Cummins India Limited
Quarter One Earnings Conference Call, 2013-14
August 2, 2013
Anant Talaulicar:
Good morning, ladies and gentlemen. I am pleased to present to you and
discuss the results of the first fiscal quarter of 2013-14 for CIL, Cummins
India Limited legal entity. In a difficult macroeconomic environment both
in India as well as globally, our sales were impacted, and 1029 crores,
these were down 9% sequentially, and 17% versus the same quarter a
year ago. Domestic sales were down 9% sequentially, and 8% versus
the same quarter a year ago. Exports, however, were down 7%
sequentially, and 35% down versus a year ago. On the back of the
lowering of sales, operating profits were down 10% sequentially, and
26% a year ago. However, operating profit margins were held
sequentially at 16% of revenue. But they did drop two points a year ago
due to the leverage loss on the back of 17% lower volume. The PBT was
229 crores at 22.3% of revenue which was down 13% sequentially, and
down 11% versus a year ago.
My view is that our team has operated extremely well under these
difficult external circumstances. This is evidenced by the fact that our
material margins have actually improved to 36.4% from 35.5% one
quarter ago, and from 35.8% a year ago. Also I’d like to point out that we
continue to generate very healthy cashflow. In fact the operating
cashflow in the quarter was 251 crores. This compares to 137 crores in
the last quarter and 230 crores a year ago quarter. So we are very well
positioned to face any sort of fluctuations in the market place, as you
know, we have zero debt. And as market conditions improved both in
India and globally, I’m very confident that we will be generating superior
results as compared to what we saw in this quarter. So with that, I’ll open
it up for your questions. Thank you.
Moderator:
Thank you so much, sir. With this, we are going to start the Q&A
interactive session. So I would request all the attendees and the
participants, if you wish to ask any question, you may press “0” and “1”
on your telephone keypad and wait for your name to be announced. I
repeat; participants if you wish to ask any questions, you may press “0”
and “1” on your telephone keypad and wait for your name to be
announced. And the first question is from Mr. Venugopal from Barclays.
Your line has been unmuted, you may go ahead and ask your questions,
please.
Venugopal:
Hi, sir, very good morning to you. Firstly on the domestic business, I just
wanted to check post-1Q performance, what sort of sales growth on the
sales front we expect for the full year FY14, prior guidance towards a
10% growth. And similarly for exports, after the 1Q decline, what are we
seeing for the year? We were earlier at about 3-5% growth expectation.
I do feel given what we continue to see out there in the marketplace, we
need to revise our guidance downwards. So I would say that our best
estimate at this point is that overall sales will be flat for the full year. And
probably in an optimistic scenario, I would say it could grow by about 5%,
and in a more pessimistic scenario, it might decline by 5%.
Anant Talaulicar:
Venugopal:
And sir, you’re including exports here, right, when you say…
Anant Talaulicar:
Yeah, this is all put together. I would say that between exports and
domestics, I have more optimism on the domestic side currently.
Venugopal:
Sir, then my second question would largely from the point of view of
when we track the results of Cummins Inc., it doesn’t look like the
powergen per se the full year expectation for them. So what is the
primary driver for such a weak export performance in 1Q, and what is the
driver reversal, if any, in the subsequent quarters per year?
Anant Talaulicar:
Well, as we look at our exports, one component of our exports are high
horsepower engines and these are largely into the power generation
market. So when you look at our global power generation sales, they
have been largely impacted at the upper end and that is what is reflected
in our numbers also. This is pretty much across the board. Probably one
relatively bright spot for us has been the US market, particularly data
centres which continue to grow based upon the fact that internet usage
and cloud usage continues to grow worldwide.
But other than that, the power generation markets particularly at the
upper end are currently depressed. Then the other component of our
exports is the low horsepower generators. There I would say, while
currently the situation is kind of flat, there is potential upside there,
because we have room to grow our market share.
Venugopal:
And sir, within that, on the export front, from a channel inventory point of
view or the inventory at the parent level, is it something which is trying to
deplete now, which gives us some more comfort or...
Anant Talaulicar:
Yes, I don’t believe that we have significant concern on the channel
inventory side.
Venugopal:
Yes, sir, and my last question on the margins. Would you plan to hold on
to margins which we’ve seen in this quarter or what are sort of the fevers
that you have both up in terms of growing margins from here or in terms
of downsizes if any.
Anant Talaulicar:
Yeah, I would say at the material margin level, certainly, our endeavour
would be to hold to approximately current levels. It might be upper down
a little bit, probably downwards to some extent by about 0.5 points. But it
will be in this ballpark that we have seen currently. And as far as we look
at operating margins, that largely depends upon the impact of sales, I
mean there’s a leveraging impact. So if you are able to see the plus 5%
that I talked about then, we could see some improvements in the
operating margins percent. Or it might be slightly depressed if the sales
continue to decline.
Moderator:
Thank you so much, Mr. Gopal. Moving on to the next question, Mr.
