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Good morning, ladies and gentlemen. Welcome to Cummins India Limited Q2 FY 2022/'23 Earnings Conference Call. We hope you are all keeping safe and healthy. [Operator Instructions]
I now hand the conference over to Mr. Ashwath Ram, MD Cummins India Limited. Thank you, and over to you, Mr. Ram.
Good morning, ladies and gentlemen. I'm Ashwath Ram, Managing Director of Cummins India Limited. Mr. Ajay Patil, our CFO, is also on the call with me. Thank you all for joining us on this call today.
I hope all of you had a great and safe festive holiday season. We are happy to announce that CIL has achieved the highest quarterly revenue and profit due to strong demand across various market segments and geographies. Now I would like to share the financial results of Q2 FY '23 through this call.
For the quarter ended September 30, 2022, with respect to the same quarter last year, our sales at INR 1,922 crores were higher by 14% compared to INR 1,689 crores recorded in the same quarter last year. Domestic sales at INR 1,391 crores were higher by 11%. Exports at INR 531 crores were higher by 21%.
Profit before tax and exceptional items at INR 336 crores is higher by 15% compared to INR 293 crores recorded in the same quarter last year. For the quarter ended September 30, 2022, with respect to the last quarter, our sales at INR 1,922 crores were higher by 16% compared to INR 1,657 crores recorded in the same quarter.
Domestic sales at INR 1,391 crores were higher by 19%. Export at INR 531 crores, higher by 9%. Profit before tax and exceptional items at INR 336 crores were higher by 21% compared to INR 278 crores recorded in the last quarter.
Segment-wise breakup for the quarter ended September 30, 2022, are as follows: the sales breakup segment-wise are Domestic. Power Generation domestic sales were INR 675 crores, 6% increase over last year and 36% increase over last quarter. Distribution business sales were INR 446 crores, 22% increase over last year and 7% increase over last quarter. Industrial domestic business sales were INR 250 crores, 10% increase over last year and 5% increase over last quarter.
Exports. High Horsepower exports were INR 234 crores, 3% decrease over last year, 1% increase over last quarter. Low Horsepower exports were INR 242 crores, 49% increase over last year and 20% increase over last quarter.
With this, I now open the session for questions. Thank you.
[Operator Instructions]
The first question comes from the line of Parikshit Kandpal from HDFC Securities.
Congratulations on a great quarter, sir, all-time high sales and EBITDA. My first question is on gross margin. So besides such strong performance, [indiscernible] of almost 300 to 400 basis points lower than our historical gross margin. So just wondered a level of pricing power. So has it receded or are you still not able to absorb the commodity inflation? Or have you rolled back some price increases because large part of EBITDA margin is getting justified because of operating leverage, but we still are not able to get back to our historical levels of gross margin of 35% to 36%. So just your view on that? That's my first question.
Thank you, Parikshit. It's a great question. I think the main factor here is that commodities while they have started softening, we are still not caught up, so we anticipate gross margin continuing to improve over subsequent quarters. We haven't rolled back any price increases. As a matter of fact, some more price corrections are on the way, which have been planned ahead of time. So there is a lag effect of commodities, and we are catching up. It's going to continue to improve.
That's great. Sir, second question is on -- I mean you've been highlighting the supply chain issues have been impacting us to the extent of 10% to 15% of demand. So given the strong growth momentum, robust revenue, so if you can just touch upon on the operational side, what is the current capacity utilization? And also, when do you think you will be able to optimize capacity utilization that we call for our CapEx, if you can address this question.
We continue to be constrained by supply chain. I would say that the situation has not really improved very much since the previous quarter. It's been getting better. So we are able to get more output out from the existing suppliers and trying to draw down our strategic inventory, et cetera. But the problems we are facing on some of the critical electronics for some of those critical parts, especially in the higher horsepower nodes of our business, we continue to see those challenges.
So with that, our capacity is somewhere between, I would say, 70% to 80% utilized. Somewhere in that range depending on which nodes we're talking about, which products we're talking about. And we are working. There have been [indiscernible] rooms now going on for 2 years. Their back work is continuing. So we do expect to see the situation gradually keep improving. But unfortunately, we have no news which tells us that the problem is just going away right now. So we are likely to see continued similar challenges even moving forward.
And what about the capacity expansion? I mean because you said you are so between that range of 70% to 80%, and we have seen other MLPs largely in India. So given the strong demand both in local and export markets, so when do you think will be the right time for you to start looking at the capacity augmentation?
