Cummins India Limited (500480) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Cummins India Limited Q4 FY 2023-'24 Earnings Conference Call. We hope you all are keeping safe and healthy. [Operator Instructions] I will now hand the conference over to Mr. Ashwath Ram, Managing Director, Cummins India Limited. Thank you, and over to you, Mr. Ram.

Thank you. Good morning, ladies and gentlemen. Hope all of you are doing well and staying safe and healthy. Welcome to the Cummins India Limited Q4 and Full Year 2023-'24 Earnings Conference Call. My name is Ashwath Ram, and I'm the Managing Director of Cummins India Limited. Joining me on the call today is Ajay Patil, Chief Financial Officer of Cummins India Limited. We're happy to announce that Cummins India Limited recorded the highest annual revenue and profit during the year ended March 31, 2024, aided by strong domestic demand across various market segments and proactive measures by the company on managing costs and improving profitability. I would like to share the financial results of Q4 FY '24 and full year FY '24 through this call. I'm now going to the financial results. For the quarter ended March 31, 2024, with respect to the same quarter last year, our sales at INR 2,269 crores are higher by 20% compared to INR 1,889 crores recorded in the same quarter last year. Domestic sales at INR 1,925 crores are higher by 38%. Exports at INR 344 crores are lower by 30%. Profit before tax at INR 701 crores is higher by 70% compared to the same quarter last year. For the quarter ended March 31, 2024, with respect to the last quarter, our sales at INR 2,269 crores are lower by 9% compared to INR 2,502 crores recorded in the last quarter. Domestic sales at INR 1,925 crores are lower by 12%. Exports at INR 344 crores are higher by 6%. Profit before tax at INR 701 crores is higher by 16% compared to the last quarter. I would now like to share a segment-wise breakup for the quarter ended March 31, 2024. The sales breakup segment-wise is as follows: Domestic. Power Generation domestic sales were INR 943 crores, 40% higher compared to last year and 12% lower compared to last quarter. Distribution business sales were INR 604 crores, 25% higher compared to last year and 9% lower compared to last quarter. Industrial domestic business sales were INR 348 crores, 60% higher compared to last year and 16% lower compared to last quarter. Exports. High horsepower exports were INR 171 crores, 17% lower compared to last year and 25% higher compared to last quarter. LHP exports were INR 124 crores -- INR 142 crores, 42% lower compared to last year and 3% lower compared to last quarter. For the year ended March 31, 2024, with respect to the last year, our sales at INR 8,816 crores are higher by 16% compared to INR 7,612 crores recorded in the last year. Domestic sales at INR 7,143 crores, are higher by 28%. Exports at INR 1,673 crores are lower by 18%. Profit before tax at INR 2,143 crores is higher by 44% compared to the last year. The segment-wise breakup for the year ended March 31, 2024, is as follows: Domestic. Power Generation domestic sales were INR 3,335 crores, 32% decrease over last year. Distribution business sales were INR 2,349 crores, 25% decrease over last year. Industrial domestic business sales were INR 1,296 crores, 24% increase over last year. Exports. High horsepower exports were INR 817 crores, 9% lower compared to last year. LHP exports were INR 699 crores, 27% lower compared to last year. Cummins India financial guidance. Regarding the sales outlook for 2024-'25, we continue to expect double-digit growth over the fiscal year 2023-'24. I now open the session for questions. Thank you.

[Operator Instructions] The first question is from the line of Parikshit Kandpal from HDFC Securities.

Congratulations on a great quarter and the year, sir. Sir, my first question is on this quarter. So we have seen exceptional margins, EBITDA margin is at 23.5%. So was there any one-off during the quarter? Because if we see the numbers, other operating expenses seems to be at INR 100 crores, which is like all-time low. So if you can highlight any key reason for this outperformance in margin?

Yes. I think it's a combination of multiple things why the margins are better for this quarter. One is we got a onetime drew-down benefit of a little over INR 60 crores from management cross charges. Second is we have some advantages on rates and taxes. We also had some netty benefits so the combined other expenses came in a lot lower. Like you said, it's a onetime gain that we had this year and this quarter. Similarly, we also saw that profit was better because mix was better. We were able to contain our costs reasonably well. We were able to hold on to some of the commodity gains even though commodities have started to inch up and we had some mix advantages that were favorable to us.