Pulkit Patil from Goldman Sachs. The line has been un-muted, you may
go ahead and ask your questions, please.
Pulkit Patil:
Sure. Thanks a lot for taking my questions. Sir, my first question is, could
you please give the breakup by segment of growth and performance for
various businesses?
Anant Talaulicar:
So here if you look at the domestic side, then the power generation
business declined 25% sequentially as well as a year ago. The industrial
business declined 7% sequentially. However, it grew 26% from a year
ago. The auto segment grew 9% sequentially, and was flat as compared
to a year ago. And our distribution business grew 13% sequentially, and
5% as compared to a year ago. So that was the story domestically. The
export numbers I’ve already quoted at 7% decline sequentially and 35%
decline a year ago.
Pulkit Patil:
Sir, secondly, could you also give a breakup of the cross charges. Last
quarter it was mentioned there are increasing cross charges being paid
to the parents going forward, what could that number ballpark be?
Anant Talaulicar:
This is about 15 crores impact per quarter. And you’ve seen it two
quarters in a row now.
Pulkit Patil:
Sure, sir. My last question is more from a strategy perspective, given the
depreciation in the Rupee. Is there any thought being given right now to
leverage India more and more assuming that Rupee is going to remain at
depreciated levels from a parent company perspective which might in the
long run benefit the listed entity in India?
Anant Talaulicar:
Yes, I would say so. I mean, obviously this makes India more competitive
as a sourcing site. And with that in mind, for example, the global power
generation business has decided to largely source the lower kilowatt
generators from India, and for which we set up the new plant at the
Phaltan megasite SEZ. Similarly we are looking to obviously take a
larger share of the high horsepower engine business. And then finally I
would say also that technical services that we’ll be doing out of India will
continue to grow over a period of time. I definitely hope the Rupee
doesn’t stay depressed for the sake of the country. It certainly helps CIL,
but I don’t think it’s a good thing generally.
Pulkit Patil:
Sir, what I want to know, is it incremental development over the last
three-six months or is it something that part of the original strategy
anyways?
Anant Talaulicar:
No, part of the original strategy, except that it starts getting accentuated
as you start seeing these kinds of phenomena.
Pulkit Patil:
Sure. That’s it from my side. Thanks a lot, sir.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much. The next question is from Mr. Bhavin Vithlani from
Axis Capital. The line has been un-muted, you may go ahead and ask
your question.
Bhavin Vithlani:
Good morning, Anant. Very congratulations on the results despite
adverse environment.
Anant Talaulicar:
Thank you.
Bhavin Vithlani:
First question is on the high horsepower exports. You highlighted that in
quarters going forward, this business is expected to pick up. If I recollect
one of our meetings with your team earlier, it has been highlighted that
China, which was also sourcing the high horsepower generator, has put
up its own manufacturing capacity. So what is the impact of that on CIL
HHP exports?
Anant Talaulicar:
None whatsoever. The China high horsepower plant has been in
existence for decades also now. But it caters to different segments out
there. So we don’t see any adverse impact of that on our sales into
China.
Bhavin Vithlani:
Okay. My second question is on the power generation. It’s more of a
near-term question. After the recent moves by the Reserve Bank of
India, have you actually seen the momentum change in the last month or
so, and if so what is the impact you are seeing on the revenues front
because of this move?
Anant Talaulicar:
We have seen no positive impact on our power generation business in
the last month. From what we can see, liquidity continues to be very tight
in the market place. From what we can see, the concern or uncertainty
on the part of investors to expand capacities remain high in the market
place. So I have no good news for you there.
Bhavin Vithlani:
Sir, has it worsened further or it’s remained stable?
Anant Talaulicar:
It would say it’s about as balanced as has been.
Bhavin Vithlani:
Okay. And last thing on, what would be the capital expenditure guidance
for current year and the next year as well?
Anant Talaulicar:
Capital expenditure guidance for this fiscal year is about 550 crores. That
compares to about 225 which we actually expended in the last fiscal
year. So we are stepping it up significantly and then the following year
will be about approximately that amount. Maybe somewhere in the 550
to 600 crores. And then we’ll step it back down into kind of more like last
year’s level. But these two years are going to be our peak years based
upon the fact that we are establishing and completing the expansion of
our megasites as well as the tech centre and the office campus.
Bhavin Vithlani:
One last question if I may. What is the update on CPCB II
implementation?
Anant Talaulicar:
It’s almost there. I mean it’s gone through every step of the process and
is now just waiting you might say the final signature and notification. So I
am hoping next week it will be done because the session starts next
week in Delhi. So that is my hope. But obviously it’s not entirely in my
control.
Bhavin Vithlani:
So are current estimates built into some pre buy, assuming that the 1st of
January 2014 norms get implemented?
