Cummins India Limited (500480) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Cummins India Limited Q1 FY '24-'25 Earnings Conference Call. We hope you are all 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.

Good morning, ladies and gentlemen. Hope all of you are doing well and staying safe and healthy. Welcome to the Cummins India Limited Q1 2024-'25 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. Thank you all for joining us today. We are happy to announce that CIL reported strong results for the quarter, driven by stable domestic demand, while export revenue is at a similar levels as the prior quarter. I would now like to share the financial results of Q1 FY '25. Financial results for the quarter ended June 30, 2024, with respect to the same quarter last year. Our sales at INR 2,262 crores was higher by 4% compared to INR 2,175 crores recorded in the same quarter last year. Domestic sales at INR 1,873 crores were higher by 12%, exports at INR 389 crores was lower by 22%. Profit before tax at INR 551 crores was higher by 33% compared to the same quarter last year. For the quarter ended June 30, 2024, with respect to the last quarter, our sales at INR 2,262 crores were almost flat compared to INR 2,269 crores recorded in the last quarter. Domestic sales at INR 1,873 crores was lower by 3%. Exports at INR 389 crores was higher by 13%. Profit before tax at INR 551 crores was lower compared to the previous quarter by 21%. I would now like to share the segment-wise sales breakup for the quarter ended June 30, 2024. Domestic. Power Generation domestic sales were INR 803 crores, an 8% decrease over last year and 15% decrease over last quarter. Distribution business sales were INR 651 crores, 22% increase over last year and 8% increase over last quarter. Industrial domestic business sales were INR 372 crores, 57% increase over last year and 7% increase over last quarter. Exports. high horsepower exports were INR 202 crores, 17% decrease over last year and 18% increase over last quarter. LHP exports were INR 155 crores, 23% decrease over last year and 9% increase over last quarter. As far as the Cummins India financial guidance is concerned, regarding the sales outlook for the full year 2024-'25, we are looking to continue to have double-digit growth over the fiscal year 2023-2024, in line with our ambition to grow at 2x of the GDP. I now open the session for questions. Thank you.

[Operator Instructions] First question is from the line of Mohit Pandey from Macquarie Group.

Sir, my first question is on Industrial segment. So if you could give color on what is driving strength for this business? I think second or third quarter of strong numbers there. That would be question number one.

I think for the quarter, I think it was a perfect storm of all portions of the Industrial business firing. So whether it is construction, which was INR 134 crores or whether it was the rail, which was INR 107 crores; our mining, which was INR 19 crores; our compressor, which was INR 44 crores. Marine was INR 33 crores and everything else when you added all of that, with a total of INR 373 crores, you saw that pretty much all of the segments are doing well. And I think that's very broadly correlated to the fact that Infrastructure continues to do well in India and is likely to continue to do well for the next few years.

So sir, do you sense of element of market share gains here because one would have expected during the election quarter softer numbers there. So any color there?

It's not apparent as of now. If there's been a real market share gain, we would get that kind of analysis in the near future, but the demand has continued to be strong for our products.

Sir. And secondly, if you could share the breakup of domestic power gen as you usually do.

So low horsepower was INR 49 crores, mid range was INR 153 crores, heavy-duty was INR 93 crores and high horsepower, INR 508 crores. You have to keep in mind that this was a transition quarter when the transition happened between CPCB-II and CPCB-IV finally.

Right, sir. And CPCB-IV would have contributed how much during the quarter broadly?

Close to 5,000 sets were sold during the last 2 quarters. So roughly, I would say that somewhere about 30% to 40% of the sales in the quarter were with CPCB-IV.

Understood, sir. Last question, if I look at the P&L, the proportion of traded goods have come down sharply, the purchase of traded goods. So anything specific to these sales, that would be my last question.

No, nothing. No trend that I can at least see, which is -- for that it's just -- just probably a slower -- a different quarter.

Next question is from the line of Parikshit Kandpal from HDFC Securities.