The INR 60 crores was the one-off, right, in other expenses during this quarter?

That's correct.

Yes. Sir, secondly on -- if I see that traditionally, we have seen the existing growth drivers for the company, right? So data centers, hospitality, real estate and -- put together. So if you see over the next 2 to 3 years, do you think emergence of any new demand drivers for our business given next 6 to 7 years, we will have a big push on the clean energy theme. So allied to that do you think what could be potentially the new growth drivers? And based on that, do you think -- incrementally we have been guiding about 2x GDP growth, so do you think that number can get revised higher over the next 2, 3 years?

First, I don't think the numbers can get revised to very much higher. Our GDP -- the aspirational GDP of our country is to grow between 6% to 8% for the next 8 to 10 years. So proportionately, our growth can be 12% to 16%. So that's a pretty broad and ambitious growth rate for a company when you compare it to the historicals of the company. So we would continue with that kind of guidance. What -- as far as markets are concerned, we think that at least for the next 5 years or so, the existing infrastructure-linked investments will continue pretty strongly. So if India wants to become a $7 trillion economy, which means doubling from where we are currently, it has to be driven by investments in core infrastructure, in social schemes, all of which also requires infrastructure. And the combination of all of that requires Cummins' product to be used in those. So I don't see any new market segments emerging, but I think the existing strong market segments will continue to do well over a long period.

Okay. Just the last question, sir, you did allude that you will grow maybe at 2%, 12% to 16% is a broad range. So that means even for FY '25, despite taking price hikes on CPCB IV+ power gen and implementation from July 1. So you don't -- looks like you don't see any major volume impact of the same. So given the prices will go up for these and last quarter, I think the contribution was about 25% of the power gen sales from CPCB IV+. So if you give some more color on do you think the margins at current -- approximately 20%. So if the growth is sustained, there's no major volume declines, do you think that margins can improve? There's a case for margin improvement from here also? So that's another question.

So that's always been what we've been striving for if you heard me talk over the last 4 or 5 years, we are continuously working on improving the margin of the business, managing costs and trying to get growth. So trying to not just get growth for the sake of growth, but to get profitable growth. So that will always be our endeavor. Of course, there will be more pressure as CPCB IV+ becomes a full stream and then everyone tries to do a market share grab. But we will stick to our principles of how we've operated in this market, and we think the opportunities are there for us to continue to grow at the 2x GDP level we are aspiring to grow at.

On the share of the power gen, sir, in this quarter. I think 25% was in 3Q. So in CPCB IV+, how much was the -- in the mix per share in Q4?

Yes, I would say roughly 1/3 of our sale in the quarter was from CPCB IV+. So it's starting to move pretty rapidly into CPCB IV+. So we see the transition in the next quarter to happen completely.

And any prebuying you're expecting in this -- in the first quarter before the CPCB IV gets implemented in 2Q?

Not very significant because see literally we have had 1 year of prebuy, how much more can people keep prebuying. So we don't expect it because what happens is even if you were to prebuy now a CPCB II product and then we go in and next year somebody comes in and says that fit in a retrofit device. So you add all those retrofit devices to the cost of a CPCB II gen-set, the cost is probably a little bit more than buying a CPCB IV gen-set. So that prebuy, which happened all over the last 3 quarters, was driven by the fact that many of the people did not have complete product ready in CPCB IV, now everyone has had literally a year to prepare so everyone should have a product, and I don't see that impact of a prebuy playing going forward.

[Operator Instructions] The next question is from the line of Ravi Swaminathan from Avendus Spark.

Congrats on a good set of numbers. First, with respect to the power gen business. I have 2 questions. One is what has been the volume growth that you had seen this year vis-a-vis last year? Just to get a sense on what is the volume growth and value growth mix that we had seen. And secondly, what is the share of data centers, was there any large orders which were there this quarter? Or do you expect anything -- any large orders coming in over the next 12 months?