Anant Talaulicar:
Yeah. But if you look at it from a fiscal year standpoint, then in the third
quarter, you’d expect some pre-buy. But then there’ll be a post-buy, you
Bhavin Vithlani:
might say, phenomenon in the fourth quarter of the fiscal year. So overall
for the fiscal year, I don’t anticipate any significant impact just because of
CPCB II .
Okay, fine.
Anant Talaulicar:
I mean clearly there are - we hope to have long term impact due to fact
we believe we are best positioned to serve these emissions, cost
effectively.
Bhavin Vithlani:
Thank you so much and wish you all the best.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much. the next questions is from Mr. Venkatesh from
Citigroup the line has been un-muted, you may go on after your
questions, please.
Venkatesh:
Sir my questions have been answered, thank you.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much Mr. Venkatesh. The next question is from Mr. Amesh
Shah from Credit Suisse. The line has been un-muted you may go ahead
and ask your question, please.
Sir I wanted to understand specifically on the power gensets demand in
Indian, it seems you said that you are more optimistic on the growth on
domestic side, but in this particular quarter power genset sales has been
down 25% both sequentially and Y-o-Y. If you can just give us a
perspective in the last couple of conference call you’ve given us some
idea of whether the demand is strong from south or north of India and the
reasons for that. If you can just give some colour on what’s the scenery
of power gensets in India specifically.
Amesh Shah:
Anant Talaulicar:
You see last year because of the drought conditions and delayed
monsoon etc, there was significant shortages in power particularly in the
southern part of India. In places like Tamil Nadu and Andhra ets, we saw
significant shortages. This year we are not seeing that phenomenal play
out, and I think the monsoon started early, so that particular
phenomenon is not playing out in terms of demand. So really what is
driving power generation demand currently is more the GDPs related
factors. So as people are looking to expand capacities in various sectors,
it’s really what driving power generation demand now country wise. And
the fact that GDP is the tendencies on a slowdown mode currently, it’s
having a negative impact on overall power generation demand in the
country. Now if you ask my sort of anticipation -- again it’s just my own
view, right... My sense is that as inflation is starting to ease and
particularly with the good monsoon hopefully even food prices start
easing then there could be certain drops in interest rate. I think the
government will be more inclined to help liquidity because right now it’s
not looking very good from that perspective. And particularly with the
elections coming up there will be some pressure to ease liquidity. And
that could have a positive impact on our domestic demand. But this was
purely speculation on my part.
Amesh Shah:
But at this point of time there is no differentiation that you see in terms of
the market. So South India versus West India or North India, you said
demand everywhere has just come off or do you see any benefits?
Anant Talaulicar:
No, we are not seeing any significant variations and demand through the
country currently.
Amesh Shah:
Sure Thank you that’s my question thank you.
Anant Talaulicar:
Okay, thanks.
Moderator:
Thank you so much. The next question is from Mr. Ashutosh Garuru from
Dalal and Broker. The line has been unmuted you may go ahead and
ask your question.
Ashutosh Garuru:
Hello, sir.
Anant Talaulicar:
Hello.
Ashutosh Garuru:
Just wanted to know what impact does your power genset demand and
all diesel related products have since the diesel prices are having
continuously going up so what kind of a demand impact are you
witnessing because of that ?
Anant Talaulicar:
Probably insignificant impact. You know again the ways sort of market
behaves is typically when people expand capacity at a building, at a
hospital, that they required backup generator right is like an insurance
policy because the grid is never a guarantee phenomenon. And as you
know at least once in a while we are shortages in different parts of the
country depending on whatever happens with the grid situation. So this is
what drives the demand for generators not necessarily diesel prices
because the majority of our generator really backup generators, they’re
not prime powered generators any more in the country. They don’t work
24 hours a day, they’re just a backup to the grid. So diesel prices frankly
are not a big factor in demands for generators.
Ashutosh Garuru:
And sir you mentioned you maybe in a decent position to do a flat
revenues for the full year. So does it mean that you would be recovering
significant portion because we have already de-grown by 17% in Q1. So
we expect a decent growth in the next nine months basically.
Anant Talaulicar:
Yeah, I’ll say that out outlook is that we will see some recovery in our
sales as we go forward.
Ashutosh Garuru:
But as we just discuss about the interest rates, I mean the liquidity
means are tightened up recently. So don’t you think it may not be
possible at least in next quarter or so and it could put a lot of pressure on
Q3 and Q4. And also you just mentioned that pre-buying before the
CPCB would be compensated more or less through the Q4 sales
maybe? Do you think we would be in a position to clock that -- I mean
cover up this 17% deficit in the degrowth...
Anant Talaulicar:
You see we operate in multiple segments. So for example our industrial
businesses have segments like construction which actually has been
recovering to some extent. Construction sales have been growing and we
are also seeing a phenomenon where even global construction
companies are now setting up manufacturing locations in India as a
export side, which is helping us. So even if the domestic construction
segment is not robust let’s say, there is that phenomenon playing out
which is going in our favour. We also participate in the rail segment and
the government as part of its budget in spending continues to upgrade
the rail system which was helpful to us. So there are certain segments of
that that are not entirely tied to liquidity or GDP growth, like powergen
might ! So with all of that put together we feel like there is room for some
recovery, not substantial recovery but some recovery in the upcoming
quarters.