Ashwath, congratulations on a great quarter, sir. Sir, my first question is on gross margins. So this time, you've recorded, I would say, almost 5-year kind of high gross margin of 37.8%. So my question was on -- is it largely attributable to the increasing mix of CPCB-IV+, PowerGen and the mix? And do you with the -- now 1st July kicking in, from Q2, there could be further tailwinds on margins as we see the mix increasing on CPCB-IV+?

I think we have had for the last few quarters, almost a perfect storm of capitalizing on the pricing increases that we've done. The mix, of course, with CPCB-IV+ and the fact that we've been able to -- commodities have helped us and we've been able to continue the cost reduction gain. So the combination of all of those are what is ensuring that gross margin -- our material margins are at record levels. I think as the cycle changes and as commodities start getting more expensive and as competitive pricing intensified, I think there will be some pressure, and I don't think this kind of material margin is sustainable indefinitely, though it is our attempt to continue to try to get as much out of it as we can.

Okay. Sir, second question is on CPCB-II and CPCB-IV. So in the channel right now, do you think is there any -- still any invention in the CPCB-II and going -- in the coming quarters, do you think that what kind of mix will now in the PowerGen move towards CPCB-IV, say more stabilized quarters, like 2 quarters down the line, how do you think will that shape up?

So the channel inventory is zero. So that which is what accounts for as we were draining the inventory throughout the previous quarter. So the transition has happened, and we ended up with depleting all the inventory. So starting from this quarter, it is only the CPCB-IV sales that are -- sets that are sold in the market.

Okay. And just one question on this -- I think GAIL project, which was -- you had won about 1 megawatt on hydrogen sites. My understanding, was that or part of that will be executed by the rest of the entity. Any update there? So how is the progress on that project?

I think the progress is that this is a global project or the GAIL application, the project is in the process of being executed and the distribution business of Cummins India has been awarded the contracts to service and support that. So it's still in the process of being installed. Some portions of it are already commissioned and introduced. This is the largest working hydrogen installation in the country.

And this is being done in -- this distribution part is part of the Indian listed entity, right, which is executing this project?

Yes, that's correct.

Okay. And just last thing, sir. I think now you're leaving. So I wish you all the best for your future endeavors, and look forward to interact with Shilpa for coming Sunday.

Thank you.

Next question is from the line of Amit Anwani from PL Capital.

First question is on exports. If you could highlight on how the export is panning out geographies, which were kind of seeing a slowdown? What is the trend there and the mix of the products?

Yes. So I think last time I had indicated that the markets have been slowing for quite a few quarters, and we think we had -- we thought we had bottomed out. And that statement appears to have held true. So we did exports -- did grow in this quarter. And we have been seeing that increase come from 2 areas, Middle East has recovered quite well and Africa is starting to recover. The rest of them are either flat to where they were bottomed out and Europe actually also is pretty flat to where it was in the previous quarter.

Sure, sir. And second is, are we largely sticking to the guidance of 2x of GDP top line growth? And on the -- any incremental thing you would like to highlight on the outlook on the growing sectors that would help.

Yes. So we continue to maintain the guidance of our ambition to grow at a minimum of 2x of the GDP, which in this year at a 6.5% to 7% is somewhere between 13% to 14% is what we think we should be able to grow. Our internal aspirations, of course, are to do much better than that. So that's what we are all working on. We have also had this ambition of growing profitably. So we continue to focus on all aspects relating to profitability. So not have growth just for the sake of growth, but continue to do it with a healthy profits. And we have been ahead of the curve as far as profit is concerned, so we could see some pressure over there. But overall, all the plans are linked to the growth of the GDP of the country because most of the products that come in sell go into the infrastructure segment. And as the country continues to grow and infrastructure spending continues to happen, we will see strong growth, especially out of India. And as far as the global markets are concerned, they are undergoing some level of slowdown in different segments because of all these different crisis currently, so many other big nations like China slowing down pretty significantly and not recovering. We think that could take some time to recover, and we continue to focus on making sure that we are in a strong position to grow there once those markets start to recover.

