we are the market leaders in this, we have experience in multiple markets, so that has been our strategy on how we are dealing with these kind of notifications. And we are showing them that even in the advanced countries of the world, despite moving to a lot more green energy than what we have, those countries continue to use diesel as a standby and other applications.

Next, we have Sandeep Tulsiyan from JM Financial.

Am I audible?

Yes, sir.

Yes, sir. My first question is, on the large-size gensets that we do for data centers where we took a project to complete one data center for 100 megawatts plus that you mentioned, I would want to understand a little bit more about the gensets which are 50-liter plus in size. What is the kind of competitive landscape for these engine-based gensets? As well as what are the indigenization levels of Cummins versus other peers in this range? And other than data centers, which are the other end market applications where 50-liter-plus engines are doing currently? That's my first question.

So anytime you need more than 2,000 horsepower from -- and where space is at a premium and you want a greater density of product, you need these kinds of engines. And we have the largest level of localization as compared to anybody else because we have the 50 liter, which we have now made capable of going all the way up to 2,000 kVA. And nobody else has a product of that size. So that certainly gives us an advantage. And the strategy of the product for us is at greater than 85% localization. Now as we move higher than 50 liters, then we have 60-liter products. We have 78-liter products. We have 95-liter products. Those -- most of those -- the 60-liter product is getting more and more localized. I would say we are at roughly at a 50% localization as of now heading towards the -- in the next 18 months, more like an 80% kind of localization level for those products. Almost everybody else is importing those products. So that -- and there are only 2 or 3 big players in the world who have products in those ranges. So we stand very well when we compete against them. And there are multiple applications on these data centers, anything that -- any where you need power data than 2,000 kVA, you need a big genset. And we are -- we have well, well worth to fight in that space, and we continue to remain the market leader there.

Got it. Second question is on the gross margin compression that you saw during the quarter. Would I be correct in saying that this compression is more to do with the mix, now being exports, being lower [indiscernible] that we're looking good rather than the pure raw material inflation impact that got in the quarter and which may come in the subsequent quarters?

I think to comment on one effect is...

How much price hikes have you rolled out, sorry, if you can address that part also.

Yes, I won't give you the exact amount of price hike. All I can tell you is if you look at the percentage of commodity increases, so commodities like copper has more than doubled. Commodities like steel have gone up excess of 40%. We have been able to realize -- I would say these price increases more than 60% of the -- of that impact we'll be able to realize through price increases. We also have certain mix differences which caused some material margin reduction in this quarter. But we are able to pass on those, but it lags behind a little more than a quarter. And so it takes some time to catch up. And the rise of these commodities are unheard of. This is the greatest rise we have ever seen in a 15-month period in the history of our business.

Okay. And my final question is pertaining to the Industrial segment. We have seen a fair bit of contraction in the railways business because of power [ construction ] climate has gone down and electrification is taking place. So if one were to compare it to pre-COVID sales, where do you think the normalized sales for the railway segment would look like, which was more like INR 350 crores to INR 400 crores a year. What would you expect the comparative number once it normalizes in the segment?

I think we are introducing many more new products, and we've started winning some tenders with those new products, et cetera. if I look at it from a longer term, I would say, beyond 18 months kind of perspective, we expect it to even better, where rail is not a contracting segment for us. It's actually a growing segment for us. What you're seeing now is a short-term impact of one the entire segment working at a slow pace and, of course, electrification happening. But we are gearing our business through deals with the electrification and actually opening up more markets for us. So I would say in the short term, it will continue to remain slightly subdued as compared to our best quarters ever in Rail. But when I look at it from a medium-term outlook, I can -- I'm very bullish on the segment for us as a company.

Next is Renu Baid from IIFL.

Congratulations on a strong performance. So my first question is broadly of this large project that we have received, that if I look on data center side, the base business volumes is at approximately INR 15 billion, still seems to be pretty much strong. So what is the comfort that we have in terms of tailwinds from the end market of broadly sustaining this INR 14 billion to INR 15 billion kind of possible run rate? Or you think there are certain slippages that are paying up [indiscernible] in the volume, which may not be sustainable in the quarters to come?

