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Edited Transcript of CUMMINSIND.NSE earnings conference call or presentation 25-Oct-19 5:30am GMT

Half Year 2020 Cummins India Ltd Earnings Call

Pune Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Cummins India Ltd earnings conference call or presentation Friday, October 25, 2019 at 5:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ashwath Ram

Cummins India Limited - MD

* Rajiv Batra

Cummins India Limited - CFO and Head of Internal Audit, Government Relations & Facilities

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Conference Call Participants

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* Abhishek Puri

Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power

* Aditya Mongia

Kotak Securities (Institutional Equities) - Research Analyst

* Anupam Goswami

Stewart & Mackertich Wealth Management Ltd., Research Division - Research Analyst

* Atul Tiwari

Citigroup Inc, Research Division - VP and Analyst

* Bhavin Vithlani;SBI Mutual Fund;Senior Analyst

* Puneet J. Gulati

HSBC, Research Division - Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Renu Baid

IIFL Research - VP

* Sandeep Tulsiyan

JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst

* Sujit Jain;ASK Investment

* Varun Ginodia

AMBIT Capital Private Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, everyone. I am Hurkikabo, the moderator of this call. Thank you for standing by, and welcome to analyst call. (Operator Instructions) So I would now like to hand over the proceedings to the Managing Director, Mr. Ashwath Ram. Thank you and over to you, sir.

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Ashwath Ram, Cummins India Limited - MD [2]

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Good morning, ladies and gentlemen. This is Ashwath Ram, the Managing Director of Cummins India Limited. Thank you very much for participating in this call. I'd like to convey the financial results of quarter ended September 2019 through this call.

Our total net sales is INR 1,285 crores, which has declined by 2% compared to INR 1,316 crores recorded in the preceding quarter.

Domestic sales stands at INR 947 crores, which have declined by 4%. Our exports grew by 3% at INR 337 crores. Our profit before tax at INR 210 crores is higher by 8% compared to INR 194 crores recorded in the preceding quarter.

When you compare this quarter with the quarter ended September 19, 2018, our net sales of INR 1,285 crores declined by 11% compared to the same quarter last year. Domestic sales which stands at INR 947 crores dropped by 6% and exports at INR 337 crores dropped by 25%. Our profit before tax at INR 210 crores is 29% lower as compared to INR 294 crores recorded in the same quarter last year.

Getting into the segment-wise breakup. To give you the -- a sense of the sales breakup by segment. Domestic, the industrial domestic business sales were at INR 214 crores, which denotes a 10% drop over last year. Our Power Generation domestic sales were INR 394 crores which is a 4% drop over last year. The Distribution business sales were INR 330 crores which is a 5% drop over last year.

Exports. The High Horsepower exports were INR 205 crores which denotes a 12% decline over last year. Our Low Horsepower exports were INR 111 crores, which denotes a 41% decline over last year.

I'll now give you our comments in the financial guidance.

In terms of sales outlook for the full year 2019-'20, I would like to revise down the target at 3% to 5% growth for domestic and negative 20% for exports business. The current sluggishness in the Indian economy arises from several factors including the prevailing liquidity situation, delays in awarding of infrastructure projects, banking sector including the shadow banks continuing to sort through their funding constraints. These factors have all resulted in reduction in demand across our key segments in the domestic business.

In our estimation, this is likely to play out further for some time with a gradual revival thereafter. The government had already undertaken significant actions to boost the economy, including allocating incremental funds to the execution of infrastructure projects, easing out liquidity as well as reduction in corporate tax rate accompanied by interest rate cuts.

Our confidence in the medium- to long-term outlook on domestic sales, especially from the infrastructure sectors, is high. Once the fund allocation from the fiscal union budget starts to positively impact this sector, we will see this area start to revive.

Export markets have continued to display softness in recent quarters, arising from the global economic challenges. In this quarter, we also experienced decline in certain markets with the global Power Generation business, based on difficulties that some of these economies are now experiencing.

We have initiated internal actions to curtail overall spending significantly to essential only, as well as improving on the efficiency of our internal processes and product coverage, creating a strong environment of cost consciousness. We continue to be positioned to outperform in our industry, and continue investing judiciously in product enhancements. We continue to focus on increasing our customer outlooks while maintaining productivity and quality as strong focus areas as well as continue delivering value to all our stakeholders.

With this, I would like to open the session for questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question of the day we have from Sandeep Tulsiyan from JM Fini.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [2]

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My first question is pertaining to the gross margins particularly. We have seen a very sharp decline of 300 basis points in the gross margins in this quarter in this first half. If you could help us understand how much of this is purely driven by a mix change, and how much of it is more driven by competitive pressures like you're not able to take price hikes, or you've taken price cuts in certain categories as we have also observed that Cummins is gaining share against the other competitors. And how much of this is reversible from a near- to medium-term perspective out of this 300 basis point loss in the gross margins? That's my first question.