Ashutosh Garuru:
And sir lastly you mentioned about the growth and de growth in each of
the segments, if you can give the actual numbers for this particular
quarter, sir.
Anant Talaulicar:
Okay. Breakup was, the growth in powergen, as I said, the de-growth
has been 25% as compared to a year ago. Industrial has grown 26%.
Ashutosh Garuru:
Sir I’m referring to the actual number in value terms.
Anant Talaulicar:
Okay. Our powergen sales were approximately 330 crores, industrial
was approximately 140 crores, Auto was approximately 40 crores.
Distribution is about 230 crores and there are some miscellaneous stuff
of about 20 crores. So that’s how it breaks down.
Ashutosh Garuru:
And export’s were, sir?
Anant Talaulicar:
Exports were 276 crores.
Ashutosh Garuru:
Yeah, thanks thank you sir, thanks a lot.
Anant Talaulicar:
Certainly, thank you.
Moderator:
Sandeep Tulsian:
Thank you sir. The next question is from Mr. Sandeep Tulsian from GM
Financials. The line has been un-muted you may go ahead and ask your
question, please.
Yeah, good morning, sir.
Anant Talaulicar:
Good morning.
Sandeep Tulsian:
Sir firstly I would like to know how have the different expatriating wise
gensets performed fiscal classified them in low HP, mid, high end heavy
duty?
Anant Talaulicar:
Okay, so here our low HP or low Kilowatt which is about 15 Kilowatts to
about 62.5 that’s how we break it down has grown sequentially by about
four percent. The mid range which is 82.5 to about 250 has de-grown
34%. The heavy duty that it 320 to 380 KV has de-grown 10% and high
horse power has de-grown 30%. Mind you, this is the combined picture,
this is domestic and exports put together.
Sandeep Tulsian:
Okay. And how would these numbers look on a year-on-year basis?
Because I think last year our 82 to 250 KVs was high
Anant Talaulicar:
On year-on-year basis. Okay, year-on-year basis we’ve seen the low
horse powers grow 10% and I think as I mentioned earlier, I think we
continue to see upside opportunities there as we brought out a revamped
product line and improving our channel capabilities. The mid range has
de-grown 25%, heavy duty has de-grown 17%, high horsepower has degrown 34%.
Sandeep Tulsian:
Okay. So primarily the contributions on the new LHP exports facilities
contributing for this 10% y-o-y growth.
Anant Talaulicar:
No, actually the LHP number I just quoted you currently was a domestic
one. The exports will be separately also providing upside potential to
CIL.
Sandeep Tulsian:
Okay. Because last year first quarters you had mentioned 50 crores for
this LHP exports so how is that number looking in this quarter?
Anant Talaulicar:
Yeah, it’s almost doubled I would say from that, It’s about - almost 90
crores.
Sandeep Tulsian:
90 crores, so that’s a substantial increase.
Anant Talaulicar:
Yeah, that’s right. And we’ll see more upside I believe as going forward.
As of course global markets recover.
Sandeep Tualsian:
Right. Okay, so secondly I would like to know on -- an update on the
Phaltan Megasite, so basically the nine facilities which was land over
here, out of that how many facilities have been commissioned and how
many are pending and targeted 700 crores odd cases for this bigger site,
how much has been incurred till date?
Anant Talaulicar:
Currently commissioned six facilities and the seventh one will get
commission towards the tail end of this quarter. So quite a substantial
amount has already been concluded, I’ll say. And as you know there are
three Cummins legal entities that are investing on this that are investing
on this Megasite which is CIL, Tata Cummins, and Cummins
Technologies India limited. So CIL has already invested almost 250
crores on the Megasite.
Sandeep Tulsian:
Okay. So the balance facilities which are pending I think is from CTIL
and Tata Cummins third plant which is coming up, right?
Anant Talaulicar:
Yeah, that’s right. For CIL, we’re also looking at down the road, another
power generation facility.
Sandeep Tulsian:
Okay. The addition of the LHP in the DTA?
Anant Talaulicar:
Correct.
Sandeep Tulsian:
Okay. Sir, secondly, I would to know similarly on the India office campus
also we had targeted 730 crores or Capex. What is the timeline for
completion of this Capex and similarly how much has been incurred till
date on this thing?
Anant Talaulicar:
India Office campus last fiscal, we invested approximately 90 crores, this
fiscal we’ll probably end up investing almost 300 crores and the balance
will come in the next fiscal year for the most part.
Sandeep Tulsian:
Sir because 730 crore is what we had guided so that’s mean by end of
FY-14 it’ll be closed to 400 crores so balance 300 to 330 who’ll becoming
in FY-15.