Sure. Lastly, if I may, the data center contribution in PowerGen and growth. And second, any supply chain issues which you feel pose any risk currently, in meeting the levels or logistical issues in that aspect, yes.

Yes. So data center globally, when we look at data centers, data centers contributes to roughly around 10% of Cummins' power generation business. And that similar kind of trend holds true in India as well. We have very strong order books there. The heavy data center applications are fully booked and are completely supply chain capacity constrained, which means that the very largest of sets, which are made by Cummins Inc. globally and are not made in India. We are pretty much on allocation basis. On all the products, which is made in India, we have enough capacity, order boards are good. There are some spikes in certain kinds of products where we run into some challenges. But overall, I would say, supply chain is well geared up to be able to meet all the demand that we are seeing.

Next question is from the line of [ Rajakumar Vaidyanathan ] who is an individual investor.

I have 2 questions. The first question is, do you see any short-term impact on the unrest in Bangladesh. So...

Nothing that we can see right away. But certainly, when there are problems, whatever we are exporting out into those regions could see a small setback, but nothing significant because the volume of exports that we do into that country is quite minimal.

Okay. And sir, the second question is compared to the last quarter, the commodity markets have kind of softened. So do you still see that as a challenge in terms of maintaining or improving the margins go forward?

I think they have been favorable. That's why we continue to have much better material margins. The concern is that some commodities like copper and aluminum, which is used in big parts in our gensets, those have continued to increase in price and so that portion of commodities is impacting us negatively. So we are trying to -- we would have gotten even more gains on the metal margin had the softness in iron, et cetera, also continued in the other commodities, but it's sort of eating away at each other.

Okay. Sir, if I can just squeeze in one more question. So with reference to the guidance given by your parent. So they have kind of said that this time, the India sales have kind of dropped by 10% and we also reduced the sales outlook for the India business from -- the previous quarter, they gave 9% growth to now they reduced it to 8%, so 100 bps reduction. So just wanted to know, is that coming out of the non-Cummins India subsidiaries of Cummins Inc.? Or is it to do with Cummins India?

Yes. It doesn't have anything to do with Cummins India. At Cummins India, we continue to guide a growth rate of 2x of GDP. So we continue to aspire to grow at somewhere between 12% to 14%. So some of those comments were also made looking at corrections in other markets, including automotive markets and some global slowdowns as well. .

Next question is from the line of Mahesh Bendre from LIC Mutual Fund.

Sir, if I look at for last 12 months, whatever the revenue we generate in PowerGen set, which are the user industries have contributed to that? I mean, any industry-wise breakup would be really helpful.

So I would say it's a data center, manufacturing, infrastructure and commercial realty.

Okay. Okay. And so we have been seeing real estate cycle has turned around for the last 2 years. So I mean, that is also the requirement for genset is huge. So that has not actually started contributing it, right?

Could you repeat your question, sorry?

Real estate, I mean, even you said commercial real estate, but even residential real estate is also picking up. So that will also generate volume growth for us going forward?

Absolutely. We have already started to see that happen, and that will continue.

Okay. Okay. And sir, in the best of the time, what was the contribution from this segment to the overall sales maybe previous years?

You're talking about realty?

Realty, yes, sir.

Very difficult to say that we -- because the segment grow very relatively and proportional to each other and sometimes it's difficult to calculate and just say which segment contribute because some segments contribute in terms of horsepower, some segments contribute in terms of volume. So data centers, for example, the volume may be very low, but it contributes a lot in terms of value. Whereas reality sometimes is a mixed bag, and there have been years when that's done very well, but you sell a lot of gensets but a lot of low kVA gensets. Sometimes, it's higher kVA. So it's very difficult to get a segment-wise share of what that is compared to the history.

Okay. And sir, last question from me, you mentioned that the channel inventory is zero. It means CPCB 2 engines are not there in the system, right?

That's correct. CPCB-II inventory has gone to zero and because CPCB-IV is overlapping and ramping up, the overall stock inventory at all our OEMs and dealers is also pretty low, amongst the lowest it's been in a couple of years.