We are looking at it. And based on the types of forecast we have and the future demand, we will take the right calls at the appropriate time, but it's not yet there. But -- so we still have plenty of muscle to flex even at 70%, 80% utilization. Not more can be done with just manpower balancing, et cetera. So we still have a lot more ability to sweat these very assets before we will need capacity expansion.
Okay. Last question, sir, on this 4 plus [indiscernible]. Are you seeing any impact of this mine coming in during the second quarter? Or was there any one-off like a data center kind of products getting booked in this quarter? Sir, any one-offs and how do you read the second half, the prebuying happening on the CPCB side?
So the good news is that all this time, we have been talking about CPCB4+ that is going to be announced. It's likely to be announced, all of that. So there was a lot of worry that what happens if it doesn't get notified on time. But it's been notified now. The GSR is out as of last week. And so the time lines are frozen. And typically because there is such a major technology transformation, so there's a major cost impact likely for end customers.
So we do think there will be a strong prebuy sometime in the latter half of the early half of 2023. And we are planning and preparing for that. So it's a double challenge. One is you can see we're already supply chain-constrained and then we are going to have to plan for a prebuy and build inventory for that. And then plan out a transition where everything paves the way. So it's quite a bit of tricky and a challenging situation, but we are also optimistic that now, there is clarity and things will move forward [indiscernible].
And any one-off during this quarter on data center orders? Any retail numbers look quite robust on the revenue side?
Yes. So those are data center orders you get in a lumpy manner. So we had similar kinds of orders last year, and we have orders this year as well. We were able to execute a few in this quarter, and there are many more in the pipeline. Data centers is one of those segments, which is growing very well for us and is growing very well in the country. And we are likely to see more demand coming out in the future.
Our next question is from the line of Deepak Krishnan from Macquarie.
Congratulations on a good set of numbers. I just had a question on the export front, given how we have done on the LHP side for the [ 9% ] increase Y-o-Y. What is specifically driving this? And what geographies are we giving share? And for that, given that we manufactured in India, China and U.S., has any China disruption led to incremental orders coming to the India MTD? So any further color on the export front and the detailed recovered numbers per segments, that will be useful.
Yes. So I think, as I mentioned in previous calls, Cummins has 3 major manufacturing hubs for products around the world. The first is in North America, the second is in China, and the third is India. Of course, we also have some older historical plants and power generation, et cetera, which are based in the United Kingdom as well that serve some of the European markets. So for certain types of products, especially the low horsepower product, India is the sole supply center for pretty much the rest of the world other than North America and China. So as demand in those markets keep fluctuating or keeps increasing, all those opportunities come to us.
And so we have seen that pretty much all the areas, if you compare versus last year, all markets have grown a little bit. Latin America, Asia Pacific -- even Europe, despite Europe slowing down a little bit versus the previous quarter has continued to grow versus last year. Middle East continues to be strong. And Africa is the one, which has been lagging and been struggling for -- even compared to the previous year. And a lot of it has got to do with the ability to get money out of Africa in U.S. dollars. And because of this, even though there could be more demand, we have held back from supplying product there because you're not able to get money out there.
So to summarize, I can say that most global markets continue to remain strong. Europe has begun to slow down a bit as compared to previous quarters.
Sure, sir. And generally, if you kind of look at it, is it literally really all volume driven? Or is it if you look at exports, how would you classify between volume and value growth?
I think it's a fair mix. Volume is higher. We continue to introduce new products. So as I've emphasized before, earlier, which are 1 product for all markets, and we introduced what we call Fit-for-market 2.0 by which we began tailoring products for very specific regions. And now we are in the process of investing into what we call Fit-for-market 3. So even further customization to deal with competition in specific countries. So it's a combination of mix, product, volume, us gaining share. So this is an ongoing journey.
Sure, sir. Just one final bookkeeping question. If you could just give us the breakdown of exports between LHP, HHP, heavy-duty MHP?
One second. I'm just doing data. So typically, we provide that kind of breakup mainly for the domestic market. But to give you some rule kind of calculation over there for exports, it's almost half-half, 50% is HHP and 50% is everything else. So that's the way we roughly look at the way exports breaks up as of today.
Our next question is from the line of Renu Baird from IIFL Securities.