Anant Talaulicar:
Yes, so what I’m just telling you right now is told you about the two
towers, the third tower would probably come in the fiscal year 2016-17
time frame, the balance.
Sandeep Tulsian:
Okay. So sir out of 730 how much would CapEx would be a portion to
the third tower?
Anant Talaulicar:
Okay, can you repeat the question, please?
Sandeep Tulsian:
Sir out of these three towers then how much CapEx is a portion to the
third towers, which would coming in 16 and 17?
Anant Talaulicar:
Approximately 300 crores.
Sandeep Tulsian:
Okay. That’s it. And lastly sir, just wanted to know what kind of a rental
income are we trying to book from these towers in the office campus
annually?
Anant Talaulicar:
Approximately one crore per month.
Sandeep Tulsian:
All right, Sir. Thank you very much. That’s it from my side.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much. I would request all the analysts to kind restrict your
questions because we have a long queue. Moving on to the next
question, we have Mr. Ankur Sharma from Phillip Capital. Mr. Sharma,
your line has been un-muted, you may go ahead and ask your questions,
please.
Ankur Sharma:
Good morning, sir.
Anant Talaulicar:
Good morning.
Ankur Sharma:
Yeah. Sir, firstly, with the Rupee falling off so much over the past few
quarters, I would tend to understand that we become a lot more
competitive against our peers, especially in the high KVA ranges where
most of the engines are imported into India. So have you significantly
gained market share, and if possible if you could share what kind of
market share you have in the higher KVAs for this quarter?
Anant Talaulicar:
We have not gained significant market share in the upper end of the
ranges because we’ve fairly been dominant in that end. So for example,
our shares significantly tend to be in the upwards of the 50% range even
going up to 75%. So there’s not significant headroom in terms of market
share. And competitive intensity continues to be very, very tight, because
as global markets are sluggish, there is quite a lot of focus on India also.
Ankur Sharma:
Okay, fair enough. And secondly, we do understand that Perkins would
be starting its facility near Aurangabad from CY14 there. So given the
market is depressed, plus you have new capacities coming through, so
how do you expect the competitive scenario thereon.
Anant Talaulicar:
I’m looking forward to the fight.
Ankur Sharma:
Okay. And, if I could just squeeze one more here, your distribution
business typically where we see growth in the range of 10-15% has kind
of slowed down this quarter. If you could just throw some colour what’s
happening there and what’s the kind of growth are we looking at for
FY14?
Anant Talaulicar:
For FY14, on the distribution site, we’re looking at approximately 10%
growth. And again, this is an area where, depending on how well we
execute, there could be some upside, because obviously as people look
to curtail their capital spending and flocked current assets, that helps the
distribution business from a revenue perspective. So we would like to
take advantage of that while things are difficult on the capital goods side.
Ankur Sharma:
Fair enough. Best of luck for the future. Thank you so much.
Moderator:
Thank you so much. The next question is from Mr. Ashish Jain from
Morgan Stanley. The line has been un-muted, you may go ahead and
ask your questions, please.
Ashish Jain:
Hi, good morning. Sir, first question is on your growth outlook. On a total
basis you said that it could be flat. Could you give some sense of
basically how you’re looking to do on export and domestic front
separately?
Anant Talaulicar:
What I would say is that on the exports front, it’ll be probably be another
decline of about 5%, and then the domestic side, I would expect a little
bit of growth in the year. It could be flat to 5% growth.
Ashish Jain:
Okay. Sir, when exports you’re saying will be down 5%, and if I see the
gain from currency on a y-o-y basis, in volume terms we’re actually
looking for a much lower decline. Is that the way to understand?
Anant Talaulicar:
Yeah, I was giving you the numbers in revenue terms in Rupees here.
Ashish Jain:
Okay. Just secondly on your exports side, can you give the breakdown
on high horsepower and low horsepower? Low horsepower you just
spoke that we had done pretty well and how high horsepower have done
on a y-o-y basis, and you’d see that changing at all -- the next couple of
quarters especially if US starts to recover.
Anant Talaulicar:
The high horsepower as compared to a year ago has declined almost
50%. That’s what we’ve seen in the current quarter.
Ashish Jain:
That’s only for exports?
Anant Talaulicar:
For exports, Yes. Just for exports. Sorry, what was the other question?
Ashish Jain:
Do you see any change if US starts to recover or US action (ph)
improves, then do you see that this trend could improve much faster?
Anant Talaulicar:
Yes, yes, indeed, it could. Because the US tends to be one of the
significant markets for exports, and it’s about I would say 15-20% of our
high horse force
Ashish Jain:
Okay. And, sir, lastly on Other Income, this quarter your other income
has gone up quite substantially. So what has really driven that and
what’s your outlook on that? Do you expect that to kind of sustain these
levels or there’s something which could be one this quarters other
income?