So to first answer the volume question, we have seen overall volume has grown by roughly about 30% compared to last year. It's different by different nodes, et cetera. So it's very difficult to say exactly by which node, how much it's grown. So overall, I would say it's a pretty significant growth, a 30% year is I would consider one of the better years of growth. As far as the major segments in the market are concerned, they continue to remain the same. There hasn't been a very significant shift is those, data centers continue to grow well, infrastructure related growth and investments in power gen continue, as does commercial realty, as does residential realty, as does manufacturing. So across the board, we are seeing reasonably strong demand as far as power gen market segments are concerned.

Understood. And there has been a sharp up-move in the industrial business revenue this time. 60% growth, yes, there was a slight base effect which was there in the corresponding quarter last year. But even adjusted for that, the number would have been really strong. Which are the segments which are driving this growth, sir?

Biggest is the construction. Construction, which has been lagging considering that the country is spending so much money on infrastructure, construction was lagging quite a bit for the last few years, that has bounced back pretty significantly. The other segments all related to compressor, marine, all have started to bounce back pretty strongly, and that's what is leading to this level of growth in industrial business.

Understood. And my final question is with respect to the distribution business. Consistently, we have been growing at 25% kind of growth in this particular segment. What is the mix which is coming from power gen and what is the mix which is coming from Industrial? And what's driving this growth?

Yes. So typically, it's very difficult for us to say how much is power gen and how much is industrial. But what I can tell you is that over the last 3 or 4 years, we have increased significant focus on trying to make the distribution business a strong, stable, independent profitable kind of business, and we see growth happening in parts, we see growth happening in service contracts. We see growth in new engines. We see growth -- pretty much everything that we do in distribution, we are seeing growth. So it's nice to see that you sometimes put forth strategies and you -- some work, some don't work. In this case, a strategy that we put forth 3 or 4 years ago, it seems to be working steadily.

The next question is from the line of Mohit Kumar from ICICI Securities.

Congratulations on a very good set of numbers and a very good fantastic year. My first question is in every annual report, you mention megawatt sales in a year for domestic power generation. Of course, you have shared that number, you said 30% growth. It means that the number which you've done for the entire fiscal is 6.2 gigawatt. Do you think this number is ballpark right?

I have absolutely no clue, but I can get somebody to calculate something like that. All I can tell you is it's been growing year-on-year, number of big sets have also been growing significantly. So it would not be surprising if that number is close. But I don't -- I honestly don't have a good answer for that right now. So I won't just speculate and tell you something.

Understood, sir. My second question is, sir, what could be data center contributions to our top line last year? Is it fair to assume that you're closer to now 8% to 10%? And compared to last year, the data center opportunities, are you more positive this fiscal?

So yes, the answer is it's getting closer and closer to become about 10-plus percent of our PowerGen revenue. It is also accurate to say that we continue to see significant demand, both in India and globally for data centers. As a matter of fact, we continue to remain on allocation for certain types of gen sets and certain types of engines around the world, there's just isn't any capacity and some of our factories globally are booked for 18-plus months now. So we anticipate this demand to remain robust and to continue strongly.

Understood. Last question, sir, Cummins launched Phantom series of 1.7 megawatt to 2 megawatt series for data center. So when we serve the Indian customer, do they expect you to offer the new launches in India and do you need to indigenize it?

I think most of those are made in India, at least the core cool packs are certainly made in India. Certainly, we will be launching those -- all global products is launched in India as well. So certainly, we'll be launching those in India as well.

The next question is from the line of Amit Anwani from PL Capital.

My question is on the export market, wanted more color since there's been decline from past 2 quarters, and we have been pessimistic on few markets. Just wanted to understand how the growth was for full year and what is the outlook on key export market for FY '25?

Right. So last year, as I stated, we degrew or became smaller by about 18%, the biggest drops have been in Europe, which almost halved and the Middle East, Africa, as well as Asia Pacific, so there has been literally no market which grew for us last year as far as exports is concerned. . As far as '25 is concerned, there still appears to be a little bit of concern as far as geopolitical crises and availability of funds in some of those markets, especially in Africa. So we are not very, very optimistic that we have seen the bottom of the market yet. So we expect it to maybe correct a little bit more before it bottoms out and then we start to see it grow back again.