Okay. So we will try to fill this in next 2, 3 quarters, right? .

That's correct. .

Next question is from the line of Nitin Arora from Axis Mutual Fund.

Congratulations on great set of numbers. And thank you for all the guidance you gave us over the last 2 years and the way company performed. The basic question here is there was a lot of fear, and I kept you asking every quarter that once this price hike comes in of the CPCB-IV, do you see a cliff fall happening in the demand? You started in the opening remarks stating that the demand remains pretty strong. Can you throw some light that how you look at this market because the price hike is quite -- it's quite immense. And we understand in your opening remarks in the previous calls that few sectors are firing like data centers, real estate as well. But how do you think this price would be taken by channel? I'm asking a little near-term question of July and August when you -- were we filling up the inventory. Is still the volume of the end market is still strong, taking into that?

Yes. Let me try to answer that question by giving you some examples from some other markets. India was a power deficient market and has kind of sorted itself out to, it is not such a power deficient market. And during all of this period, we have continued to grow and we have -- the demand continues to increase. Now what happens as the country becomes more affluent and we get used to having power working for us 24/7, the lack of power becomes almost unbearable. And so even though you have more reliable grid power, you still need the backup power and a big chunk of what we sell are all backup. And when you need power, you need power, then you don't ask yourselves, hey did I pay 15% more or 20% more when I bought the genset. Even you don't ask us all those questions. You need power, you need power. And so that is the way it has been around the world that the regulations are driving the cost up because of tighter emissions, et cetera, end customers really don't care about emissions. They care about overall value. We are trying to deliver more value to them by making the products more fuel efficient and more dense, et cetera. . So in an overall scheme of things, the cost of a genset, et cetera, is a pretty small percentage of capital costs to run infrastructure. So it doesn't significantly impact purchasing power. That's why the demand is not dropping. The demand is strong and overall, since the infrastructure of the country is growing, the power demand in the country is growing. The affluence of the country is growing. Everybody wants more power, and so demand continues to remain strong despite pricing.

This is very helpful, Ashwath. Second question, just on the export side. You touched base on that, that few green shoots are seen. But generally, in your sense, what kind of inventory levels globally are at this point in time? You used to map on inventory at the channel globally. Is that something if you can talk about? And on the demand side...

It's well stocked. It is a pure demand issue as of now. And we are seeing increased dumping from other countries where local demand has fallen off. So to keep their utilization of factories high, their products are being dumped in export markets in South Asia, in Latin America, in Africa. So there is bound to be more pressure at this time. It's a pure demand constrained, not any other channel inventory or any of those kinds of concerns.

So in your view, it might take 1 or 2 quarters more to stabilize that part and then you start seeing growth because your base is quite weak over the next -- over the last 3 quarters, when I look at last year base. So you expect some growth to start kicking in? Or you think still it's 2, 3 quarters away?

Yes, like we expected, we already saw that it seems to have bottomed out, and we're starting to see some growth. How much of it will sustain is difficult and how long it will take because we seem to be going from one crisis to another crisis. So we already see now that now that the Ukraine kind of thing seems to have calmed down a little bit, but the Middle East has hotted up and now with all of the new stuff happening, there's even more crisis. So when such things happen, all kinds of slightly discretionary spending all comes to a halt and then you only start buying emergency kind of things. So it's very difficult to predict how the cycle is going to turn. We are just trying to be ready with more products, more availability, keep continuing to work on our cost base so that we can be even more competitive in those markets so that when they do bounce back, we are ready.

And just last comment of yours on the distribution business. That is something growing very well and also contributing to the margins as well. How you are -- going forward, how you're looking at this business? Does that the growth eventually comes down now because the way you are highlighting the things on the power side, i.e., then it should be continuing with the growth what it is doing. So just your one comment on that.