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Ashwath Ram, Cummins India Limited - MD [3]

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So I can answer that by saying that the biggest chunks of the loss of margin are caused by mix and by FX impact. We also see some impact due to commodities, which we should recover in subsequent quarters, and a little bit this quarter with some of the regrouping that we have done. But actually, from a pricing perspective, we've actually been able to realize slight improvement in margin because of pricing. But certainly, we don't have the leverage to increase price significantly in a softening kind of market. So to answer your question, until the mix improves, I don't see us being able to significantly improve margins.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [4]

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So my second question is pertaining to the exports comment that you have given in the press release that certain markets within power gen are experiencing some difficulties is what you mentioned over there. What I want to understand is, are these LHP markets predominantly in the Middle East/Africa that we're talking about? And are these issues more structural in terms of currency depreciation? Or are these cyclical demand issues which may get recouped in the near term?

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Ashwath Ram, Cummins India Limited - MD [5]

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Yes, as a matter of fact, the biggest areas of drop has been in -- actually, for the first time, we have seen a significant drop in pretty much all markets around the world, but the biggest drops I see are in mainly Middle East and Africa. There, we've seen greater than 50% reduction in demand as compared to the last year. But the story is similar for other parts of rest of Asia and in other markets as well. And so I'm not entirely -- you cannot attribute just currency issues to be the main factor. We are seeing the weakness in those markets as well.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [6]

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Okay, and the last question, sir, is on the CapEx. So given all this weakness in demand, we have always guided for like INR 250 crores to INR 300 crores kind of an annual run rate. Are we likely to trim that number to probably include the balance sheet and the cash flows or that is the amount of CapEx that is required to maintain this yield?

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Ashwath Ram, Cummins India Limited - MD [7]

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So it is the kind of CapEx that is required to maintain the future growth. And as we have indicated in the past, there are many major emission changes which are coming to our market especially in the power generation and in the construction markets. And to lead in those kinds of markets, we need to make those kinds of investments.

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Operator [8]

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Next we have Renjith from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [9]

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Sir, I just wanted to understand, is there any impact because of the floods in [Kola Bihar]? Because most of your customers come from Kola Bihar , so because of that was there any impact on our production?

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Ashwath Ram, Cummins India Limited - MD [10]

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We did have minor disruptions because of that but not significant enough to impact the result in any manner. Those were more disruptions in the supply chain and then having to scramble at the end of the month to try to ensure most of the shipments were met. But not significant enough that it will impact the business in any manner.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [11]

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And sir, if we look at the overall power gen, if you can throw some more light into the segmental breakup of power gen, and which are the subsegments which are impacted more and where are you seeing growth in terms of HHP, MHP LHP?

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Ashwath Ram, Cummins India Limited - MD [12]

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Yes. So the overall slowdown of our economy in India has pretty much resulted in all market segments slowing down. We have some catch-up work to do in our Low Horsepower segments, and so we saw some growth in the Low Horsepower segments this quarter, but the major indicators all are pointing towards [all] slowdown in this sector as well because due to the overall slowing down of the Indian economy. Now when you look at each segment within the economy, or within the economy that impacts power gen, then I would say that infrastructure, manufacturing, those are the segments which are impacted more significantly, whereas segments such as data centers, large retail continue to go ahead with the projects which are already in the pipeline.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [13]

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Okay. And can you just give [me like] how big is our data center in the overall sales of power gen, and what kind of growth is there in power -- the data center market? Hello?

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Ashwath Ram, Cummins India Limited - MD [14]

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Yes, sorry. I was just looking up the data for that, so sorry about that. That business that gives us roughly about INR 75 crores to INR 80 crores, and is growing at a CAGR of 10% to 12% annually.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [15]

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Okay. And this INR 75 crores to INR 80 crores is for this quarter?

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Ashwath Ram, Cummins India Limited - MD [16]

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No, this is more of an annual number.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [17]

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Okay. And lastly, if you can give the break up you give for every quarter regarding LHP, MHP and HHP for the power gen segment?

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Ashwath Ram, Cummins India Limited - MD [18]

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So the High Horsepower business did about INR 165 crores. The Medium Horsepower business did roughly about INR 120 crores and the Low Horsepower business did about INR 110 crores.

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Operator [19]

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Next we have Abhishek Puri from Axis Capital.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [20]

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Sir, if you can just break up on the Industrial business as well? I mean from construction, compressors, mining et cetera?

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Ashwath Ram, Cummins India Limited - MD [21]

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Sure. The compressor business did around INR 25 crores. The construction business did around INR 55 crores, mining did around INR 13 crores. Rail did around INR 105 crores. Marine did close to INR 10 crores and everything else did close to INR 10 crores.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [22]

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Understood. And secondly, on exports, I mean the Middle East and North American market GDP growth has not been that weak. So is there some structural change in the economy that you're seeing which is why the demand is weakening there?