Sure, sir. Secondly, wanted to understand since there has been pretty strong growth in the domestic market and from past 2, 3 quarters and the outlook remains pretty strong. Wanted to understand any CapEx requirement and what are the current utilization levels? Yes.

Just balancing CapEx is what we always do as we bring in more products, to balance out some of the capacities, we keep doing incremental CapEx. But when you look at the installed CapEx, we continue to remain at roughly 50% utilization. From a manned CapEx, we are greater than 90% of utilization. So it's -- capacity is not a problem for us, so if we can get more demand, we will certainly be able to scale up pretty quickly. And some of the strategic long-term investments, those are typically 18- to 24-month type of projects. Those are being done for global demand and those kinds of things. So there's no real CapEx short term surge or emergency that is happening. But there is a steady plan to meet the long-term demand and to attempt to be a better global player.

Sure, sir. Lastly, on the data center, so you highlighted that we are approaching 10%. So just wanted to understand, are we -- do we have a strategy outside India also with respect to data centers and anything we are expecting from the export market also for data centers?

Certainly, we continue to sell products to other countries for use in data center markets. So some of our high horsepower exports go into those markets. So certainly, our attempt is to try to maximize and export more as well. As the global opportunities keep opening up, we continue to attempt to play in there.

The next question is from the line of Renu Baid from IIFL Securities.

Congratulations to the strong performance. So my first question is to understand a bit more with respect to how has been our localization plan for the CPCB IV engines and how do we expect -- as in terms of timeframe over next 2 or 3 years, how do we expect to fully localize this product? And thereafter, what kind of impact on the gross margins do you see as the localization progresses for the new range of product?

Yes. We have over a dozen platforms. And I would say a majority of them are at high levels of localizations, and I mean high levels is greater than 70% to 75% of what we usually classify as high level because there are certain components related to electronics and certain types of parts which are not made in India, so we continue to have to import them. There are some new introduced product lines which were never made in India, which are currently being imported and sold and we are in advanced stages of planning of attempting to localize them. So this is an ongoing cycle of trying to increase the percentage of localization and then help -- using that to help with pricing, to help with a better position in the market and to use it to improve the profitability of the company. So there's nothing which is either going to be very dramatic. It's a gradual process because a very large chunk of the products is already localized.

Sure. And in this context, you also mentioned the commodity price has started to inch up now. So how should we look at the gross margin outlook for fiscal '25, combination of CPCB IV, change in the mix, commodity price going up. Earlier, you had indicated 33% to 35% gross margin range. Last year, we clocked about 34.5%, 35%. So how should we look at the margin outlook for next year?

We will continue to aspire to hold at that kind of margin level, though it's starting to become a challenge because every major piece of commodity, whether it be copper, nickel, exotic materials used in after-treatment, platinum, silver, gold and even oil prices are all inching upwards. Even some forms of steel which we had seen a decline now for nearly 6 quarters in a row have now bottomed out and have started to inch up. So there will be significant pressure on the material margin but we will continue to work with the supply base in trying to get more efficiency out of that and attempt to hold this growth. This is the line in the sand which we want to hold, but it's always a challenge to do that.

Got it. And with respect to new product development, can you share update where are we with respect to certain products for the rail market, including Vande Bharat train sets, for mining and marine. And how can this help to accelerate the growth in the respective segments for the industrial portfolio in fiscal '25-'26?

So quite a bit of progress has been made as far as new products is concerned, especially in rail, we have supplied new prototypes of our Hotel Load Converter, we are now supplying CPCB IV+ compliant diesel sets into the 500 kVA power cars and also in the backhauling coaches. We are beginning to supply new products in DETC propulsion sets. We're also entering into tenders for all kinds of CPCB IV+ compliant power cars. So overall, as we are looking at the market, we are seeing quite a few opportunities, not only in rails, but we are introducing new products in mining, we are introducing new products in marine. We are trying to introduce -- of course, power gen we've already introduced most of the new products. We continue to increase new products even into the construction segment with new series of engines, et cetera. So overall the -- both as far as product proliferation and adding significant new products into the market, that work continues pretty strongly.