Congratulations on the strong results. My first question is on the gross margins. While you did mention that pricing actions have been in place and you expect sequential improvement in gross margins to continue, but if you look at CPC before implementation coming in the next year, there will be changes in cost structure, sourcing mix.
So from a medium-term perspective, how should we look at Cummins' journey to getting back to the old gross margin levels of 34%? In the last call, you did mention that you would want the margins to target the margin to be back in 34%, 35% levels. So what would be the time line to get back to those levels of margins and the levers, which will help the margin improvement to 33 %, 34% levels?
We want it as soon as possible. The reality is that commodities have been slowly coming down, and we've held the pricing. We continue to increase prices in strategic modes where gross margins have dropped more heavily. So we want to -- by the time we launch CPCB4+ and get that into a stable state to attempt to get back to the previous levels of margins. So I'm not talking about 2 or 3 or 4 years, we would want to get to that kind of margins in the next 18 to 24 months.
Sure. And broadly from -- given that the notification is out, there is more no clarity the final changes required. What is the expected input change in the pricing, which is expected both for engines and genset across the major modes [indiscernible] before?
I can't give you the exact increase as far as prices are concerned. All I can tell you is that they are substantial. I'll give you an analysis towards a different market segment.
In the automotive space, when they went from BS IV to BS VI, the prices of the full engine plus after-treatment system, the cost of those went up by about 50%. So it's likely to not be as high in this because the engine -- but after treatment makes up a smaller portion of an entire genset, but it is likely to be substantial because we are changing the technology and the euro -- CPCB 4-plus are equivalent to [ Tier 4 ] final emissions of the United States. So they are very, very stringent. So the technology required to do that is pretty expensive. So that's what's going to drive the increase there.
Got it. Secondly, if you broadly look at the performance across domestic and export seems very much resilient to the external market. And we also mentioned Europe started to slow down. So if we look at exports, do you think that 15% to 20% growth in the export revenues value should be sustainable? Or you think there could be pockets of contingent impact from the slowdown, which is now looking more evident?
Very difficult to predict, Renu. With the way the global economies are going, it all depends. Everyone keeps increasing interest rates and multiple economies are driven into recession, then it's going to be difficult to help sustain this kind of growth. If things were to normalize, stabilize at certain point, we certainly have a lot more to gain. Even in a slowing economy, I think we, our aspiration is to continue to grow. So whether that is through gain in market share or through improving more products, even if the overall global economy does not grow, we would still have the ambition to attempt to grow. Now how successful we are in doing that depends on how well some of our new product advances go, how well we are able to leverage the CPCB4+ to capture some of the other global markets, et cetera.
So there is -- it's not a simple answer. Our ambition, of course, is to keep growing at this rate. if not more. But the reality is of the way the cycles are going to work in multiple markets, based on global commodities, based on geopolitical crises, based on oil prices, based on inflation, based on the dollar getting stronger in some multiple currencies. All those are going to play a factor in how some of those other countries are going to be able to compete with us on.
And have we seen any positive sales impact of the consolidation of global supply chain for ICE engines, which you were expecting to have that started to play out? Or you think it still will take time despite the increased energy costs in the rest of the world?
It's starting to play out a little bit, but you really see these -- real impact we will see in a couple of years. But we are certainly seeing trends where it is starting to play out more and more.
Sure. And one last, if I can ask. Within the Industrial segment, Rail segment was one where the growth numbers or volume of mix has been a bit volatile. So if you can share some of your comments on various segment outlook and is specific for rail business, how are you looking at that portfolio ramping up again?
Yes. So Rail is beginning to bounce back, it's not yet bounced back to the previous high levels, and we hope that we've launched quite a few new products, including getting into the electrification space with our [ hotel ] lower converters, et cetera. So we hope to see that beginning to catch up and then beginning to grow ahead of where we were in the past.
The area where we've been slightly disappointed in the industrial space has been in the construction space. We were expecting construction space starting from the previous year to have a multi -- a decade-long growth of over 13% to 15% CAGR. The reality is that the spends have not happened, and we have actually seen that market contract a bit and it's only now starting to show some signs of revival.
So construction is an area, which has underperformed. Our plan, rail segment, which has performed out of on plan. And the other areas of mining, defense, marine, et cetera. Those have all performed better than planned. So that's the way I would classify the industrial market. We remain extremely bullish and optimistic about the future of this segment. It has underperformed some of our other segments, though in the last year or so.
Right. And just a follow-up on the construction, you think the demand impact is also linked to the increase in prices due to CPCB implementation or it is more on the end market demand?
