Cummins India Limited (500480) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Cummins India Limited Q1 FY '27 Earnings Conference Call. We hope you all are keeping safe and healthy. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shveta Arya, Managing Director, Cummins India Limited. Thank you, and over to you, ma'am.

Thank you. Good afternoon, ladies and gentlemen. I'm Shveta Arya, Managing Director of Cummins India Limited. I hope all is well with you. Soma Ghosh, CFO of Cummins India Limited joins me on the call. Thank you for joining us today. This fiscal year has begun with solid demand across key end markets and continued order execution, reflecting the strength of our customer relationships. However, higher commodity costs and inflation, we made key factors influencing margins during the quarter. Now I'd like to share the financial results of Q1 financial year '27 through this call. For the quarter ended June 30, 2026 with respect to same quarter last year. Our sales at INR 3,375 crores are higher by 18% compared to INR 2,859 crores in the same quarter last year. Domestic sales at INR 2,854 crores are higher by [ 20% ]. Exports at INR 521 crores are flat. Profit before tax before exceptional items at INR 721 crores is marginally lower by 0.7%. For the quarter ended June 30, 2026, with respect to last quarter, our sales at INR 3,375 crores are higher by 14% compared to INR 2,963 crores recorded in the last quarter. Domestic sales at INR 2,854 crores are higher by 14% exports at INR 521 crores are higher by 16% profit before tax before exceptional items at INR 721 crores is lower by 12%. Segment-wise breakup for the quarter ended June 30, 2026, are as follows: Domestic business, power generation domestic sales are at INR 1,424 crores. That's a 35% increase over last year and 10% increase over last quarter. Distribution business sales at INR 886 crores, 14% increase over last year and 16% increase over last quarter. Industrial domestic business sales are at INR 458 crores. 10% increase over last year and 20% increase over last quarter. Exports. High-horsepower exports at INR 296 crores are a 16% increase over last year and 37% increase over last quarter. Low horsepower exports are at INR 180 crores, which is 20% decrease over last year and 2% increase over last quarter. With that, I now open the session for questions. Thank you.

We'll now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Parikshit Kandpal from HDFC Securities.

So my first question, is on the demand side. So given you have done such a phenomenal revenues in this quarter. So just wanted to understand on the ground, how is the demand? How are you able to supply to the demand? Are you in any way, I mean not able to take it off demand or losing market share to the competition because of this? Is there any capacity constraint in supplying the QSK60 or 95 has the lead time increase just on the product side, I want to understand from you on the production side, how do you cater demand? Are we losing out any orders because of shortage of the capacity.

Thanks, Parikshit. From a demand side, I'm presuming you're asking me a question about power generation, but I will give you answer from a power generation perspective. So from a power generation perspective, Demand, we continue to see strong in the market. both CPCB-4+ range and in the higher range, different segments, but still continue to see demand coming in. From a supply perspective, capacity on the higher end, there are a few players in the market, and everybody is facing the same situation as the demand is [ outpacing ] supply for everyone. And we have been putting in efforts to increase capacity at those specific notes. So largely, we are able to cater to the demand in the market. But like I said, it is a similar situation for everyone in the market in the high horsepower space, where we are bold continuously adding capacity and the demand is outpacing the addition of capacity that we are able to do. Are we losing orders where the market is very competitive. And everybody who's playing in this market tries their level best to get the orders. So losing orders is not just a function of whether we are able to supply it or it is a function of various other factors, customer preferences and their relation -- the relationships of organizations with the customers. From our perspective, our relationships with all our end customers are very strong. Our distribution business in the aftermarket gives us the capability to cater to aftermarket needs the reliability of our products in the market. So we see that helping us continuously. I hope that answers your question.

Okay. And just on the commodity, so we have seen the commodity prices the pig iron going up almost on a Y-o-Y basis on a full year basis about 14%, 20% just wanted to understand, I mean, your earlier comment at the start of the call and even in the press release about the commodity impact on the margins. So what are kind of pricing actions we have taken, especially post -- in Q1 and the start of so which will help us mitigate the impact on the gross margins of this commodity inflation.

Yes, you're right, commodity has been impacting major commodities, steel, pig iron, aluminum, copper significant increases. And commodity-related cost inflation also has been impacting the West Asia crisis, labor shortages at our supplier and all of those have impacted us in the quarter. Now yes, we have -- at the beginning of quarter 2, we have taken some price increases and price is quite dependence on market conditions and how market accepts some of the price hikes. We do continue to adjust pricing, we have taken on, and we will continue seeing how the market adjusts to this price increase and then see how best to manage the cost inflation and the price increases going forward.