See the distribution has multiple segments where it gets revenue. It gets revenue from service. It gets revenue from parts. It gets revenue from selling into certain market segments, where the big business units don't do. So we are seeing growth in all of those areas. So we are seeing as the population of product in the field continues and as the infrastructure development continues, if you use the equipment more, you need more service, you need more parts. And the second portion of that is we have always had very low penetration from a market perspective, and we continue to focus on better service, better availability of parts, better quality of parts, all of those are leading to growth in that. And we think this is not a 3-year, 5-year kind of cycle, we think we can sustain this kind of growth for at least a decade.

Next question is from the line of Umesh Raut from Nomura India.

Congratulations for the good set of numbers and wish you all the best for your new role as well. My first question is pertaining to Industrial segment. I think even though we have seen a contraction in railway business largely because of Indian delivers initiative towards railway electrification. But I think we have a surprise on 3 lines of business within Industrial, especially on the marine side, defense side and on construction side. And during the annual report as well, you were mentioning about some of these larger defense projects get better in terms of defense business, for example, Zorawar Tank and shipbuilding businesses as well. So can you please qualitatively give us a trajectory in terms of outlook for these 3 segments within Industrial?

Yes. So construction is directly related to infrastructure. This is where we supply engines into all the earthmoving equipment, which are on the road typically. And that is, I think, is in a multiyear boom cycle, especially the country is going to grow at the rate at which the government wants it to grow. So anywhere you build a road, you build a building, you build a dam, you build a port, you build an airport, any infrastructure activity requires us doing equipment and all of those -- a big chunk of those use our product. And so that's why that's doing so well, and it will continue to do well. . The next segment is rail. Like I said, the big chunk of slowdown for Cummins in that business was the migration of a big chunk of the diesel-driven locomotives, et cetera, going into electrification. And as I have said in the past, we continue to invest in the electrification cycle also. We think it's a tremendous growth opportunity coming up. We have now got product, which is now certified and approved and it is now doing trial runs in rail. And we also saw a lot of demand for DTC those kind of orders, even with existing diesel. So that's why this quarter was so good with rail. And we think the future for rail is also very optimistic because we have such small presence in electrification that as our products become successful, I think the opportunity is significant for us. The third, of course, in mining, you can't -- as the economy continues to grow, we need more steel. We need more coal. We need more aluminum. We need everything and mining will continue to boom, and we -- that's doing reasonably well. And marine compressors is a cyclical market, but compressors also as the economy does well and the infrastructure does well, you need more compressors, so we do well there. And Marine is a lot related to fishing trawlers and defense and those kinds of products. And there's record spending happening there. They do -- of course, it's a very lumpy business because the gestation time for building ships, et cetera, is long, so it's not as predictable as some of the other businesses and the same goes to -- for defense. We have great products, great partners, great customers, but the gestation period of those products is anywhere from 3 years to 10 years. And so it's very difficult to predict when exactly those will get translated into revenue and profit. So that's what -- but overall, when you add all of those things together, there is no bad news that we have to share because the ambitions of the government are pretty well tied into the products that we are producing.

Got it, sir. My second question is pertaining to distribution segment, where you are continuously launching new range of service products. So just wanted to understand how much of a contribution you are reserving from new range of these launches of products? And how you look at this distribution business in export markets as well?

If you look at the last couple of years, we have been growing that business at greater than 20% CAGR. And like I mentioned, in each of the sub areas, whether it be parts or service or rebuilding engines, new engines, old goods. Each of those areas, we are seeing growth happening, and we continue to focus on that. And that is -- we think that there is a lot more growth available there. I think we are entitled to a lot more growth available there, and that's where the focus is.

Got it, sir. Sir, last question more on the bookkeeping side. You said HHP power generation on domestic side was closer to INR 500 crores plus. But how much of that was related to less than 800 kV where CPCB-IV+ products are getting applicable?

We track it as greater than 500 kVA, but less -- and in the CPCB-IV+, actually, I don't have that information in front of me. So I don't have a good answer. But we'll see CPCB-IV starting to ramp up very, very strongly. So it will start getting much clearer in the next couple of quarters. .