No -- yes. I think it's directly correlated to end market demand because when you build x amount of highways, you need x amount of equipment. So when we want to use that equipment, it doesn't matter what the net impact of those price increases are very small compared to the cost of building those roads, et cetera. So it's the slowdown of funds to build those actual projects on the ground, which is what, in my view, is the reason for it lagging. And we have started to see it slowly start to come back. We hope now, it will pick up steam and then continue forward like it has started off in '19, '20.
Our next question is from the line of Sangeeta Purushottam from Cogito.
Yes, good morning, and thanks for giving us the opportunity. We wanted to get an understanding as on the export side, you don't export to the other hubs such as North America, China at all?
We export some, but we don't export. Too much of the product there because one is because of treaties such as [ USMCA ], they have requirements to produce minority of the products within the countries of United States, Canada or Mexico. So it doesn't fix the -- you don't set the pricing targets, if you have to add the duties and then still sell into those markets. That's our take that is concerned.
As far as China is concerned, we sell some products into China, but they also have capacities within China to produce as many products as we can produce, if not more. So the access to that market is limited. Similarly, their products don't get sold in our market and they could ask similar questions. But yes, that's the way it is, but it's sold in the rest of the world.
All right. And given the rest [indiscernible] to China, manufacturing facilities all within the same group, would it be fair to assume that you are likely to benefit from any shifts from China to India of manufacturing?
I wouldn't say we are unlikely to benefit. We are already benefiting a little bit because the competition in -- for us in those market segments mainly comes from China. So if customers are going to buy less Chinese products, then automatically, they buy more of our products. So not in a direct sense, but in an indirect expense, it certainly helps us.
So what you're saying is that you're benefiting from the non-Cummins producers in China, the shifts from there?
That's correct.
We also had that from a fact that as a backup to China strategy, things we are indoors in China are being dual sourced in India, and things, which were single course in India, maybe at some stage, will get [ dual source ] in China. So everyone's beta more cautious about having all their eggs in 1 basket and in 1 region. So there is a whole bunch of work happening in dual sourcing and risk management.
Right. Right. And in terms of the broad macro drivers for exports as well as domestic, would it be fair to say that over the medium term as 3 to 5 years, the domestic [ outliers ] are likely to be stronger?
So if India continues to grow at 6% to 7% growth of GDP and our own ambition is to grow at 2x of the GDP, so certainly, the India market growth rate will be faster than export growth rate unless our products really work well, and we do a good job on product management, and we are able to gain market share.
Our global market share, even though we are the largest power generation manufacturer in the world for gensets, we still have a lot of opportunities around the world. So we do have an opportunity to grow the market faster as well, but a lot of that is dependent on many other variables, whereas the domestic market is completely under our direct super regions. So we think we can grow that at a faster rate.
Right. Okay. One last question that's with the changes of market division likely to happen soon. And you mentioned that there could be a substantial increase in the cost of the [indiscernible] gensets. Is that likely to impact demand?
So in all of these technology transitions, and we have seen this trend now for, I would say, over 100 years that this company has been in existence, and there is this concept of prebuy, where people buy a larger quantity of the previous technology products and then they hold off buying the product for a little while because they have stocked up on inventory, et cetera. And so there is a little bit of a lull.
And then over a period of 12 to 18 months, it catches back up and goes back to the old historical rate and you continue to get growth. So these technology changes and price increases, et cetera, do not impact long-term demand for the product.
Our next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
A couple of questions from my side. First is, if you could just help us with what are the implications of Cummins in India from the acquisition of Meritor by the global entity? And also, what will be the implications for the listed entity? That's one. Second is more color on exports will be appreciated. If you could give geography-wise breakup of the exports and how are you seeing the macro trend there.
Third question is on the industrial side. If you could give us a breakup compares or construction, et cetera, as have you've been giving. And last is, if you could help us with the capacity utilization and the [ control ] facility and at our mega site, where we source from CTIL and also Tata Cummins facility. More color on the capacity utilization at these entities where we buy the products just to understand the overall capacity utilizations. These are my questions.
So the Meritor, being an axle and brake company acquired by Cummins Inc. globally, has very little impact on the Cummins India business other than we can now -- in the construction and in some of the other heavy-duty applications, we can now aspire to sell an entire powertrain solution rather than just selling an engine and an after treatment, so it improves the ability to sell a complete package.