What do you think from Q2 onwards, we'll have the gross margins coming back to the historical levels, almost like you have done in the past 36%, 37%. So do you think that this pricing action will result in the impact from Q2 onwards or this slow grind reversal on the GPM?

I think the commodity increases at this point in time are very unprecedented than ever in the past. And freight, by the way, as well has also been a challenge. The costs have been increasing. There are continuous supply chain issues that we see and continue to manage. So some of these issues will continue. Price, as I mentioned, we will see how the market reacts to it and they then take some more. [indiscernible] will the margins reach historic level? What I can say is our ability to manage community increases, inflation increases and also trying at the same time to manage our costs. We are getting better at that. So will we be able to improve our margins? Yes. I will not be able to say whether we will be in stock in or not, but these are unprecedented times in terms of commodity improvement and inflation coming at the same time.

Just wanted to wish you all the best. I think under your leadership, you have delivered phenomenal returns to the shareholders and created well and hope it will continue post your departure. I wish you all the best.

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

I have 2 of them. Firstly, on what we see as related party transaction approvals that have come in for the current year imply a very sharp increase and particularly in -- to exports to the U.K. subsidiary of the parent. A, if you can help us understand how does this sort of play out? Is this approval valid only for the current year? Or this kind of export is for a bulk period of maybe 2 to 3 years? How should we think of this sizable increase in the [ PT ] approvals that you're taking for the current year? That's question one.

Jonas, I'll answer the question and then you can ask me the other one. So from a related party transaction purposes, this is only for the current year. The approvals that we have taken are only for the current fiscal year. The intent is to ensure that we have adequate flexibility to support any export opportunities that come our way instead of seeking repeated approval from the shareholders. So this is what we do as a prudent governance practice. I don't think you should read any more into it than that.

Okay. The reason I ask is, every time you guys take this approval, the actual export sales are above those numbers. So I was just trying to understand whether this time around also, it's something that you already are aware of in terms of an order book coming in from the U.K. subsidiary or this is purely an anticipation, like you mentioned.

This is purely in anticipation, Jonas, just as a prudent governance practice and order books don't get built this early in the year, they get built 2 to 3 months in advance only and the geopolitical situation is not as stable to be able to [indiscernible] a year down.

Sure, sure. The second question was on the distribution piece. We've seen very strong growth in the last 5 years. The sales of this segment have sort of grown at 20%-plus kind of CAGR. I know it's wrong to look at this 1 quarter, but this quarter, that growth has sort of come off to 14%, which is still healthy. If you can remind us what are the drivers or levers still left in this business? That can support, if not a 20% growth, but at least a mid-teens growth. Is that possible? Or now are we seeing some bit of peaking in terms of penetration of the installed base, tapping of the installed base, et cetera?

I think, as you rightly mentioned, you should not read too much into 1 quarter. Because I do believe that the distribution business has more possibility of all the things that I had mentioned until now, higher penetration, ability to serve customers as a one-stop shop end-to-end, our digital solutions, all of those coming in. There is absolutely -- all those things are on track. And this is more a quarterly situation. Please also remember that we had a higher base earlier. And the next thing is that when commodity increase, freight issues, all of these happen, supply disruption sometimes cause us to deal with lower parts availability. So do not read too much into this quarter. [indiscernible] is absolutely has the potential to grow at 20% growth over this year and the next few years as well.

Perfect. Great. If I can just squeeze in 1 quick one on exports. This quarter, was it impaired because of these freight challenges? Or this was the normal run rate as it was as per target in the sense what you sort of budgeted for the first quarter?

This is normal. Remember that the West Asia crisis is actually leading to some of our exports not going to the Middle East as anticipated, there are other markets we'll be [indiscernible] some of this. So no, I'm pretty anticipated.

Next question is from the line of Aditya Mongia from Kotak Institutional Equities.

The first question that I had was on just the employee cost metrics, some clarification over there, given that employee count after the annual report was flattish. -- seems to be a fairly large increment. And I'm asking you to in context or any one-off in side because the parent has suggested some incentives that have a finite life being paid to employees by them.

Aditya, the employee costs, yes, you're right. The count is flat. So there are 3 things impacting the employee cost in this quarter. First is the annual merit increase that gets effective April 1, '26. So there is an impact of that. Then we do true-up of our variable comp factor based on which direction the company is going and where is expected to land at. So we do a true-up in this quarter, which has been done and there is an impact of that. And then there is some acturial credit, which was booked in the last quarter. So there was some -- this resulted in you seeing a lower cost. So that's why this quarter seems higher. So there are those 3 impacts in the employee costs.