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Ashwath Ram, Cummins India Limited - MD [23]

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Actually if you look at markets such as North America, first of all, North America is a very small market segment for our products. Those are mainly served out of the North American market itself. We serve the rest of the world and the rest of America, and we have seen significant slowing in the [power generation] coming out of those markets. I'm not sure how I can correlate it directly to the GDP of those markets. But just to tell you that the United States is a very small market for us from India, whereas the rest of the world, especially in Middle East and Africa are the most significant market for us which are impacted quite significantly by their economic conditions. We are certainly...

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [24]

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I'm talking about the Middle East. I was talking about the Middle East one only. Because the GDP growth, I think are -- is between 2%, 2.5% to 3%, 3.5% for the last couple of years. So is there any significant slowdown in GDP or is there any structural change that you're -- we're seeing in that market that is leading to people using less [DTX] or industries using less DTX or the growth in the commercial real estate market is slowing down. I'd like the way you're seeing the slowdown in the Indian market. I mean is there any structural slowdown or is it more of a specific sectors that are slowing down that are impacting our growth?

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Ashwath Ram, Cummins India Limited - MD [25]

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I will have to defer on that question what are all the factors which are causing the slowdown. All I can indicate at this time is we have seen this for quite a few quarters sequentially that the markets are slowing down in some of those countries. And what are all the factors which are leading to that and the correlation to their own GDP, I'll probably have to get back at a later stage on our analysis on that.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [26]

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Understood. And lastly in terms of some of the themes that you mentioned there, we had opportunistic pricing in the LHP segment locally to gain more volumes. But I think your volumes have picked up for you to some extent on the LHP side. Is that the reason for margin dilution? Or are we getting back in terms of pricing? Is it because of the competitive intensity? And if you can specify that.

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Ashwath Ram, Cummins India Limited - MD [27]

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I think the Low Horsepower business is always the most competitive business from a pricing perspective. So if you sell more in Low Horsepower certainly, it will have a relative impact on margins decrementally. And as we all know, with the market, overall market slowing down, certainly competitive pressure is more intense. So certainly, that does have - play a factor as we fight for market share, that there will be a little bit of impact there. But it is not significant. That is not the big reason for the market decrement.

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Operator [28]

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Next, Renu Baid from IIFL.

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Renu Baid, IIFL Research - VP [29]

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So my first question, I just want to understand more from the exports now that if you consistent of a sequential duration over the quarters, [can you already see the exports here bottoming] out? Because when you see from the HHP exports sequentially just seeing some improving back to INR 200 crores. LHP has continued to drop. So where exactly should we look at the days minimum volumes which should sustain even if global GDPs are to contract or remain broadly stable in the [immediate]? So how should we look at the worst for the exports from the near to medium term perspective?

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Ashwath Ram, Cummins India Limited - MD [30]

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Yes. So that is a very good question and a very tricky question because it's very difficult to predict. But when we talk to our counterparts in the global market, when we talk to the sales folks in the global market, the local people, et cetera, the indication that we are getting is that I don't think we have seen the worst yet because typically what happens is the next quarter, which is the last quarter of the year is when people do their final corrections of inventory. So I think we are close to the bottom, but I won't -- I won't be bold enough to say it's not going to get a little worse before it starts getting better.

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Renu Baid, IIFL Research - VP [31]

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So probably December quarter could further see some inventory correction global level and thereafter probably from the fourth quarter next calendar year onwards, we could see some signs of bottoming out?

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Ashwath Ram, Cummins India Limited - MD [32]

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That's the broad indication we are seeing. Like I said, because [we have taken loss], we think we are very close to the bottom now, but it is very difficult to predict in exactly which part of the export business you've already got in there and you turn around in this part, so there is still some more inventory correction to be done.

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Renu Baid, IIFL Research - VP [33]

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So second would be on -- you've mentioned that Middle East and Africa is further [strong] by 50%. So any insight you can give with respect to how has been the split between our various markets in the first half, and the respective performance where it makes both side.

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Ashwath Ram, Cummins India Limited - MD [34]

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I'm just looking at that information.

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Renu Baid, IIFL Research - VP [35]

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Yes, in the case of...

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Ashwath Ram, Cummins India Limited - MD [36]

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You want to know first half versus second half, is that what you're asking for us?

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Renu Baid, IIFL Research - VP [37]

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The first half '20 performance, how does the export stack up regionally, and what kind of decline have you seen in these large geographies?

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Ashwath Ram, Cummins India Limited - MD [38]

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Yes. So like I mentioned earlier, the biggest drops I would say are in Middle East and Africa. And whenever I look at those kind of numbers, I've seen in excess of 50% or closer to 50% is the kind of drop we're seeing. The other regions like Brazil as well as some of the other regions in Latin America have -- Brazil has dropped the most in Latin America within which it has dropped close to 40%. Actually, the rest of Latin America has actually not dropped as much. As a matter of fact, we have a little bit of growth in that market. But rest of Asia has also dropped pretty significantly, dropped over 30%, and we've also seen some of the shipments that we do to China has dropped off by about close to [30]%.

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Renu Baid, IIFL Research - VP [39]

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And Europe?