We see demand is quite strong, and not all segments have come back. So when I look out into the future, I see demand actually picking up, but it's -- the reason I hesitate to say this is fantastically better and this is giving us optimism is because supply chain is still constrained. So we are still running with backlogs of certain types of orders, they're still not able to supply the market with unconstrained demand. But I remain optimistic that supply chain will continue to improve and we will continue keep growing the demand. I guess that's the way I look at it, and I'm bullish right now on the way demand outlook is looking out for the next 3 quarters, at least.

Got it. Sir, secondly, on exports, now that we are back to almost the pre-COVID levels in terms of quarterly run rate, can you share some color in terms of the growth standard across all of the key regions? And what kind of tailwinds can be expected as global economic growth picks up?

Sure. So pretty much I can say that the biggest growth we are seeing in the Asia Pac region, and a lot of it, I guess, is because of very strong demand continuing from China as well, even though that has started to taper down a little bit. But the other regions of Asia Pacific, like Philippines, Indonesia, Malaysia, all of those regions also continue to do really well and have bounced back the fastest. Latin America is just -- is just getting ready to come out of there. Their COVID hit has been deeper and have been at a later [ title ] than even ours. So they are just coming out of it. And Europe is still lagging behind. And we think it will take another couple of quarters for Europe to start picking back up. The Middle East is also -- is just getting ready to start bouncing back with oil prices becoming stronger. But still, travel, et cetera, has been so restricted, and those economies are very, very heavily dependent on the service industry and oil industry. So those fundamental markets in those countries, at least in Middle East, are just slowly starting to recover. Africa is starting to bounce back. But Africa has reached such a low that even a small comeback seems that, wow, these things are really much better. That's the way I would look at the overall growth, that things are slowly starting to come back with Asia Pac leading and followed by Africa and then Middle East and Latin America.

Sure. So my third question, very importantly from a long term perspective. What solutions does CIL or Cummins India have to wait for customers, who also offer nondiesel-oriented solution, backup solution? It could be clean energy, combinations of that or maybe otherwise. So especially the applications like realty, data centers. So a, can we do without diesel type of product for taking diesel in some of these end markets? And if so, is Cummins India ready to supply them for their requirements?

Yes. So the answer there, Renu, is that eventually, yes. But when we look at the TCO from a customer perspective, we still feel that as of -- at least for the next -- till the end of this decade, diesel is the best answer for those kinds of large customers and they continue to buy these products around the world, especially data centers and those kinds of products. Solid fuel oxide cells are probably the best answer, not battery for those kinds of large applications. We are already experimenting on a few niche customers in Korea and a few other places. But the -- we think that somewhere in the late 2030s is when we will see more movement into those kinds of technology. We have the technology. We are the leading player there. As you know, we have -- we own one of the biggest hydrogen companies in the world. We have set up 3 major gigawatt hydrogen production centers. We have battery company. So we are already investing in all of those technologies. As we find it appropriate, we are looking at opportunities where we can bring in those technologies into the country. And in the power generation space, certainly CIL, if it needs to play with multiple energy technology, we will be the first to market.

So broadly, just to summarize in respect of the technology base, do you foresee a momentum to backup solutions or demand? Especially for large corporates who are looking to move towards net zero for the mandate for compliance. Does that seem to take [indiscernible] the demand for backup continue?

The demand for backup will continue at least for a least till the 2035 time frame, by which time some of these technologies have an opportunity to mature and provide a better CTO for these large solutions where migration can happen at a faster pace in the sub-10 kVA market, where solutions like inverter, UPSs, batteries can replace small diesel gensets which are sold. We have a very small play in that space, but we certainly will also attempt to make up sales in the battery technology in those spaces.

Next is Bhavin Vithlani from SBI Mutual Funds.

Congratulations for good set of numbers. Sir, the question is on...

Thank you.

The question is on the exports, slightly longer term. And when we add up CMI's revenues from the high-horsepower engines, it comes to about USD 5 million, and the exports from Cummins India plus CTIL is about $200 million. So do you see an opportunity to increase the exports considerably over a 5-year basis as CMI moves more towards hydrogen and battery?