So in your view, the industrial segment, which was clocking high teen growth in '22-'23 and moved finally to 22%, 25% growth should continue to grow in high double-digit 20%-plus? Or the growth will moderate in high teens?

I think it will grow at 20%-plus, but our long-term outlook when we had provided it a couple of years ago was that we see at least 2x of GDP growth of the industrial segment to continue for 10 to 15 years because we are comparing the -- where our infrastructure is today compared to where some of the developed nations, like China and Europe and America are. And when you look at the state of the infrastructure, we have versus the state of the infrastructure they have, significant amount of investments are needed. So I think if we continue this journey of wanting to become a #3, #4 economy and improve our infrastructure, then this demand should continue.

Sure. And last, if I can, bookkeeping. We have seen very strong cash conversion profile of the business continuing. Today, we're sitting on net cash shift of almost INR 2,600 crores. How do you plan to utilize this for future growth?

Well, we continue to give return to the shareholder significant amount of cash. And we are also looking to fund some of the future growth and some of the future ideas on how the business will look in the future. Some of those investments are not likely to pay back returns very easily. As you know, in some of the new energy cases, billions of dollars have been sunk and the returns have all been negative so far. So we are creating this war chest and looking for opportunities, and we will deploy it as needed. Currently we are using the war chest to develop new products and continue to invest in scale and capacity as we become a major supply chain hub for the world.

The next question is from the line of Jason Soans from IDBI Capital.

Sir, just understanding in terms of this CPCB IV+ exposure. So just want to understand that...

Sir, sorry to interrupt, sir, your voice is breaking. May I request you to use your handset, please?

Yes, sure. Hello, is it better now?

Yes, sir.

Yes, okay. Yes. So I was saying, sir, with the scope of distribution which is increasing and the CPCB IV+ component also increasing in the sense there will be more electronic parts here in this business. So just wanted to know, sir, in terms of margin profile, is there scope for a better margin profile going ahead with the contribution of CPCB IV+ increasing?

The answer is yes, that is what we have been aspiring to do. The reality is still to be seen when competition hots up, when everybody is at 100% CPCB IV+. So again, to clarify, yes, certainly because the content is more, the complexity is more, the technology is more, the risk is more. So there is an opportunity to have better margins. The reality all depends on competition in the market.

Sure, sir. And sir, you had also alluded to reconditioning being a massive growth opportunity ahead as it is in the developed economies. So I just wanted to understand, I mean, reconditioning will be a good option to play, but it could hurt your volumes going ahead or probably cannibalize your volume. So just wanted your perspective on how would you balance both of these going ahead?

I think these are different market segments. So a person who wants a new product has a different profile and a different cost profile and a person who wants a reconditioned product has a different cost profile and a different set of expectations. So in applications such as industrial and mining, et cetera, reconditioning is the most normal way of doing things because these folks utilize their equipment 24/7. So if you have working equipment, then you get significant value backed by reconditioning, and those customers don't want to buy new anyway. But there are other market segments where utilization is low, and there are some advantages to having the latest and greatest technology and certainly in those segments, they don't want reconditioned products. So we are talking about 2 entirely different market segments. And sometimes, we can use reconditioned products to compete against some competition who has different and lower margin expectation. So it's pretty complicated, but I think there's an opportunity. Globally, we have seen in multiple markets around the world that the 2 markets coexist. And of course, reconditioning is incredibly good for the environment. So if you are looking at it from the ESG angle, nothing is better than reconditioning as far as greenhouse gases are concerned. So that's the way we are looking at the reconditioning market from an India perspective.

Sure, sir. And sir, just in terms of your genset OEMs. I just wanted to understand better in terms of -- so the Jackson power, Sudhir gen sets or Powerica being there. I just want to know this on a basic level, do -- is there any value addition from their end? Or they are just pure-play regional distributors for Cummins India?

They do some last-mile value addition. It's -- but the technology is entirely Cummins' and these guys add some value, and they also reach out, they are the contact with the customer. So from that sense, the value is in working with the customer and making sure that they are serviced to the Cummins' standards.