Anant Talaulicar:
I think what has happened is one of our subsidiary companies, 50-50
joint venture, Valvoline Cummins declared a dividend in this quarter of 14
crores. They were not declaring any dividends for the last two years or
so, as we were looking to invest in new lubricant plant in Ambernath near
Mumbai. That plant is now up and running as of this month. So now, with
the cashflow that they’re generating, they felt comfortable providing a
dividend of 14 crores. So that was one positive impact we saw. And
there was a Foreign Exchange gain of 7 crores that we saw because of
the slight devaluation in the Rupee from 54.4 to 59.4 quarter on quarter,
which causes us to revise our reciprocals value. And there was about a
13 crore interest on our income tax refund. So we had gotten some past
income tax refunds. That’s probably a one-time phenomenon. So that’s
what helped us in terms of the other income this quarter.
I suspect going forward it’s not going to stay at these levels. It’ll probably
come down 20-25%.
Ashish Jain:
Thanks. That’s useful.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much. The next question is from Bisal Singh from Religare
Capital. The line has been unmated, you may go ahead and ask your
questions, please.
Bisal Singh:
Yes, sir, good morning.
Anant Talaulicar:
Good morning.
Bisal Singh:
I just wanted to understand on the domestic and the exports sale. So has
there been some impact of inventory collection in the channel both
domestically and in the exports in this quarter?
Anant Talaulicar:
On the exports side, No. Probably on the domestic side there has been a
bit of a correction that has taken place. So what you saw this quarter is a
bit of that channel correction, not just demand fluctuation in the end
market. But I think that’s largely now out of the way. So I think both
domestically and export-wise, we are now pretty exposed to the market.
Bisal Singh:
Anant Talaulicar:
And secondly, on the exports you’re talking about decline of 5% for the
year. Now, how do you explain this in the light of the fact that probably
North American power generation markets are looking up. And you’ve
also added capacity at Phaltan for your low KVA genset exports, which
probably will help in your exports pickup. Of course, I do understand that
globally things are a bit uncertain. But my point is on the exports, how do
you look at it in light of these two factors.
Right. So clearly US is now the bright spot relatively. Europe is in a
decline and is unlikely to recover any time soon in our view. As a
continent, there might be a couple of bright spots, a little bit Germany or
England. Then China is also in a depressed condition from a power
generation market perspective, and we are not expecting any quick
recovery there. Africa has also gone into decline as commodity prices
have come down and commodity demand has come down. Latin
America and Brazil especially is continuing to grow. But it’s not as large a
market for us as compared to the other ones I quoted. So with all of that,
this is where I came out with my overall guidance.
Bisal Singh:
And on the power generation facilities that you have in US, UK and
Turkey and probably in India, the point is that are you likely to increase
the revenues from India given the depreciation of the Rupee and hence
probably increase your exports from India? I mean, I was also looking at
that aspect, because you do have these four capacities which are doing
your power generation bid.
Anant Talaulicar:
Yes, there’s no doubt, especially if the current situation continues in
terms of the Rupee etc, that you’ll see the share of the Indian plant
grows substantially in the power generation global scheme of things,
over a period of time, obviously, not necessarily in fiscal year.
Bisal Singh:
And just to repeat, your LHP exports were, you said, at 90 crores in the
quarter?
Anant Talaulicar:
Yes, I did.
Bisal Singh:
Okay. And finally on the gross margin improvement that you’ve seen in
this quarter, what is the impact of currency and low raw material prices, if
you could just divide the gross margin improvement in those two
components.
Anant Talaulicar:
Yeah, the currency impact on gross margin is not very significant. We
saw it on the other income side. On the gross margin itself, not as large
of an impact but there is some impact. So I would quantify it as
approximately 0.1%.
Bisal Singh:
Okay. And the remaining comes from your commodity prices being
lower?
Anant Talaulicar:
The remaining comes from commodity prices as we compare it to earlier
periods. We’ve also taken a price increase on the power generation site
to some extent for the 0.7 point impact. We’ve continued to drive value
engineering, what we call our ACE programme (Accelerated Cost
Efficiency) which has helped us by about 0.6 points etc. So it’s a
combination of factors. I would say largely speaking I would say it is
because of the cost reductions that we’re driving in our materials.
Bisal Singh:
Sir, I know the last price increase you took in November 2012. Have you
taken a price increase after that also?
Anant Talaulicar:
We took a price increase in February of 2013. But also you need to bear
in mind we give a price reduction to the parent on the exports. So they
almost cancelled out each other. Price factor is a very little one overall.
It’s mainly the cost reductions that we’re driving, that provides the net
improvement to your gross margins.
Bisal Singh:
Okay. And so finally one question. In the press release after the results
you have said that you would continue with your investment at a lower
pace. That’s what we’ve seen as quoted in the press release. So I just
wanted to understand what are you implying by lower pace. Are you
saying your Capex is going to be lower than guidance? And where I’m
coming from, historically if I look at your Capex guidance that you have
given and the Capex that is finally done, there’s a huge difference. And
the CapEx always ends up lower than the guidance that you’ve given.