Certainly, the opportunity for increasing exports from India continues to remain strong. There are many product families that are now only produced in India. And we are using the advantages now offered, CTIL and other themes to bid for more projects out of India. So the answer is, yes, there is an opportunity to do more. How that actually plays out because there are other -- just like we have [indiscernible], every country has their own version of that. So there is [ NPA ], and there are so many other global barriers to protect industry in their own region. So we are within the gambit of all of those complexities. There is still an opportunity for us from India because of our great quality, low cost base. If we continue to perform well, certainly more markets will keep opening up for us. So the answer is yes, we are looking, exploring, trying to figure out how we do more out of India.

Sure. Just another question is you also highlighted about a couple of other products which are currently imported, which is the 78-liter and the 95-liter engine. As we see demand in India for data center picking up and, if it all, the need to localize prices. So will that be housed under CIL or CTIL?

It depends on the market that we're serving. So CIL serves the data center market, and that is not handled out of the -- out of CTIL, et cetera. But so eventually, all the final revenue goes to CIL for those markets. But depend -- where the investment will be made depends on what Cummins looks at from a strategic perspective, where it needs to put its money for the best return on investment. So we will always look at what is in the best interest of all the stakeholders, whether it is our India shareholders, whether it's the global common stakeholders, everyone, and make sure we take the best decision in the interest of everybody.

Yes, sure. Just a follow-up...

We continuously keep looking at opportunities to be more out of CIL.

Sure. And a follow-up, like about 4 quarters ago, you had highlighted that you're evaluating options to simplify the structure. Any progress on that front?

Good progress, but I cannot say more beyond that other than once we are making -- where -- once we make some progress, it will need to be obvious and everyone will hear of it. All I can say right now is that we continue to evaluate these options.

Next is Nilesh Shetty from Quantum Mutual Funds.

Yes. I have 2 questions. The first is, I mean, everyone is aware that the global supply chains have been sort of messed up, and shipping -- the cost as well as container availability have become 2 major issues. So I just want to know how much of that has impacted Cummins India? Or has there been no impact at all?

So there has been quite a bit of impact. I think we have not been able to meet unconstrained demand, and we have faced cost challenges. We have -- we are not able to ramp up at the rate at which we want to ramp up. And there are some of these challenges which are not going to get over some for maybe even longer periods of time. Especially the problems in the supply chain of electronics. It now looks like it could be end of '22 before those problems will get better. So we can watch continuously every quarter, but the problem keeps spreading. It spreads to multiple areas. It spreads to commodities. It spreads to power. It spreads to now the latest commodity that is impacted is silicon and silicone. And yes, so we are playing it. As we've seen it, we have volumes working in India and around the world trying to deal with the situation. I think we are able to reasonably stay ahead of the problems but not to the extent we would like to be completely happy.

Okay. I know companies sort of have built their supply chains with the IT in mind. How much of that is being record given the kind of disruption you've seen on the last 18 months as companies go...

Over the last 2 quarters, we have taken inventory -- strategic inventory percentages have gone up quite significantly. So we have taken many of those calls, and we are building more inventory. Like I said, inventory is a double edged sword, so it hits you on cash. But we have taken some of those calls, and we are doing that. So yes, not everything can work with the same type of model in terms of the supply chain.

Okay. And just one clarification. On the input side, do you have a hedging policy? And how do you sort of manage the wild situation that happened with commodities?

At a global level, certain commodities, there are levels of global hedging policy there, but not for everything. So we do see that a lot of -- some of the commodities, because there are still 2 or 3 levels of product not a direct -- we are not -- we cannot do direct hedging on those. So the only way to deal with that is through commodity agreements with customers and pricing increases that we pass on from time to time. But certain critical materials in certain technologies, we do have some hedging strategy.

Next is Charanjit Singh from DSP Mutual Fund.

Congratulations on a great set of numbers. So my first question is on the domestic power gen market. If you look at historically, this market has grown by around 5% to 6% CPCB4 maybe for the last 5 to 6 years excluding [indiscernible]. So going forward from a market perspective, how do you see the outlook? Maybe if you can not quantify but at least qualitatively, do you think that overall growth can be much higher than what we have seen in the past? And what will be the drivers for that? That's my first question.