But is it fair to assume that LHP, MHP plus heavy-duty on the domestic power generation side would be forming closer to 90% of CPCB-IV+ products?

Yes. That's a very good logical assumption. And I think, yes, that is likely to be true.

Next question is from the line of Mayur Patel from 360 ONE Asset Management.

My question is relative to the one asked by Nitin. So Ashwath, in the past, we have seen like in CPCB-II transition. First, we saw a first good amount of prebuying happening before the transition. And then the price hike has some dampening impact on the volumes post implementation. And we did see some weakening in volumes. But this time around, you are guiding for no such major drawdown on volumes despite a 35%, 40% rise because of change in norms. So just confirming this confidence is coming from the current investment cycle in the country? And do you have some decent color on your pipeline of inquiries? I'm not asking for any specific numbers, but some qualitative comments on that, please?

Yes. One is we had a whole year to absorb the prebuys and all of CPCB-II and IV. So the market is now already -- this is -- it's not new news that CPCB-IV is happening and the prices are changing. So the market has had time to absorb, time to use up as many CPCB-IIs as we could. And we now find the channel inventory to be very, very low, which means that there aren't any CPCB-II sets to sell and the order books are scaling up and order books are pretty strong. So we are tending to align to the hypothesis that the demand is now agnostic of the price increase that the CPCB-IV calls for.

Got it. This is what gives you the confidence despite exports yet to pick up about 12% to 14% growth, which would mean a slightly higher ask rate for the remaining 9 months. So I think the demand resilience is what is giving you that comfort. So understood that.

The order books are strong, and there's no inventory in the pipeline. So that's what is giving me the confidence right now that there's no real -- nothing to be concerned about.

Next question is from the line of Pulkit Patni from Goldman Sachs.

I think first one was similar to what Mayur asked. Sir, my second question is on competition. What we understand is that we were one of the first ones to actually release nodes of CPCB in the market and that time, our pricing power was significantly better than anybody else simply because there was nobody else. I understand some of your competition has launched quite a lot of nodes in the last couple of quarters. So can you just talk about whether we are seeing some sort of price discovery for the CPCB-IV+, i.e. Is that also going to be a factor in the margin number you are seeing, which cannot sustain at these high levels? Is it just commodity or is it also that price discovery now emit more supply could drive margins lower?

Certainly, always, once you start to see what competition is pricing at, we do -- we will need to take some adjustment actions based on our own. We command a certain premium as compared to competition based on the product quality and the robustness and the features that we offer to our customers. But one has to look at where the competition comes in bulk production. And then there is bound to be some level of readjustment. It doesn't typically happen all across. It happens in certain nodes where somebody else has a competitive advantage in terms of scale or economies and somebody else doesn't, and so the only way to maintain the relative positioning is with pricing. But overall, I don't see too much of an impact due to pricing. We are very happy with the 1 year of experience we've had with the products. We think they're absolutely super competitive and we have some relative positioning advantages, and I think we should be able to capitalize on that and hold on to the pricing structure.

Sure. Since I have one more question. Maybe I'll just use that. Ashwath, all that you've said on the domestic market in terms of your commentary is extremely positive and particularly in light of CPCB-IV being fully implemented, et cetera. I'm just trying to reconcile this with what you have put out in your release, where you say we remain cautiously optimistic about the demand in the near term and optimistic about the longer term. So how come there is a disconnect between cautiously optimistic in your commentary in the press release, but your commentary in general is pretty optimistic about the domestic market. So is my understanding a little different on interpreting that?

No. Not at all. It's like our -- in Cummins, we have a saying that no good deal goes unpunished. So our own relative good performance in the last couple of years makes us slightly cautious about the rate of growth that we have been able to achieve in the past versus what we can continue to do in the near future. We continue to be extremely optimistic about the growth opportunities when I look at a 2-year, 5-year, 10-year kind of window. What we remain cautious about is the short-term cyclicality like the transitions happen in one quarter, the second quarter, there's time for the pipeline to fill up and then for people to get moving, et cetera. So all of those are very difficult to predict whether you go from a steady state of 100% on one series of products to steady state 100% on the second series of products. There's turbulence during the transition, and that is what leads us to be slightly cautious about that.