So I think those are opportunities. We are just evaluating and trying to figure out where those opportunities are. It gives us a play and to utilize synergy in these segments like construction, mining, where some of those products could be used. As far as -- I'll first answer utilization, and then I'll give you a breakup. As far as utilization is concerned, [indiscernible] like I said, is like at a 78% to 80% utilization and primarily driven by supply chain, not having enough parts to utilize it at a greater level than that. So as we keep getting more parts and more material, we should be able to push the utilization higher and we gain better efficiency also. So we don't see needing to put in more investments for quite some time.
As far as utilization of plants, other entities where engines, et cetera, are purchased from. I would say those are all high-volume plants with mega capacities. And I would say their utilization is below 50% as of today. So there is plenty of capacity available for Cummins India were to need more capacity.
So let me get into the details of exports region-wise. So in this quarter, we had on Latin America had sales of INR 116 crores. Asia Pacific had sales of INR 143 crores. Europe has sales of roughly INR 70 crores. Middle East had sales of INR 109 crores and Africa had sales of about INR 40 crores.
And then getting into the breakup of the industrial businesses, [indiscernible], which is going through a cyclical downturn had sales of [ INR 13 crores ]. Construction had sales of INR 93 crores. Mining had sales of INR 38 crores. Rail had sales of about INR 40 crores. Oil and gas and defense and marine and all of those put together had another close to INR 60 crores.
Our next question is from the line of [ Bhavin Shah ] from AlfAccurate Advisors.
Yes. So sir, a couple of questions from my side. Number one, can you -- when this new version of CPCB4 gensets will be launched?
The target for when it becomes effective is July of 2023. So they have to be launched by 1st July 2023.
1st July 2023. And sir, once these new versions are launched, do we see strong export growth from here on? Like when the Indian -- then basically the Indian manufactured gensets are at par in terms of the compliance with the global standard. So do we see strong export growth from there?
We see access to some markets, which we did not have access to earlier. So we do see more access to some cities and some areas in Europe. We do see access to some areas in North America, like Canada and the United States where they buy some of our products, and they buy some components from USMCA. But they don't buy entire products from us, but we do see better access to those.
But like I mentioned earlier, there is an offsetting concern that with U.S., even if we were to be able to do that, we may not be able to still supply entire product but we will be able to supply subsystems of products. So -- but really, the opportunity should open up more. So it doesn't hamper in any way because we continue to have the older ranges also in our portfolio and a few additional new markets also open up for us.
Okay. But sir, you indicated that you will not be able to supply the full system. So still, there would be some bottlenecks because of the compliance?
There will be bottlenecks because as per USMCA, they have to buy majority of the product source from, for example, in Canada, United States or in Mexico. So despite the fact that we may be -- we may have those products, we may be even be cheaper. It still may not -- they still may not be able to purchase these products from us.
Okay. Because of their regulatory norms?
Because of the free trade agreement unless India also finds the free trade agreement, which makes it, which gives us exemption from USMCA restrictions, we will not have access to some of those markets without having to pay those antidumping kind of penalties.
Our next question is from the line of Puneet from HSBC.
My first question is with respect to the CPCB. From 1st of July, will you not be allowed to manufacture or will you not be allowed to sell the product of the previous solution?
We will not be allowed to manufacture the -- our OEMs and our dealers and distributors who have brought in rent-free, which has been manufactured before [ 1st ] of July will still be able to continue selling it till we run out of it. I think, and there's a cutoff of that as well, I think at the end of the year by which they will not even be able to sell product for their inventory.
Okay. So there's a 6-month benefit?
Yes. Yes.
Second is if you can also talk about you said that you don't need to increase capacity, but we may need to add labor? Can you also elaborate on how much labor would we need to add if you were to take the capacity utilization to 100% from the current level?
One is certainly, we'll have to add labor. We are also -- over the years, we have been bringing in more and more automation. So we can increase efficiency a lot more, without adding too much labor. So will we continue to work on semi automation to improve efficiency, to improve quality, to improve safety and those kinds of things. So I cannot give you an exact number.
It depends on how the demand is because different lines, whether it's assembly, whether it's big engines or smaller engines, medium engines, depending on the type mix,the number of amount of labor required on which project will vary. But I don't know, if I were to take just a thumb rule kind of guess, it's maybe 400, 500 people will be needed to get to 100% utilization.
Okay. So what I'm saying to this is, do we get some operating leverage once the demand goes up on account of labor or that...