So this is one of these industries that is directly linked to the GDP of the country. As the country grows, this business grows at a faster rate. So as you build more infrastructure, if you build more roads, airports, ports, data centers, all of that, this business will grow. When we don't spend money, it doesn't grow as much. So since India is getting ready to -- we have ambitions to first become a $5 trillion economy and then become a $10 trillion economy over the next 5 to 7 years and we want to spend $2 trillion on infrastructure, I think all of these are very strong indicators that this power gen business will grow. From a top line perspective, I think it will grow for Cummins even more than for other companies because we are also seeing the emissions transition. And what happens when emissions transition happens, even if volume doesn't grow, the size of the pie increases just because of the complexity of the technology. So we have seen that in multiple markets. So I'm very optimistic on the count that the CPCB4 will grow in the short term. Usually, when there's a technology transition, there is also a prebuy. So we are likely to see demand go up as the transition happens. But in the long term, it's pretty strongly linked with the GDP, and that will keep improving. And we will see this definitely growing.

Okay. Sir, in terms of price hikes for our products in various categories, what are the kind of price hikes which you are thinking? And as commodity costs continue to put more pressure...

Very, very significant but still lagging behind commodities. So I would say we typically lag about a quarter and a half behind commodities. That's because the rate of increase of commodity prices have been so steep that customers are not able to absorb such steep prices in prices. So we have to slowly ease that into the market. So it's a very, very big challenge right now. But we do keep increasing prices to offset some of this. And of course, we try to keep optimizing the product and try to be more cost efficient to still be able to manage and not ask as much math from customers.

Okay. Sir, just last question from my side, on the data centers, you've seen a good success. So in terms of the pipeline which you'll be building up as you are interacting with the customers, how is it scaling up from, one, the average size that you are suppling to the customers? And in terms of the competition, in terms of our market share, how deep is it in the data centers market? If you can just give me a detailed understanding on that.

I won't give you exact market share numbers. All I can tell you is we are the leading player in the country in that space. And demand is strong, and many, many more data centers are coming in. Typically, a data center, standard configuration is roughly about a 20-megawatt kind of size, kind of -- these are the standard modules, but typically 5 to 10 2,000 kVA sets kind of size because with 5G, people are also trying to have more distributed data centers towards customers to avoid latency and other issues. But I feel our pipeline is pretty strong.

Next is Nitin Arora from Axis Mutual Funds.

The question is again on the exports. You highlighted in the past 2 quarters about the supply chain issue. If that has -- and you commented that you are seeing recovery in all markets. Demand is coming up. But if one has to draw a conclusion with respect to the backlog or the order backlog you have in exports, given you're not going to execute because of the supply chain, and seeing, let's say, the project of supplying gensets, are you rather confident this might not be going in the project, this will lead to the delays. Can you throw some light what kind of a backlog you will be having today in exports? I'm asking this question because this number is getting too volatile every quarter, and you have suffered in it largely because of the supply chain or the demand is strong. But just to get a comfort that what kind of a backlog you have which can help us understand that what really is the demand because it is getting hampered by the supply chain. If you can throw some comments on that.

I would say we have done a pretty reasonable job on exports because we focus first on exports from a priority perspective. And with the way we manage container logistics, et cetera, to meet demand kind of number. Typically, order backlog run maybe 30 days at the most is the way I look at it from an export perspective. From a domestic perspective, actually, we are running at -- on greater backlog. And the backlogs are not necessarily in every area. There are certain segments, certain goods where the problems are more active. So it's very difficult for me to pinpoint and tell you that, that is the exact order backlog. By more literally, we have order backlogs. Some are significant. There are certain goods where we have as many as 2 months worth of order backlogs. This is unprecedented for us. Typically, we have 15, 20, 25 days worth of backlog. These are like double, triple that. But there are other goods where we have caught up. So I can say from an overall perspective, when I look at unconstrained demand, as we speak, if all supply chain problems are solved tomorrow, how much will I be able to do? Maybe, I would say, 20%, 25% more from where we are today, that would be my guess as of now. But it's very difficult for me to give you a very good answer to say how much is the real backlog.