Anant Talaulicar:
That’s right. So obviously we are going to be watching this very closely.
But despite that, overall, if you look at the trend, it’s going to be upwards.
So we’re actually increasing our levels of Capex. Where I was trying to
come out at was if you look at it compared to maybe a couple of years
ago, we have slowed things down. We wanted to move at even a more
blistering pace. We have slowed things down based upon external
condition.
Bisal Singh:
Okay, sir. Thanks for this.
Anant Talaulicar:
Thank you.
Moderator:
Thank you so much. The next question is from Mr. Ankit from Jefferies.
The line has been un-muted, you can go ahead and ask your questions,
please.
Ankit:
Hello, sir. I would just like to confirm one thing that in terms of exports
with Cummins Inc. Has there been any change in sourcing and pricing
norms in this quarter per se?
Anant Talaulicar:
No
Ankit:
Okay, and still we would expect exports to recover from some minus
30%-odd to 5% over the year?
Anant Talaulicar:
That’s right, yes.
Ankit:
Okay, sir. Thanks a lot.
Moderator:
Thank you so much. The next question is from Mr. Kunal Seth from
Prabhudas Liladher. The line has been un-muted, Mr. Seth, you can go
ahead and ask your questions, please.
Kunal Seth:
Yeah, most of my questions have been answered. Just one thing I would
like to know is, sir, though we understand the near term macro, but what
is the long term trend you would see in the market in terms of growth
both in domestic and export markets?
Anant Talaulicar:
Again, I think I would go back to the long range guidance that I’ve been
giving out here, is that we expect the export markets in the long run to
grow in the lower teens and the domestic market to grow in the upper
teens. So again, I would back to that, if the macro condition starts
moving to what they used to be about three years ago.
Kunal Seth:
Okay. But it should be in like the next three, four years, or you would
want to wait for macro to improve before we can get back to this
guidance?
Anant Talaulicar:
My feeling is frankly that India can recover anytime. In the sense that the
fundamentals in India are there, I think what India needs is good solid
political leadership and some policies that help the market go back to
what it used to be. So India is simply -- that’s all that is limiting it, in my
view. There is inherent demand, there is the middle class. Everything is
in our favour. I think people just want to see some clarity of policies,
some stimulation of the market place and focus on supply. So that can
happen next year. So it’s anyone’s guess.
But there is no fundamental issues, in my view, that will slow India’s
economy down long term. As far as rest of the world goes, I think the US
is already in a recovery mode. And if they are able to tackle the deficit
issue a little more aggressively, then there will no stopping the US.
Europe will take time, in my view. Europe will take another three years or
so to start mending. And China, anyway, guided that they don’t even
want to target 10-12% growth rates anymore. They are looking at more
like 7% now. And they are going to go through fairly major transformation
from an export-oriented economy to being a consumer-based economy.
So all that probably -- they move very fast, anyway. But let’s say it takes
time a couple of years. So this is my best guess anyway, or speculation
of what could pan out.
Moderator:
Thank you so much. The next question is from Mr. Indrajeet from
Macquarie Capital Securities. The line has been un-muted, you may go
ahead and ask your question, sir.
Indrajeet:
Thanks for taking my question. A couple of things. First is you mentioned
90 crores low horsepower exports for the quarter. Now, are these coming
entirely or some part is of that from the new facility and how do you
expect your capacity utilization and the new facility to pan out with near
term and with three-year perspective. So how big that opportunity can
become.
Anant Talaulicar:
So in this quarter, the new facilities were in the ramp-up mode. So a
proportion of the 90 crores came from this new facility. But as you start
looking out over the next couple of quarters is the new facility that will
entirely provide all the exports. Now, in the long term, we’ve got a
capacity of approximately 35,000-36,000 units per year. And at that sort
of full capacity utilization that will be over 1000 crores of business for CIL.
Indrajeet:
Okay. And do you think that your, I would say, sister companies in
various emerging markets, they have already started to kind of invest
into creating a channel for this low horsepower engines or that is still
something which is in very early stages? Because that would be
contingent to you reeking that full capacity utilization. And any rough
sense timeline that this could be three years, five years or even longer to
get there?
Anant Talaulicar:
Yeah, those channels, to your point are being developed. That process
has already started. But it’s not concluded. It’s a mixed bag, I would say.
There are some distributors that are very capable, others who are still
incapable. And my guess would be probably a three-year journey that
we’re looking at in terms of building appropriate channel capabilities
worldwide.
Indrajeet:
Okay. Second question is on tax rate. Now, with this new facilities
starting to take over the entire LHP export production, do we see more
benefit from tax rate coming through? So what would be the number that
we should look at for, FY14 and then sustainable tax rate numbers?
Anant Talaulicar:
I would estimate that the tax rate would go down by a couple of points
based on the new facility ramping up.
Indrajeet:
Okay. We are currently at 27% in Q1 and so it’s established 25% should
be the number we look at?