Yes. We always get leverage on labor. We get leverage on utilization of fixed cost assets, everything.
And last one is you also talked about the shortage of parts. What are the parts where you're in still a bit of shortage, and...
I think the biggest opposition of those are based on electronics and those continue to be in crisis. They continue to be an allocation, there are other specialist parts which are -- which need some special materials coming out of countries like Ukraine, which are also constrained. And so as alternate capacities are being set up, so those parts also get constrained. A lot of times, that has got to do with fuel system parts, some specialized castings, et cetera. So majority, I would still say the electronics-based part, but that's -- it would be unfair to say that only electronics. There are quite a few other things also which are constrained.
Right. And any site of the shortage is easing or you're getting higher allocation?
It's been getting better every quarter, which is why we are able to do better every quarter for the last, I would say, 7, 8 quarters. But I do not have a clear answer on when we think the problem will just go away completely. Big investments are being made by players to set up alternate capacities, the moment some of those start to kick in. Globally, I think this crisis should resolve itself.
Our next question is from the line of [ Mahesh Bendre ] from LIC Mutual Fund.
Sir, you mentioned the data center opportunity seems to be a decent in Indian market. So what is the current contribution to this particular segment to our sales. I mean what is the outlook for that going forward?
I wouldn't give the exact breakup in terms of value, but I can tell you that it is one of the fastest-growing segments. If I look at the power generation market, the top 3 segments for us in the previous quarter that grew our data center, pharmaceuticals and biotechnology and overall manufacturing.
And so we've had the highest number of large genset shipments ever in our history for data centers, commercial realty and manufacturing. So that gives you a kind of indication of how strong this market is. And we don't think this market will slow down for, at least, couple of years. We think that the can sustain this growth.
Sure, sure. And sir, what is our capital expenditure plan for next 2 years?
Capital expenditure is in line with what we have been doing for the last -- if you -- and as we have clarified, the big capital expenditures that we used to do in the past, we are behind those. We are -- we have been doing roughly about somewhere between INR 200 crores and INR 225 -- INR 200 crores to INR 250 crores kind of CapEx spending for the last 2 years. A big chunk of that is driven by sustenance CapEx just to keep the things going to upgrade things, et cetera.
Another big chunk goes into growth projects where we develop new products, launch new ideas, et cetera. And the bigger other chunk goes into engineering. So we expect to be in that kind of band for, at least, for the next few years until we get some -- until we get to that point, which others have been talking about where capacity utilization is so high that we just have -- we feel we need to put in more CapEx to grow capacity from a long-term perspective.
Our next question is from the line of Lavina Quadros from Jefferies.
Thanks. My questions been answered.
Thank you.
Our next question is from the line of Aditya Mongia from Kotak Securities.
Good morning, and thank you for the opportunity I wanted to, first of all, stress a little bit more on the distribution segment. This segment appears to be probably growing faster than product sales over 1H.
And while we've been reading about an annual report endeavors of yours to grow, it would be good if you could kind of bucket down what all is firing for you? Is it more say, offering more services to your existing installed customer base? Is this more competitions customer base are going to be able to kind of get inside or maybe, let's say, is it more because of auto-linked spares and services sales are going up? If you could us give some color, it would be very useful.
Yes. So to -- in one line, it's all of the above. And so we have seen -- we have been putting in tremendous focus into this segment because we feel that what we are entitled to and what we have seen as Cummins' entitlement in other markets, it's been lower in India. And so there has been a lot of focus to improve the availability of parts for customers. So parts have been growing in multiple segments.
We have -- we are doing more reconditioning and recall, and that's greener, better for the environment and is a better value for customers because we provide a warranty on all rebuild and reconditioned products. So as utilization increases, distribution business also grows well.
So mining is now working 24/7 in India. So because of that, our business is growing. The service business is growing fast, business is growing. We are getting more contracts. We used to do just the engine. Now we do, let's say, for rail, we do the entire, the powertrain, including the whole compartment. So we are expanding services.
We are adding more product lines we are reaching out to more customers. We are bringing more out of old customers back into fold. They are offering more products. And also, we are -- because of the impact of commodities, et cetera, we are also increasing prices. So the combination of all of those is resulting in, at least, steady growth, and we think more can be done as far as the segment is concerned.