Very well. And sorry for again asking this question. That's my second question. The government set some narrative. I understand what you said is ex all that EV, that, in 10 years, maybe [indiscernible], in 15 years, we will exit despite emission get changed, already spent money on the CPCB nuance. But eventually, the narrative has been set. Can you tell us, because I think battery or the backup battery, we are not present in that segment as well on the backup side. What we have is more on the hydrogen portfolio. How would we add on that even if, let's say, 5%, 10% of the market shifts -- I'm asking this question because in some of our sectors, railways and auto, that it remains to be seen that if nothing will happen in electric. Today, everything in the 3-wheeler is turning electric, and ICE is not growing. So it's more of a narrative which government is setting up. So can you throw some light how are you cutting back -- especially in the power emission side? I understand you explained the concept of this here. But if government starts giving subsidy the way they are giving to the 3-wheelers, then how the situation will change? That will be really helpful if you can comment on that.

So this is -- we have been studying the scenario now for over 15 years. And based on that, we have been making investment, acquisitions, et cetera. Over the last 5 years, we have seen the ramp-up and made many of those happen. As you're rightly saying, there are certain characteristics which lend themselves to move faster. So 2-wheelers, 3-wheelers, things where the utilization is low and where the energy density is low, those are the areas which have -- which are industry movers. They are moving the fastest in China. They are moving the fastest in India. They're moving the fastest everywhere else. Now when it comes to working equipment, if you look at the same trend, whether it is China, whether it is America, Europe, anywhere also, as the tonnage or the size of the equipment grows larger, the time it takes or the complexity of the storage systems et cetera is enormous. So even I am saying that sub-10 kVA, we think the transition will happen because I can put in a power wall system or we can put in an inverter system or those kinds of systems. And over the next 10 years, we will see maybe 100% of that sub 10 kVA market move to alternate energy. But when you go higher than that, the system required, the space required, the parts required, the complexity required, the management required, the technology does not exist today. Whatever incentive you may give or not give, neither do you have the technical capability to deliver on that for customers nor is the availability there. So there is no way we are putting our head in the sand and not watching it. We are watching it faster, sharper than everybody else. But we think there are alternate ways the transition will happen. All we're saying is we are ready with all of those answers. You let align on what the path is going to be. That's all. So we are working very closely with the government to say that, okay, you want this. Where do you want to give incentive? Do you want to give incentives to a technology which is sustainable and where you can get scale and which helps you in your 2030 ambition to get to 0? Or do you want to wait for a cliff event to happen in 2050 without any plan?

Got it, sir. That's very helpful.

Yes. So like I said, and there are real breakthroughs in battery technologies, et cetera, which have made the speed of movement faster. We are monitoring all of those as well. And this is not a tactical space where the strategy -- we cannot evolve at a faster pace. If we think something is going to move even faster, we will put in even more of our investment. I think we have the ability to move faster than anybody else because we already have our skin in the game in all of those technologies you mentioned.

Next, we have Aditya Mongia from Kotak Securities.

Congratulations to the entire team for a very strong results. I have a question on the [ supply ] side. The first, just on the exports part, now if I got it rightly, what you were suggesting is that if there is no surprising disruption, then a quarterly run rate of INR 500 crores seem possible today, right, or INR 2,000 crores number on a full year basis. On the other side, you're also saying that certain parts of the world, like LatAm and Europe, Africa, are still recovering. I want to get a sense from where is this new demand coming in, that is, just saying you grow versus pre-COVID level to a number of about a percentage of the demand that you are seeing.

Right. So first of all, you used INR 2,000 crore number. Certainly, that is our aspiration is to get there. That would be about INR 700 crores better than the best numbers we have achieved. But we don't see that. I mean that's the way we are thinking about it. So it's not a number which scares me. I think as one of the earlier colleagues asked that there is so much global space, can you do more, yes. We are trying to do more and we are looking at it. But what is driving global demand multiple? So one is as the same trends in India are also playing out in the world. Everybody is working from home, so data centers are becoming bigger, computers are getting faster, camera phones are -- the megapixels per image has gone up by 10x in the last 5 years. So storage is increasing, so all [indiscernible] are increasing. Everybody is using mobile phones. All of those kinds of trends are driving global demand for more and more and more data storage, telecom infrastructure. That is the primary demand driver for growth. And then, the subsequent infrastructure buildup around the world as people try to get more and more people employed and as people try to build better and better infrastructure, that again drives another cycle of growth and demand in the power gen business. And we are seeing that in multiple parts of the world, and I think that's what's driving demand.