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Ashwath Ram, Cummins India Limited - MD [40]

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Europe is kind of holding steady at roughly about a 25% to 30% drop.

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Renu Baid, IIFL Research - VP [41]

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Okay. And just to put into perspective, Middle East and Africa combined should be nearly 50% of the revenues, or slightly lower?

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Ashwath Ram, Cummins India Limited - MD [42]

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Middle East and Africa should be about at least 30% of our revenue, 35% of our revenues.

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Renu Baid, IIFL Research - VP [43]

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1/3 combined?

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Ashwath Ram, Cummins India Limited - MD [44]

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Yes.

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Renu Baid, IIFL Research - VP [45]

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So second perspective would be on, recently we had the new corporate tax policies been announced trying to encourage more domestic manufacturing. And last quarter, we had highlighted that we saw some green shoots of local [closing] or supply chain movements coming in the component side for the intra-technologies [around or in]. So how should we, as in as India holders [in coming developments] likely opportunities for CIL to benefit from any supply chain movement for reallocation from China, if at all? And which -- can we expect that there could be some export-oriented product lines being added? Or the India portfolio is likely to be the way it is and no material changes from this?

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Ashwath Ram, Cummins India Limited - MD [46]

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As of now, we are not seeing any significant changes to the portfolio. We did see a little bit of advantage in the previous quarter in our alternator business, but nothing else we have seen an impact on so far.

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Renu Baid, IIFL Research - VP [47]

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[But for] anything from a medium term from a 2- to 3-year perspective you think there could be some positive movements to our portfolio? Or it would be too early at this point of time to comment?

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Ashwath Ram, Cummins India Limited - MD [48]

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As I indicated last time, the -- currently, India is a lagging market as far as emissions is concerned in the power gen industry. As we move towards the leading market once CPCB4 plus comes in, and the technology we are using is very similar with what some of the other markets are using, then there is a chance that opportunities could increase, but it's a little [while early].

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Operator [49]

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Next we have Bhavin Vithlani from SBI Mutual Funds.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [50]

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So the question again is on exports. What we understand from the channel is there was some issue with respect to the sanctions on Turkey and Iran. And again, on the Africa side, there is growth in markets like Nigeria where redistribution on the Cummins side has been weak and where some of the stronger distribution in these markets are not doing well. So your comments on that will be helpful. And any work which is going on which will strengthen the distribution within the Africa. So the economies which are growing stronger and getting larger, we will have this, much more on that?

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Ashwath Ram, Cummins India Limited - MD [51]

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So Cummins has what we call an Africa ABO, which is very similar to an India ABO, which is an area in which a business operates, which looks at all the markets and looks at all the opportunities and then tries to set up the right kind of resources to exploit or to grow in those markets. And those folks have been working pretty significantly and very closely. We have over the last, close to a year, assigned dedicated resources within the India CIL structure to be able to focus on those markets, try to understand what it is in those markets, which is either causing the market to slow down, or what could be done even if the market is slowing down to increase our presence and our market share in those markets.

Now it's ongoing work, and I can't at this stage report that we've had any major breakthroughs or critical success. But we are highly focused in this area. We understand the importance of this markets to the success of our business here in India. And we are putting in the right kind of resources to try to get a better understanding of what's happening and getting into all that.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [52]

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Sure. The second question is along a similar line. So in the annual report, you mentioned about some new product introduction like the QSK19 where it's currently not a large part of the export portfolio. So which you also highlighted in the [annual] speech. So when do we see a growth in models like these? And like to the previous participant, you mentioned that there is a probability of you going on to developed markets once the portfolio moves through those CPCB4. So are you looking at maybe [pre-forming] some of the launch and then you can expand your addressable market on the North America and the European side where the products are meeting the emission standards of those end markets?

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Ashwath Ram, Cummins India Limited - MD [53]

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We are looking at all opportunities. We haven't found any very significant ideas as of today as many of those markets have [tend some] slowed down, and we are working in a POS-optimized standard manner even in those markets. Some of the companies in those markets are also going through a tougher kind of market situation. But we are looking for all opportunities, so we have always been open to look for opportunities and keep working on them to improve the business.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [54]

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And sir, on QSK19, it's another significant highlight, when can we see the export of this model actually pick up?

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Ashwath Ram, Cummins India Limited - MD [55]

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Actually, specifically, I don't have an exact date or time when this is, but we are exploring options on there, this product, once we have reached a POS-optimized volume, or a POS-optimized structure with that product here. We are looking and exploring some options of where we can try to export this product.

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Operator [56]

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Next we come to Varun of AMBIT Capital.

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Varun Ginodia, AMBIT Capital Private Limited, Research Division - Research Analyst [57]

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My question first is, can you give a sense of the inventory levels at global distributors? You said before that it's normally in the range of 30 to 60 days. So where the normally lies now? And secondly, on tax rate, in the second quarter, the number was very low. So what was the driver behind that?

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Ashwath Ram, Cummins India Limited - MD [58]

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Right. So first I'll answer the question on inventories, and all I can tell you about inventories is they are at a similar level as they were in the last quarter, and on the taxation portion, I'll let Rajiv answer that question.