Understood. I understood that. So should one assume that this INR 300 crore number, ideally speaking is a high base for the remaining quarters of the year?

Yes.

The second question that I had was more on the export story. I wanted to get a sense that when in the annual report, the mention is made about the company is finally entering into Europe with the [indiscernible] certification. Expanding presence inside North America and again, getting inside a few other things. Should one think through this as a good faith for exports and I'm saying, sir, because typically exports go up in jumps. They're stagnated in the growth. Are we entering into a phase where the expectations are that exports will start growing, let's say, at a high single or low double it base from here on?

Difficult to say that Aditya. Difficult to say because as I was mentioning in the answer to the earlier question, Middle East exports are not that strong for obvious reasons right now. The other markets have been pretty decent, like your Asia Pacific and so on. This is -- I would not say read too much into it because, yes, this is a little lumpy quarter-on-quarter.

Next question is from the line Renu Baid from IIFL Capital.

Congratulations for the strong performance. Shveta, my first question is, last year, when we closed the year, you're expecting fiscal '27 to be a moderate year. And as we see 1Q has seen pretty strong growth in volumes. So how do you read the volume outlook for fiscal '27? And your key comments in terms of the end market outlook. Do you see positive surprises to come by in the second half? [Audio Gap] And secondly, why it's difficult to comment on the near-term gross margin mix given that the cost structures are behaving. But the fact that we see growth coming in the high HP segment pretty strongly. Data center is a strong driver for us. So if you take a 2-year view, where do we see the gross margin stabilizing? Are they reverting back to 35%, 36% range? Or you think that exports coming up, margins could have further tailwinds? How do we see a medium-term outlook on the material margin front?

Renu, I can tell you, it's a very difficult question to ask. This is -- it is -- given the way the situation, both on supply side and demand side is developing both domestically and in the export. In a 2-year time frame, I mean would be able to give you an answer of where the gross margins will get. What I can tell you is that our endeavor definitely is to be at the kind of gross margins, which we take [indiscernible] should. So that is our endeavor, and that is what we'll work towards try and get better at managing commodity, try and get better at anticipating these some straight supply kind of challenges, manage our costs even better than we have done. So I think definitely, there is scope to improve our margins here on.

Sure. And lastly, quickly, if I can ask, any updates on new product launches, which are planned for second half of the year, especially in the railway and the other part of the business.

Renu, you will get to know as soon as we are ready to announce those.

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

Congrats for a very good set of numbers on domestic side. My first question is pertaining to your comment that you made in today's AGM that probably in the future, you are planning to supply components for data center market and U.S., especially towards Cummins Inc. So I wanted to understand scope for you in exports market on these particular lines, what [indiscernible] detail. And at the same time, if suppose there is incremental demand in other Asian countries as well as with respect to other geographies because of data center capacity expansion, would that be catered through India operations?

Umesh, there was no specific comment that we are starting components exports to the U.S. Let me clarify here. we are catering to the data center market in domestically and since we are a global integrated supply chain, we do manufacture components and engines which go into our different books. Now this was not specific to the data center. This is not specific to [indiscernible]. And this is nothing new. We have been doing this for a long period of time. So I don't have any incremental demand coming from that. This is business as usual.

Next question is from the line of Ankur Periwal from Axis Capital.

Congratulations on strong revenue growth. Just double-clicking on the revenue growth first. You did allude towards the growth outlook on the industrial side. One, how has the bigger ones, railways and construction sort of picking up in terms of demand across the HHP or the mid and the low end range. And secondly, within PowerGen, if you could help us better understand what led to the sharper growth? Was it more led by data center or products or what led to the growth there?

Ankur, on the rail side, we have consistently been seen for the last few quarters, good orders coming in and good execution. And we continue to -- we will continue to see that based on the orders that we see currently. On the construction side, we largely -- this quarter was flat to the same quarter last year, slightly lower than the last quarter. So construction largely is flattish. And there is a slowdown due to monsoons that is now anticipated. So that is about the rail and construction. Power generation, yes, you're right. There was some data center project execution in this particular quarter, which we saw yes.

Sure, Shveta. And second bit, your earlier comment wherein you did highlight that the demand has been holding up pretty strong and especially led by the HHP part of the business. And you also mentioned that we had taken 1 price hike starting early this quarter, Q2, that is Will it be fair to say that as we speak today, all the RM inflation has been passed through when the demand has been strong and logically, price increase would have been easier to take. Or are we still sort of contemplating, taking a hike depending upon the volatility and what's the thought over there?