Next question is from the line of Jonas Bhutta from Birla Mutual Fund.

At the outset, congratulations and all the best, Ashwath for your new role. I have a couple of questions pulled out primarily from the annual report. I'll sort of try and be brief. Firstly, on the PowerGen side, sir, you spoke about increasing dealer count. How much of role did that play in the FY '24 sales growth beyond the prebuy? Was it a material thing? And similarly, you spoke about one ICF contract on the distribution side. So how much of sort of contribution on FY '25 basis, can that one single order sort of move? So that's the first question.

We're continuously adding more dealers and certainly that contributes. It's very difficult to say exactly how much is that. But again, it is important, which is why we keep adding more to get better penetration and better positioning in the market. So we will continue to keep doing that. We continue to monitor all the dealers. We continue to look at who is performing well and who is not and then appropriate actions are taken of either finding better people or looking at different ways by which those dealers can be more successful. And as far as some of these orders are concerned, they are good orders. So I wouldn't say any one order very significantly changes all the results for the company, but it all adds up. It's all like big chunks in a bucket which then keeps expanding. So I would say that it's positive.

Understood. Sir, the second question was in megawatt terms, your sales last year grew almost 40%, but in unit terms, the increase was just 4%, which sort of implies a greater share of higher HP nodes that sort of got sold. Was that largely a prebuy impact or this kind of deviation between the megawatts sold versus units is here to stay? And given that within that 26,000 only 10% were 2,000 units were roughly CPCB-IV+. Could you sort of now talk about as this contribution sort of increases, the impact on warranty expenses, royalty and purchase of traded goods. And just wanted to fold that into another question, a sub-question was now that you've had some time what is the average price increase in the CPCB-IV+ regime, if you have to just put a very simple average or weighted average number, what is the price increase versus the CPCB-II regime? That's the final question.

I'll answer the last question first, it's anywhere in the range between 15% to 25% is what the pricing increases have been. To answer the other question there -- if you see historically, we have always been the weakest at the lower horsepower ranges and that's because they were the -- they had over the last 15 years or 20 years, they had turned into commodities. It becomes pure mechanical products with not real great differentiation that we could show as compared to competition. And certainly, I would say that competition has gained share in some of those segments. And we continue to wear those technologies where there was higher durability, reliability requirements, those with the high horsepower nodes where we continue to gain share. Why we think CPCB-IV+ is a game changer for us is because it forces the market into changing from a commodity player to having to invest in technology and then having to service and support greater technology, higher warranty costs kind of products, which we have done around the world for many, many years. So it's a sweet spot for us. So in this transition to CPCB-IV+ and higher technology, we hope to not only gain in horsepower but to change the cycle from a volume perspective also. So we are trying to pursue our ambition to be stronger in the areas where we have been weak in the past and to hold on to or improve our position even in the nodes where we have been strong.

Got it. But what does it do on the -- as the share of this increases, so on the warranty and royalty because we've seen a very sharp decline in royalty or service fees to the parent over the last 5 years. Also the R&D expenditure of just INR 10 crores versus a peak in -- peak of almost INR 190 crores in FY '20. Is the R&D expenditure, while a large part of that is housed in parent, but how does that impact R&D expenditure over the next 2, 3 years?

Yes. We are done with the peak R&D expenditure. So now it's only going to be sustenance and improvement kind of expenditure as far as that is concerned. I don't see anything very significant from a royalty as well in line with what we have publicly stated for quite some time. So I don't see any concerns with that. I actually see this as a great opportunity to improve our market position and also to leverage all those investments to export some more because we now have a higher emissions product than what emissions are needed in the rest of the world. So it actually brings us to level playing field as far as the rest of the world is concerned, it brings us to a more competitive position as far as low-cost power is concerned in the local market. So overall, I see more positive than negative from this transition.