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Rajiv Batra, Cummins India Limited - CFO and Head of Internal Audit, Government Relations & Facilities [59]

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Yes, the tax rates at the outset, I wish I could enjoy that tax rate for quarters to come. So clearly, there is a reversal today here, and that is on the deferred tax that we have provided entire rates, where we are now bringing up. So it's a onetime the number that you're getting. Next quarter onwards, we will step back with an elected new rate, which will be about 25.2%. Still, on a full-year basis that will give us a benefit of between INR 30 crores to INR 40 crores a year.

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Varun Ginodia, AMBIT Capital Private Limited, Research Division - Research Analyst [60]

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My sense was that the reversal of deferred taxes, you can't take credits taking forward if you're opting for a new regime. So can you take them at lower rates going forward? Is that possible?

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Rajiv Batra, Cummins India Limited - CFO and Head of Internal Audit, Government Relations & Facilities [61]

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That is exactly what happened this quarter. Whatever we had [reported] in the past of 34%. [What we are bringing now down] would be the tax rates. So that is the onetime effect if you take these at new rates.

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Operator [62]

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Your next question is from Puneet Gulati at HSBC.

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Puneet J. Gulati, HSBC, Research Division - Analyst [63]

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Can you give some more color on what's happening on the distribution side of the business, which product is seeing the [gulf] biggest increase in volume more than others?

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Ashwath Ram, Cummins India Limited - MD [64]

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Pretty much, we're seeing that parts, with the overall economy slowing down, we are seeing that sales of parts has slowed down a bit. We are also seeing that some of the new engine sales have also slowed down a little bit. I think this business is actually holding out quite well, and we are pretty confident that we won't see too much of an impact in the business.

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Puneet J. Gulati, HSBC, Research Division - Analyst [65]

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But is it more in the steel genset parts-driven or in the power gensets parts-driven?

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Ashwath Ram, Cummins India Limited - MD [66]

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It's both because they are not using equipment that much. So certainly on the industrial side there is a bit of a slowdown and then equipment is not being used that much to build the roads or to build the highways, then you don't do as much maintenance and you don't sell as many parts. So it's a combination of both the [lower volume] on the power gen side, if you don't -- if manufacturing is not working at full power then the factories are not running 24/7, then it's likely that even that equipment is not used as much and so the requirement of parts is slightly lower.

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Puneet J. Gulati, HSBC, Research Division - Analyst [67]

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Okay. So the other thing I couldn't quite understand was your total exports declined by 25%, but when I look at the break up that you've given geography-wise, everything seems to be upwards of 20%, 25%, what [leads to set it down 50%, 30, 40%] Asia minus 30%, Europe minus 25% and China is minus 20%. So is there some part of the business that you didn't mention that actually grew to take care of some of the lower decline then what were showing in these geographies?

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Ashwath Ram, Cummins India Limited - MD [68]

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Yes, we had a -- like I mentioned, we had some sales to the U.S., a very small percentage, a small value that declined by only about 14%, 15%. We actually had some increase in sales to Mexico. It actually grew by about 200%, but on a very small base. We sell spare parts into those regions as parts have [exposed] that didn't drop as much. So we sell some into the U.K. which dropped by only about 20%.

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Puneet J. Gulati, HSBC, Research Division - Analyst [69]

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Okay. So are you finding newer geographies now, apart from this is there anything else that you can target to ensure that the sales decline don't continue at this rate?

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Ashwath Ram, Cummins India Limited - MD [70]

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We have leads to already [140] countries. And so certainly, we are not going to leave any stone unturned to see if there's any opportunity in any market, we will try to capitalize on that, because we depend so heavily on exports. So yes, it's certainly a priority for us to focus on.

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Puneet J. Gulati, HSBC, Research Division - Analyst [71]

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Okay. And lastly can you give some color on what would be your capacity utilization now?

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Ashwath Ram, Cummins India Limited - MD [72]

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Anywhere between 50% to 60%.

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Operator [73]

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Next is of Atul from Citi.

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Atul Tiwari, Citigroup Inc, Research Division - VP and Analyst [74]

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Yes, thanks, my questions have been answered.

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Operator [75]

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Next we have [Ajin Kierbat] of Macquarie.

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Unidentified Analyst, [76]

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Sir, my question pertains to a comment in your press release as well as initial remarks that now you have taken internal initiatives to curtail costs to essentials only. Now my question is, even historically comments have always been in that continuous improvement mode you have had these ACE and AMaZe programs that have been going on for a few years. So what different is now being done under this new initiative, what are these nonessentials that you're trying to curtail, and are there any internal targets, if you could please quantify?