Ankur there's always a lag between when the cost takes us and then the price realization actually starts happening. So price realization will start happening a few months down the line because we do run backlogs in our power generation business. I did mention that there is strong demand, and we are constantly in this space of supply catching up with demand. So there is there are backlogs because of that, and hence, price realization takes at least a quarter. So we have -- will we be able to recover all commodity increases through this price rise? No. So we will have to see, and that is what I said, commodity increases, we try and see what are the best way of passing that on to the market, price rises one. Our all cost control value engineering methods are another. They're working on both. And if required, we will then, based on the market absorption, see how we can do another price increase as and when needed and if needed.

Sure, Shveta. That's helpful. And congratulations and all the ways for your future intervals.

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

My first question pertains to any development on the BESS side we saw, I think there was a commentary from the global parent also, and you guys also highlighted some time back. So I just wanted some color on that.

Amit. From a BESS perspective, we are still in the process of getting on those. We have already installed the best at our -- one of our own plants, our own rebuild center in Phaltan. We have installed this best as a demonstrator and we are getting our customers to see experience that very close to getting some orders, but nothing more to share yet on that.

Right. Second question, you -- I think in the last call, you highlighted about the inquiries picking up at accelerated pace for the data centers, I think, from October onwards. And we have been hearing a lot in terms of probably daily. So just wanted to understand your color how has been the inquiry pipeline in the past 3 months. Anything you would like to highlight in terms of the data center inquiry pipeline in domestic market are the customers able to take this price hikes? Or is this also impacting the flow of orders. So any sense on the data center perspective in terms of inquiry book and execution?

Sure. Yes, the data center inquiries as they had picked up in the last few quarters, the momentum continues, very strong momentum on the data center side. And our execution has also been strong. Please remember, these are all big gensets. So take time for delivery as well. So we are not only generating inquiries for this year, but we are now talking about the next year and the year after that. And price increases as far as data center goes, I think, for data centers, it is really important to work on lead times and ability to supply when they have the site readiness, those are more critical, more important for data centers than the price. Of course, this is a conversation. But lead times and having genset sellable when their site is ready is more critical.

Yes. lastly, anything on the CapEx because you talked about the long pipeline, what's the CapEx and utilization levels for this year and next year? Any color?

Our utilization level is between 70% to 75%. So it has been consistently going up. And the capital investment is in line with what we have been doing in the last few years in our existing plants.

Next question is from the line of Rahul Gajare from Macquarie.

I wanted to ask you that we have seen last year where the Gulf market was down this quarter also, we've seen that reflected in the LHP genset. I want to know, there must be these orders which are expected to be delivered. So is it right to assume that once these the West Asia crisis or the disturbance settles, you will have a bunched up delivery to Gulf region. Is that right to think?

No, Rahul. That is not. Because whatever we are not able to fulfill with whatever availability they have from their own region. These orders do not stay that long.

Okay. Fair enough. And I just wanted to double check this number. The HHP number that you quoted was INR 296 crores for this particular quarter.

Exports?

Yes, Exports. Yes.

Yes, that is correct. INR 296 crores.

Next question is from the line of Shirom Kapur from Jefferies India.

I just want to ask you on -- so you commented that took a couple of price hikes at the beginning of this quarter. But just wondering whether 1Q also saw any price hikes that you've done to pass on this increase in commodity costs. And specifically on data centers as well, given these are longer lead time orders, how is the -- have you been able to take any price hikes here? Have you been able to get any better pricing on these given the commodity cost increase? That's my first question.

Yes. So price hikes in quarter 1, no. We did not take price hikes at that point in time. And it does [indiscernible] as an order-to-order discussion with customers. It's not a blanket price increase. it really depends on what the volume of the order is, when is the delivery required? When do we start engaging with the customer? What is the customization level required. Price differs from 1 data center customer to another and from order to order.

Okay. Understood. Just secondly, if you could -- a more of a bookkeeping question, if you could share the breakup between within domestic powergen loss, MHP, LHP, HHP and also within industrial, the breakup across segments for this quarter? And also how much data center contributed to your powergen sales this quarter?

Yes, let me do that. So for power generation domestic, the low horsepower sales in this quarter was INR 77 crores. The medium range is INR 248 crores. The heavy duty is INR 125 crores, and the high horsepower after that is the remaining. And data centers out of this, in this particular quarter, was 40% of overall power generation revenue.