Okay. Got that. The second question that I had was the benefit for [indiscernible] in the global level. I think [indiscernible]. What is -- you're talking the adoption of that kind of a product as of [indiscernible] in India because from what I can see, the kind of cost savings [indiscernible] is pretty small. Is there an availability issue out there or is this something else?

You are talking about -- could you elaborate a little bit? You're talking about what are you comparing, sorry?

So is there a view on the genset, in [indiscernible] international yet? I think we have those gensets in our offering. And as you said, [indiscernible] the recent study by CMB suggests that the OpEx -- the operating cost savings are quite meaningful and thus, the payback period is not everybody yet. And I'm just trying to get a sense of the -- are there other bottlenecks with the transition happening which probably would be beneficial for the company?

Yes. Certainly, for example, now the government is pretty [indiscernible] and is putting a lot of money into the gas impact structure, so LNG, CNG, for example, and using more blended fuels. So automatically, if you use clean carbon fuels and mix it with diesel, you meet multiple objectives. For example, you will lower the overall carbon footprint of the country; and secondly, lower the cost. If diesel is $100 and you can get a biofuel at $40, the blended cost given that 30% utilization lowers the cost of diesel significantly, it lowers the TCO, it solves your cleanliness, carbon problems as well as you are seeing any of the fundamental infrastructure. So that's one side of it. Second is gas. Gas, we are -- the country is laying huge infrastructure across the golden borderline, et cetera. We expect that infrastructure to be in place in the next 2 to 3 years. And we have an entire portfolio ready which we will introduce once the supply is made available. So that represents an entire new opportunity where I think at Cummins, we have the leading technology in those spaces. And as compared to other folks, we do [indiscernible] for us and allows us to play more in those spaces. So yes, I think as the transition happens, it opens up more opportunity for us.

Great. And the third question that I have, Mr. Ram, was on the data center orders, the large one. And this is, you said, the domestic order, right, not an export product and the $20 million order you were talking about?

Yes.

If I think that order -- basically, what I'm trying to ask you is that has that diluted effect on your gross margins, EBITDA margins? Because otherwise, at such a strong top line, 15% kind of margin appears to be low in the quarter. I'm just trying to get a of sense, if I take that out, will the number be better or not?

It will be a little better because that happens on a [ constant ] pricing basis because those products are products we don't make in India and those are imported. So yes, so it does have a slight impact of dilution on margin. And as the percentage of localization for us keeps increasing, some of those -- it should have a positive impact on margin.

The last question of the day we have from Parikshit from HDFC Securities.

Congratulations on a really good quarter. My first question is on the [indiscernible] policy which you spoke earlier in the call. So what depends on whether it is instituted or [indiscernible]. And yes, and how big this opportunity could this be overall?

I'm sorry, could you repeat the question, please?

Hello? You -- earlier on the call, you mentioned about discussing policy discussion with the MoEF to reduce emission footprint in India. So I just wanted to understand whether it is practically implementable in India because earlier gensets don't have any registration number, so it's very difficult to track [indiscernible]. So do you think the challenge is [indiscernible]. If not, then how big this opportunity could be for you?

I mean as I said, everything helps, right? If you're using an older technology product, which is beyond 10 years, it's polluting at a rate of 20x what our new generation product will be polluting. That's why we made the suggestion. And if you offer up a scheme by which you get some kind of a rate or something, if there is an incentive for somebody who has an old product to say, okay, this is a good time for me to upgrade and get rid of my old thing and offset some taxes. Typically, these schemes, they may have like a 5%, 10% improvement on demand. They don't have a huge colossal improvement in demand unless it is mandated and executed with a lot of governance, which, as you rightly said, is not possible with all the older sets in the country. But yes, it's working in the commercial vehicle spaces. We are seeing some improvement in demand pickup because of these schemes now implemented. Not very great, but it's improvement. And so we remain optimistic that if they can do those kinds of things, why don't you eliminate 2 problems? Yes, of course, it has a little improvement on sales, but it solves that overall cleaner air kind of problem, which we want to fix.