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Ashwath Ram, Cummins India Limited - MD [77]

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Yes, so to clarify the ACE project, which is called Accelerated Cost Efficiency, and the AMaZe project which is more focused towards quality, those have been focused -- the ACE project has been more focused on material costs, and certainly that work also continues. But now the more increased focus is on reducing the cost overheads. And with that in mind, there is significant pressure we are applying to reducing like travel, reduce cost of maintenance, reduce all -- reduce headcount and balance out all of those in line with utilization. So that's where the biggest focus areas are going to be, to look at all other areas of overhead which the company incurs, while also putting focuses on the material cost [that we have].

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Unidentified Analyst, [78]

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Okay, and then are there any internal targets or any broad view how much you want to save within this year or by the end of next year?

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Ashwath Ram, Cummins India Limited - MD [79]

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I won't comment on that right now, other than to say that they are pretty significant and we'll let the numbers speak for themselves in subsequent quarters.

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Unidentified Analyst, [80]

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Okay, sir, and just one related question, especially since you mentioned about potential that some of these cost cuts could be headcount. Will this program then probably see an increase in maybe outsourcing instead of in-house manufacturing, especially for those engine models which may not have significant volume to justify in-house manufacturing? Because you've had this mix of outsourcing as well as in-house manufacturing, right?

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Ashwath Ram, Cummins India Limited - MD [81]

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Yes. So as you can see, our capacity utilization is at between 50% to 60%. So the opportunities for increasing outsourcing are diminishing. But we are looking at all ideas.

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Operator [82]

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Next is Sujit Jain from ASK Investment.

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Sujit Jain;ASK Investment, [83]

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Sir, have we lost market share in export markets, important markets such as Middle East and Africa?

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Ashwath Ram, Cummins India Limited - MD [84]

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Our analysis currently says we don't think we have lost market share, and we have seen a similar decline with our competitors as well.

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Sujit Jain;ASK Investment, [85]

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And what is our market [it has been] in MHP and HHP in the domestic power gen business?

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Ashwath Ram, Cummins India Limited - MD [86]

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We don't share the exact market share information, but all I can tell you is that it continues to be strong and we are holding onto market share.

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Sujit Jain;ASK Investment, [87]

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I'm not looking for exact numbers, but incrementally, have you gained, lost, has it been stable?

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Ashwath Ram, Cummins India Limited - MD [88]

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It has been stable. In the High Horsepower business we continue to gain a little bit of market share.

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Sujit Jain;ASK Investment, [89]

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Understood. But is it at the cost of price pressure?

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Ashwath Ram, Cummins India Limited - MD [90]

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Not at this time. But even though, like I mentioned, there was a change in the mix, certainly causes impact to margin because the Low Horsepower business is lot more competitive than the High Horsepower business.

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Sujit Jain;ASK Investment, [91]

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Understood. And one last quick clarification. In the [modular] data centers, to an earlier question you said that at annual size, in terms of returning for us is about INR 80 crores. Is that the correct understanding?

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Ashwath Ram, Cummins India Limited - MD [92]

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Yes.

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Sujit Jain;ASK Investment, [93]

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Okay. And what is the total size of the data centers market currently in India, and overall market share you would be having there?

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Ashwath Ram, Cummins India Limited - MD [94]

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We think it's somewhere between INR 100 crores to INR 125 crores.

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Sujit Jain;ASK Investment, [95]

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Okay. Okay. Because we had an earlier understanding that was run by the previous management, and the previous comment was that probably we had -- the [Asian] side of the market was bigger; it was growing at 20%, 25% of CAGR, and our market share was about [28%] there.

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Ashwath Ram, Cummins India Limited - MD [96]

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I think if you see the earlier numbers as compared to where they were last year, we are seeing a dramatic growth in that segment. But based on what we are seeing now with the overall infrastructure slowing down a bit, we are now indicating close to a 10% to 15% CAGR moving forward in this segment.

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Operator [97]

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Next we have [Barak] from [Vian Ensus].

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Unidentified Analyst, [98]

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Sir, just wanted to understand, what's the outlook for margins in the medium to long term given that we've not seen benefits on the RM side as we [had planned]. While we're working on the longer term offsetting this, but we haven't seen a massive or a substantial reduction in other spending also. So how should this pan out, say over the next 3 to 4 quarters?

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Ashwath Ram, Cummins India Limited - MD [99]

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I think [that where we can get it] is likely to be -- likely to remain at these levels unless we see improvement in the export markets. So that's where we think we are likely to be. The next 2 or 4 quarters we have to get -- we think there's likely to be a bottoming out of those markets and then a gradual improvement. So we don't see any significant change from the levels we have.

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Unidentified Analyst, [100]

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Okay. So now that -- I mean, you were earlier executing [63%] order in raw material sales. [Then it's the raw material prices in there and commodities, is there some now we will still remain at around what you are still thinking to expect]?

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Ashwath Ram, Cummins India Limited - MD [101]

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We are likely to see a little bit of improvement in the commodity. What we lost in commodity in third quarter, a little bit of that will come back in subsequent quarters. But that's to the tune of somewhere between 0.3% and 0.5%, not very significant.