The next question is from the line of Aditya Mongia from Kotak Securities.

Ashwath, the first question is a little bit more broad based. I mean you've been there with the company for the last 5 years. Wanted to check with you as -- like 5 years back, what were the key areas of improvement or concern that you saw in Cummins, which have now kind of become better and as you leave the company at this point of time, which are the key areas of improvement that you see your [ things ] are shaping up from hereon?

Yes. So when I took on the role 5 years ago, my biggest focus area was to try to align everybody that what we have been used to in the past, a growth rate that we had been used to or something over the cycle we could break and we could set a very clear vision for the company. And then if you all work together focused on the execution of that vision, we could achieve bigger and better things than what had been achieved in the past. And with the support of a very, very strong team, we not only created the vision, we were able to execute on that vision of getting growth in multiple areas, focusing more on the product, focusing more on execution, focusing on a long-term strategy and then sticking to a plan. I think the last 5 years have enabled us to create a very, very strong platform where this process methodology and this focus has yielded good results. And we have used the time to also build a lot of capabilities within the company bring in some very, very smart people, who can then take this strategy and drive it into the future. So I feel very good about having had enough time to work with the team, come up with the strategy, be able to execute it and then transition it into a more which can be sustainable in the future.

I got that. Now from that 36,000 feat level more near term. I wanted to understand, Ashwath, maybe someone also kind of pointed it out that about 7 gigawatts of capacities were added by Cummins. No, this appears to be a fairly large number at a country level compared to whatever capacity, utility we would be adding at this point of time. And typically, the ratio of what the sector was adding from a PowerGen perspective to what the country was adding from a utility perspective was more like 40%, 50% has become 80%, 90%. I wanted to check from you whether it's a sign of maybe power deficit demand, it's a sign of something else. But I just want to get your sense whether this is starting to become a very, very high base to kind of grow on from a volume's perspective. I understand realization can boost revenues for the company? But from a megawatt volume perspective, are we getting inside kind of a high base at this point of time?

No, I think we are at an inflection point where I think this kind of growth can sustain for many, many years. Especially if you see, we are just not even the $4 trillion economy, if it is the ambition of our country to become a $7 trillion economy by 2030 and by the 100th anniversary of our country to become a $12 trillion to $15 trillion kind of economy. I don't see any other option than for us to be -- have to grow the requirement of power significantly have significant more infrastructure in the company -- in the country. And all of that, in my view, is going to lead to significant more demand. So I actually -- I'm not at all concerned about the high base. It actually is significantly smaller than where I think we will all be in 10 or 15 years.

Understood. Sir, last question from my side. This is on margins. I think you've seen enough of for the competitive intensity in the CPCB-IV transition, are you getting the sense that when things settle given the higher value addition from the company, the CPCB-IV genset can be margin accretive for the company over and above whatever reduction would happen here?

That's correct. That we believe that. And nothing which so far in the last 12 months is telling us any different.

Ladies and gentlemen, we will take this as a last question for the day. I would now like to hand the conference over to Mr. Ashwath Ram for his closing remarks. Over to you, Mr. Ram.

So thank you. Thank you for your active participation and engagement during the call. Cummins India believes that domestic demand in various end markets may sustain while for the export segment growth may gradually recover given the geopolitical uncertainty. We do see quite a few challenges, some in supply chain, some in the whole geopolitical situation, et cetera, which we continue to work through. . We remain cautiously optimistic about the short term, but quite optimistic about medium and long-term outlook. With a strong balance sheet, world-class infrastructure on the ground for manufacturing and product development, best-in-class talent, an amazing team. We are very confident of sustaining our growth trajectory. I want to thank all of you for asking these amazing questions and all the support that you've given this company. With this, I close the call. Thank you for your continued trust and confidence in the coming times.

Thank you. On behalf of Cummins India Limited and the leadership team, we would like to thank you for joining us and making it an engaging session. We are ending the conference call now. You may now disconnect your lines. Thank you.