Anant Talaulicar:
Right.
Indrajeet:
Okay. And last question from my side is on the expenses side, if you look
at staff expenses, they’re being kind of almost marginally down. Is there
something these sustainable number or we see again pick up in the cost
as volumes start to come and get better? So is there a part of contractual
workers employable will again go up as volumes pick up? Is there
something like that, the way to look at it?
Anant Talaulicar:
Yeah, they would go up. In fact, our merit increases, for example, for
professionals take effect July 1. So you are going to see that, in fact from
this quarter, for example. So that’s probably not a sustainable number, it
will grow. But I can assure you, there’s a lot of scrutiny on that number.
And unless business conditions improve, we are going to be holding a
pretty tight lid on all expense.
Indrajeet:
Okay. Thanks a lot.
Anant Talaulicar:
Thank you. Perhaps you could take one last question.
Moderator:
Sure, sir. Well, we will take the last question. And the question is from
Mr. Nainesh Rajani from Tata Mutual Funds. Your line has been unmuted, you can go ahead and ask your questions, please.
Nainesh Rajani:
Thank you very much, sir. Sorry, in case if I’m repeating a couple of
things, as I joined in the call a bit late. For your high horsepower, sir,
what is the capacity utilization levels at this point in time?
Anant Talaulicar:
About 50%
Nainesh Rajani:
Sir, you mentioned in between that southern region, as far as power
generation is concerned is going off to some extent. Now, going forward
do you see the other piece of the business in terms of industrial
automotive to be able to compensate for the slowdown or the de-growth
that you are seeing in the power generation domestic market?
Anant Talaulicar:
Auto certainly - auto would not be able to compensate because it’s a
much smaller business. The industrial can compensate to some extent
but again the power generation business if you look at the mix of our
total business is the largest piece. So the other two will not be able to
entirely compensate, they’ll have some - well, auto I’m not expecting
significant recovery in the short term but industrially there are some
bright spots that could help.
Nainesh Rajani:
Sir the third thing is the CPCB norm norms which you’re saying will be
implemented and the volume of take for that can happen in the fourth
quarter, does your flat guidance indicate, revenue guidance indicate
some sort of optic from on account of this CPCB norm change?
Anant Talaulicar:
We are predicting and assuming that the regulation does go into effect
on the first January 2014. We expect the pre-buy impact to happen in the
third quarter. But then that could be followed by a post pre-buy impact if
you want to say - probably negate each other largely is what I expect.
Nainesh Rajani:
Sir because you’re speaking to few of your competitors and they
mentioned that there could be some kind of delays as far as CPCB
norms are concerned and hence is there a possibility that in case if there
are some delay as far as these norms are concerned, our guidance for
revenue can be further lower down?
Anant Talaulicar:
Probably, not significantly for the entire fiscal year. As I mentioned there
might be a quarter to quarter impact but not for the entire fiscal year.
Nainesh Rajani:
So for the entire fiscal year irrespective of the CPCB norms you’re saying
that flattest kind of revenues is possible at this point of time.
Anant Talaulicar:
It’s possible, yeah.
Nainesh Rajani:
Sir my last question would be on the operating margins, you indicated
that the competitive intensity has increased and obviously your capacity
utilization is slightly lower. Margins you’ve already mentioned that that
can be 50 basis point lower than what you’ve reported in this quarter. On
account of low volumes and increase in competitive intensity do you see
that being under pressure and can follow up from this level significantly.
More than 100 basis...
Anant Talaulicar:
No, I don’t see any significant because intensity is already there, we are
dealing with that intensity currently. Yeah, on that point I don’t expect
significant impacts to the margins.
Nainesh Rajani:
All right sir. That’s all from my and thanks a lot and all the very best sir.
Anant Talaulicar:
Okay. Thank you ladies and gentlemen, I greatly appreciate all of your
interest and very insightful questions. I think again as you’ve seen the
company is facing very strong headwinds at this point which are outside
our control but I believe that the company is pulling all the levers very
well that are within our control. I’m feeling very well with the way we are
executing and some of the actions that we are taking right now are
positioning ourselves very well for the eventual and inevitable upturn that
will take place. Economies don’t stay depress forever as we all know.
And Cummins is very placed to take full advantage of the recovery based
upon our leading market positions, the scale that we have and the very
strong relationships that we have with our customer partners and
supplier partners etc. The un-match technology that we can offer at very
competitive pricing to Indian market as well as overseas, so with all of
that and with very strong talented team that we have in place, I continue
to remain optimistic about our long term prospect and we are very well
position to face any sort of fluctuations and downturns in the market
place based upon a very strong cash flow and balance sheet. So thank
you very much for your confidence in Cummins India Limited.
Moderator:
Thank you very much, sir. Thank you ladies and gentlemen for joining
the conference call. With this we conclude it for today. Wish you all a
great day ahead and a weekend too. You may disconnect your lines,
thank you so much.