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Unidentified Analyst, [102]

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Okay, and this run rate of about INR 160 crores, INR 170 odd crores of operating expense, I am thinking this will have some [spending then on your variable] expense also, so despite the 12% [of expend on your] revenue, 11%, 12%, this is down only 2%. And so how should this pan out then?

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Ashwath Ram, Cummins India Limited - MD [103]

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I think there is an opportunity from the way we are looking at it -- there's a very large chunk of fixed cost in there, but there are some opportunities to improve on this as part of the overall overhead reduction.

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Unidentified Analyst, [104]

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Okay. So I mean net-net, if I understand correctly, you're saying that it's only about product mix and that [share is those variable margins and so will remain available] margin?

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Ashwath Ram, Cummins India Limited - MD [105]

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Yes, that after all our cost reduction efforts, maybe you'll see some improvement, but not to be expected that we can recover from the impact of exports, exports not recovering.

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Unidentified Analyst, [106]

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And then if I'm right, when you say product mix you mean more of LHP than HHP or you mean exports or domestic, or you mean both?

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Ashwath Ram, Cummins India Limited - MD [107]

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Both. Both have a big impact. One is the mix between exports and domestic and the second is the mix between LHP versus high -- versus HHP. Because the LHP continues to remain strong and keep growing and HHP doesn't do as much, we still see an impact of that mix as well.

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Unidentified Analyst, [108]

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Okay. And sir finally, in your last quarter something was mentioned around you were looking around a [task force] to have a distribution team in Africa which will get us some orders which have higher gross margin. Any update on that?

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Ashwath Ram, Cummins India Limited - MD [109]

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So that will continue, and we have people out in the field of -- of all the travels that we have curtailed and we are planning to curtail, that is one travel we are not curtailing, where we do have people out in the field trying to understand those markets, understand the competition and try to keep working on increasing the business over there.

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Unidentified Analyst, [110]

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Okay. So when do we see this distribution?

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Ashwath Ram, Cummins India Limited - MD [111]

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We targeted a very small area close to a year ago. We are continuing to [build] and enhance that.

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Unidentified Analyst, [112]

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Okay. And as of now, we see that this volume that we want from [the task force] is not significant?

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Ashwath Ram, Cummins India Limited - MD [113]

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No, because we have not been able to curtail the impact of the significant slowdown in those markets.

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Operator [114]

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Next we have Anupam Goswami from Stewart Mack Wealth.

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Anupam Goswami, Stewart & Mackertich Wealth Management Ltd., Research Division - Research Analyst [115]

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Sir, you mentioned some green shoots in the economy. But in the domestic and export, how much is [the time which] is from the economy in this?

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Ashwath Ram, Cummins India Limited - MD [116]

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I wish I had a crystal ball that I could give you an exact time, but I'll give you my 2 cents for whatever that's worth. I think you should start to see a little bit of improvement at least in some of the infrastructure projects by Q1 of next year. But the overall -- these changes which the industry is expecting, I don't see those happening until early 2021. So even though the government is very, very active, and they understand what's happening and they're trying to do many, many things, the nature of the situation we find ourselves in this country I think will take at least 18 months to start seeing significant improvement.

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Anupam Goswami, Stewart & Mackertich Wealth Management Ltd., Research Division - Research Analyst [117]

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And so the export market [you said the number] is around 50%. Can you expect some bottoming out soon, or do you have some more time to continue [working on that]?

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Ashwath Ram, Cummins India Limited - MD [118]

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Yes. Certainly, you can expect that. We just don't know if there it is -- what we are seeing today is that bottom or is -- do we see a little more worsening before it starts getting better. But all indicators and all the conversations we have with people in those markets are we're getting very, very close to the bottom.

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Operator [119]

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Next we have Aditya Mongia from Kotak Securities.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [120]

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Sir, the question which I had was on the margins. Is it possible to quantify the difference between the export and domestic margins in the business as it stands today?

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Ashwath Ram, Cummins India Limited - MD [121]

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No, we don't do that. All we can tell you is that export margins are better than domestic margins.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [122]

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Got that. Could you subjectively highlight whether those margins on the export front have come down or have they remained steady over the past few years?

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Ashwath Ram, Cummins India Limited - MD [123]

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They have remained relatively steady. There has been no change in that.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [124]

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Sure. A related question was that over time you've seen your domestic margins come down on account of external competition which you would have seen in the marketplace. How do you see this risk of external competition to the exports business and margins going forward?

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Ashwath Ram, Cummins India Limited - MD [125]

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There's always going to be competition, but Cummins as a company is the leading technology provider in this space. So we do have product differentiation. There will always be competitive pressure, there will always be margin pressure. So the way we think about it is we have to keep working on making sure the products that we sell provide a better value than what others are able to provide. We have been able to do that. The company is in existence for 100 years this year, and we are pretty confident that in the future, we have all the investments already made. We have the technology, we have the supply chain capabilities, we have the [cost base] in India. So all of those factors will continue to be positive for us to be able to compete well in the market.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [126]

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Got that. The other question that I had is if you could provide me the breakup of exports that was slightly more granular? I think today, as of now you have provided MHP and HHP. If you can give that technical (foreign language).