That's really heartening to know. The second question that I had was more on this comment that you had made that we want to clear catch-up on gross margins. Now as I understand, if I, let's say, take the average on, let's say FY 2017 to '21 and the gross margins today probably 400 bps lower. Are you suggesting this kind of decline that has happened in the last 2 years can be kind of fully covered up over the next 18 to 24 months as you suggested?
That's what we're going to attempt to do. Whether we are successful or not, you all have my comment and then you all can grade me on our score card, but that's the ambition we seek to get back to a better gross margin because that's what we think we are entitled to, from the kind of quality of the product as well as the services we provide to customers.
Now like I said, it's easy for me to make a statement like this to all of you. The people on the ground have to do a lot of work. It's got to do with cost reduction. It's got to do with engineering. It's got to do with product management, it's got to do with getting better realization from the market. So I think a combination of all of business is how we plan to get back. But yes, it will be.
And of course, we get to reprice with CPCB4, et cetera. So that's going to be our ambition, how well we succeed is for future calls for us to analyze on.
Sure. I'll just probably have a follow-up question over here. And I think this is important for us to understand. See, if I were to compare -- be comparing our return ratios, and that's one barometer of assessing how better you can go from here. They are already kind of at, let say, 2015 levels within CPCB-2 have not happened. The company was doing fine in terms of competition. Everything was earning decent margins, including competition. And since then, we've seen: a, returns fall down because competition plays also; then b, the new as a company starting to do something more micro in nature, managing our cost better, and managing your product portfolio at better special and export side.
Now with already you operating at decent returns at a depressed gross margins today and these are 20% plus the ROIC regulations. Do you see scope of doing more micro management of margins, which means you're doing something that competition cannot kind of come up with? And thus, excluding better gross margins/EBITDA margin/return ratios?
Yes, we are a product technology company, and we have always won around the world, and we have introduced product technology, which is more reliable, more robust, more durable, provides better TCO for customers. So as always, we will continue to work on the product side to help give us those kinds of advantages. And we continue to focus on the fixed cost side, the variable cost side on how we can continue to get efficiency year-on-year on our labor efficiency, year-on-year on our white collar folks. So yes, it's possible. That's -- I guess, that's what good management is all about, to see how to make that happen. It's not going to be easy in this kind of volatile environment, but that's what we are aiming to do.
You, our next question is from the line of Priyankar Biswas from Nomura.
So my first question is regarding this CPCB-4 tech transition. So what I understand is the customers have a window to buy, let's say, the older products after, let's say, 1st July 2023. So until distributors got stocks. Is that the correct understanding? And if so...
That is correct.
If so, then how can we -- how -- are we be able to take up the price hikes that are necessary for a CPCB-4 engines, is the customer still has the option to buy something, let's say -- which meets this requirement and still at a relatively much more affordable?
Right. So the first is, right now, there are certain nodes, which are already capacity-constrained. And so even if somebody wants to build up inventory and then wants to buy product, it's not going to be available post--July time frame. In all of the other nodes where extra inventory or material can be available, people will be prebuying and they will be buying more material, and they will stock up. And our hope is that we have more pricing increase coming in, in the future. And we are hoping that commodities will soften further. So the combination of price increases -- holding on to price increases and commodity softening, the combination of both of those is what we hope will play in our favor to continue to hold or improve margins.
So sir, the reason why you're asking is, so clearly, some of your competitors are behind you on the technology curve as far as CPCB-4 is concerned. So wouldn't it make rational sense for them to actually overproduce this period so that they have a lot more older products inventory since they cannot reasonably expect to compete with you on CPCB-4 at least in the very near term?
Yes. And that would be what I would do if I were in their shoes. Unfortunately, that unconstrained supply of raw materials is not available to anybody. So even today, if we could produce more of everything, we would be producing more. But the supply chain cannot meet up with that kind of spikes in demand. So yes, it will happen in some node, it will happen, and we will have to deal with that for 6 months. But in many nodes, it will not happen and the transition will happen sooner.
Just an add-on question here. So in the past, like if my memory serves me right, with the transition to CPCB-4, we were kind of expecting that with the 5G opportunity in China, probably we could see some uptick in sales or maybe something in the North America. So in North America, the parts and components market, how big can it be for us like, let's say, today, you have seen an x level of exports? So just by the parts because you highlighted the [indiscernible] constraints, I understand that. So how big can it get?
It's pretty big. I mean, there is no, I can't give you exact numbers as of today. But I can tell you that for us to be able to maintain the rate of growth we have had in the last 2 years, it can be sustained in the future if we were to even just supply components going forward.