Okay. The second question is on -- I mean, we have now started seeing [indiscernible] transition that you laid out in terms of charging stations and all, and that is gradually picking up. So are we looking at having some OEM trials for backup power solutions for this infrastructure being laid out? Because we are still at early stage, but we are hearing a lot of OEMs looking -- even startups and other companies looking at implementing this infrastructure in India. Any thoughts? Are we looking at this opportunity, implementing it aggressively that we can get more business from this opportunity?

Yes. Simple answer is yes. Yes, we are looking for opportunities in those spaces as well.

Okay. Just last question, sir, on this draft, the [indiscernible] draft, the discussion paper. So did you get an opportunity to discuss this with MoEF as to what their thoughts and what you have and you touched upon what you have recommended? But do you think that practically -- so what was the additional feedback on this? If you can just comment on that.

Their suggestion was people -- other people we have spoken to tell us, oh, this can just happen very quickly. And so they -- what they disagreed is that, based on our experiences in other markets, that we could work with them to write joint white papers, to come up with a clear transition plan to really show what is that impact, what is the cost impact, what is the carbon footprint impact, what is the adoption rate impact, what is the relative real emission impact and what can I do today, so those 4 themes I spoke about. I think across, whether I spoke to [indiscernible] or MoEF or MHI, I think all of them are open to listen to ideas on how we can do this in a better manner. And I think we are going to increase our efforts to provide that information, provide that clarity and help the nation transition. So I think we have a role to play here, and I think we're going to try to play that.

Okay. Just last thing, sir, if I may. Just -- you are very bullish to mention on the demand outlook and maybe can better off by 20%, 25%, if everything was optimally working out. So just wanted your thoughts or any plans given the strong outlook commentary of yours, any plans on CapEx or any thoughts within CTIPL, if there is some arrangement anywhere without moving the new [ flight ] capacity, so that we can deliver more without incurring CapEx. You're thoughts on the CapEx and how that...

[indiscernible] all our CapEx over the last 2 years, and I've been saying this, I think, for 2 years now that our big investment on infrastructure, that work has been done in the past. And all our CapEx cycles are towards growth projects and new technology and whatever it takes to sustain that. So even if you look at our CapEx plan for last year and this year, it is, I would say, almost 50% of everything we're spending from a CapEx perspective is on growth projects or new products, et cetera. And another, I would say, 40% is on sustaining what we have already invested in. So very, very little goes towards building new infrastructure, et cetera. So we remain confident that, that will be the case going forward. We still continue to have tremendous amount of capacity we have already built. We are -- and we -- as the demand grows, all we have to do is improve our utilization and help us get better leverage.

I would like to now hand the floor back to Ashwath Ram for his final remarks. Over to you, sir.

So thank you, everyone, for taking the time to attend this call. I want to wish all of you very, very happy festival season, Diwali, all the festivals that are coming up. I hope you are all vaccinated, all of you are staying safe, taking care of your families. It is really important that we do that. As I mentioned earlier, we have a very clear long-term strategy as far as clean energy is concerned. The first one is to say what can we do today, what can I tell my Cummins, our company, is doing today over the next 5 years and not 20 years later. The second is what are the technologies we can bring in that we can drive mass adoption. So as we do niche projects, et cetera, that's okay for a few people, but it's not going to work for the country as a whole. The third, of course, is that what is the transition time line, what are the -- what is the time line by which we can -- all of these technology investments have to happen. So new -- the new technology time line comes in place, and we have made a written commitment that by 2050, we will be zero carbon. And the fourth is you can't look at carbon from an isolated perspective. You have to look at it from a well-to-wheel perspective. You can't -- we can't [indiscernible] 5% coal and say that, okay, I want EV. All the electricity used in EV because from burnt coal, you have not solved the carbon problem at all. So we are working with the government with our own technologies on all of those 4 areas to make progress. We have tremendous investments in infrastructure capacity in place, a lot of technology, a lot of new products, we continue to keep launching, which is why we remain bullish about the future outlook with all the infrastructure spending, et cetera, happening in the country. It's -- I think the next few years are going to be quite interesting. And we are looking forward to all the emission transitions as well as continuing to keep working on improving our efficiencies in the system and keep delivering good results. So I will thank all of you for the support and have a good year-end. Thank you.

Thank you so much, sir. I would like to thank all the investors.