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Ashwath Ram, Cummins India Limited - MD [127]

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In terms of -- what are you -- what exactly are you looking for from a granular perspective?

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [128]

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So LHP, midrange, heavy duty, those kinds of numbers here?

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Ashwath Ram, Cummins India Limited - MD [129]

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Okay. So Low Horsepower is roughly around INR 55 crores, medium-range is roughly around INR 60 crores. Heavy duty is around INR 35 crores and High Horsepower is around INR 175 crores and spare parts is around INR 20 crores.

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [130]

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Sir, the last question from my side, the Phaltan facility that you operate out of, this is export facility. Amongst these export categories, is it fair to assume that everything apart from HHP is coming from there as direct to our revenue book? What exactly is [sent from Phaltan] today amongst these categories?

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Ashwath Ram, Cummins India Limited - MD [131]

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Yes. So pretty much all of the LHP, the midrange and the heavy duty. Sorry, I'm just getting some clarification here. So LHP and midrange comes out of there. Yes, did you get the answer?

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Aditya Mongia, Kotak Securities (Institutional Equities) - Research Analyst [132]

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Yes. So you said LHP and midrange would come from Phaltan and everything else may be outside?

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Ashwath Ram, Cummins India Limited - MD [133]

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Everything else comes from Kothrud.

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Operator [134]

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Next we have Sandeep Tulsiyan from JM Financial.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [135]

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So just one data related query I had. The way you gave the breakup for exports, if you could provide the same breakup for the domestic power gen business also.

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Ashwath Ram, Cummins India Limited - MD [136]

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Okay, so Low Horsepower is roughly around INR 40 crores, midrange is around INR 130 crores, heavy duty is about INR 60 crores, High Horsepower is about INR 165 crores.

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Operator [137]

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Next is Renjith from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [138]

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Just in this [one] you had mentioned in the opening one of the questions that the gross margins were impacted due to mix of forex and the product mix. So would it be possible to quantify how much was the impact due to forex?

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Ashwath Ram, Cummins India Limited - MD [139]

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I would say roughly about 42%.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [140]

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Okay, and how do you see the gross margins? Going forward, will this improve or what is -- in the trajectory how do you see that? Are this -- should that improve because when we look at Q1 and Q2, there is a 50 bps improvement in the EBITDA margin. So do you see the trajectory of this improvement going forward? Or will it be in this similar range? How do you look at it?

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Ashwath Ram, Cummins India Limited - MD [141]

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Currently, I think it will be in the similar range.

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Operator [142]

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Next we have Bhavin Vithlani from SBI Mutual Fund.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [143]

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Bhavin from SBI. Just one quick clarification. Last year, your material margins were considerably higher. Was there any onetime benefit? Because of that we are looking at a Y-o-Y benefit. Because Q-o-Q, the material margins looks slightly better.

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Ashwath Ram, Cummins India Limited - MD [144]

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So when you [count] the material margins, I think we had a little bit of advantage because of, one is exports were a little bit higher in some of the [north]. We had also construction volume was much lower. And so construction had a much lower material margin, so that mix has helped in the material margin improvement, and there is -- there were some onetime impacts in the previous quarter, in Q1 of FY '20, which also you saw the benefit of in this quarter.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [145]

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Could you quantify the impact?

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Ashwath Ram, Cummins India Limited - MD [146]

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No, not at this time. All I can tell you is the mix has certainly contributed to -- it was a significant portion of that improvement.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [147]

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Sure. Just one -- again last clarification, the exports you gave the geographical wise breakup, everything was down 30%, 50%. Were you giving the breakup only for the MHP and LHP? Because when you gave the break up, HHP is better on a volume basis.

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Ashwath Ram, Cummins India Limited - MD [148]

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No, we gave you the overall breakup.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [149]

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Okay, because when I'm adding up I'm a little bit confused. Everything is down 30% to 50%. But when we look at your HHP, it is not that bad. MHP is actually [how it]. So it was one thing if it is only the MHP -- HHP sorry which -- LHP is the [recovery you have given].

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Ashwath Ram, Cummins India Limited - MD [150]

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No, because some -- like I mentioned some segments and some areas it is positive, and many others did not have this kind of 25% type of drop. They were below 20% because when you add it all up, it comes to about a 25% drop.

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Bhavin Vithlani;SBI Mutual Fund;Senior Analyst, [151]

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Can you share the breakup? Like you shared Africa, Middle East is 30%. I mean, if you break the geography, percentage break up, maybe you can help us a little better?

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Ashwath Ram, Cummins India Limited - MD [152]

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I think that's too much detail for me to give you at this time, but I can tell you that it adds up. The math adds up.

Okay, thank you, everyone. I look forward to talk to you next quarter.

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Operator [153]

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Thank you so much for addressing the session, sir. Thank you participants for joining in. That does conclude our conference call for today. You may all disconnect now. Thank you and have a pleasant day.