Sir, the last question from my side. Sir, you don't give a guidance, I understand that, but I think your parent gave a guidance of something like a 20% growth for the calendar year for the entire India business. So how does that translate for us essentially based on the parent's commentary only?
Yes. So you can take that as a [indiscernible] fund. So that's the kind of growth we are aiming for. We still do not provide a full guidance and we should -- we will probably get started in future quarters from providing that guidance. But we remain cautiously optimistic, which means order boards are good. We are gaining in watching to see if the impact of all of these global turmoil is going to have any negative effect on us. But if it doesn't have too much of a significant impact on us, then we will continue to perform the way we have been performing in the last 6 quarters.
Our next question is from the line of Deepesh Agarwal from UTI Asset Management.
My first question is if we see in India, a lot of your peers are setting up electrolyzer of wholesale capacities over the next 2, 3 years. I understand you have an ambition out there, but to be cost competitive, do you think Cummins will also have to set up a facility soon in India? And if so, which of the Cummins entity will house the manufacturing unit?
That's still being evaluated. So certainly, we had to set up in India to be cost competitors in India, also to meet the Make in India, PLI, those kinds of guidelines, we'll have to produce in India. What's being evaluated is what's the best way to produce, whether it makes sense for Cummins to set up its own capacities or whether it makes sense for Cummins to partner with somebody to get the leverage of scale and access to end markets. Those are the questions we are asking ourselves and then evaluations are being done on what's the best path to enter from India perspective from a long term.
So it's still in evaluation. And Cummins has probably more experience in setting up capacity globally in the electrolyzer space than any other manufacturer. So we are quite optimistic and bullish on India. But evaluation is currently going on, on what is the best part of entry into the country from a long-term perspective.
Sure, sure. Sir, secondly, it seems under CPCB-4 plus, sir, the share of bought-out components will increase. Do you think increase in the bought-outs could be a spoiler to your gross margin ambition of, say, 35% to 36%?
No. I don't think that's going to be a spoiler for us. We are going to aim for that, and we are going to get there.
Sure. And sir, last question, a bookkeeping question. Can you quantify the large data center revenue, which you would have booked in this quarter?
So we can't quantify the exact data center revenue, but all I can tell you is very similar to the same period in the previous year, where we closed one of the very big data center orders. So it's a pretty big quantum jump.
Ladies and gentlemen, we will be now taking our last question. That's from the line of Gopal Nawandhar of SBI Life Insurance.
Sir, as I remember earlier, there used to be some arrangement with the parent on currency depreciation. So if you can just highlight how much of those currency depreciation benefits flows to Cummins listed and how much is to be passed on?
Right. So there is a quarter-on-quarter settlement as far as currencies is concerned. From our perspective, in the current quarter, we've had a benefit on currency of something like 0.5% and it will get trued up in future quarters.
Okay. So I remember earlier like it was like plus 5%, currency movement is capped by us and then went over and above that, we generally used to pass it on to parent [indiscernible] arrangement?
There is a prearranged formula, but I don't have the exact numbers with me right now, so I won't comment on that.
Okay. Okay. Secondly, sir, just a clarification. In the beginning, you mentioned about some price correction. Is it like a decline -- because of the decline in the raw material you're asking or calling out that? Or you're talking about the positive pricing?
We are talking about price increases.
I now hand the conference again over to Mr. Ashwath Ram for his closing comments. Over to you, Mr. Ram.
So I want to thank all of you for your participation today and your patient listening to all the questions and all the commentary.
Cummins India strongly believes that the demand in various end markets will sustain. However, as I mentioned earlier, uncertainty in the industry prevails because of high inflation, interest rate, policy rates, supply chain disruptions. This week, again, China has announced that they will be tracking down on COVID. And so every time that happens, we see more disruptions. So these kind of disruptions continue.
We continue to watch the geopolitical events and these supply chain challenges very, very closely. These are unfolding in different parts of the world, so we are watching it very closely.
We, at Cummins India, though, are extremely confident to maneuver through these tough times. We have demonstrated that in the past to these tough business times in a very progressive manner. We are very confident and optimistic that things will continue to be steady or get better.
With this, I, thank you all, and I would like to close this call.
Thank you. On behalf of Cummins India Limited and the leadership team, we would like to thank you for joining us today and making it an engaging session. We are ending the conference now. You may disconnect your lines. Thank you.