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Good morning, ladies and gentlemen. Welcome to Cummins India Limited Financial Results Call for Q4 FY '22 and Full Year FY '22. We hope you're all keeping safe and healthy. [Operator Instructions]
I will now hand over to Mr. Ashwath Ram, MD, Cummins India Limited. Thank you, and over to you, Mr. Ram.
Thank you. Good morning, ladies and gentlemen. Thank you for taking your valuable time to come and talk to us. My name is Ashwath Ram, Managing Director, Cummins India Limited. I hope you and your family are doing well and staying safe. Joining me today on this call is Mr. Ajay Patil, our Chief Financial Officer of Cummins India Limited. Thank you for joining us for the CIL financial results call for FY '22 and full year FY '22.
At the outset, I'm very happy to inform you that Cummins India Limited closed FY '22 with record revenues and so with our associate company, Cummins Generator Technologies India Private Limited and JV Valvoline Cummins Private Limited. Post Wave 2 of COVID-19, we observed strong economic rebound enabled by a combination of factors like mass vaccination, government spend on infrastructure and social programs, pent-up demand across different sectors. Cummins India responded strongly despite significant supply chain challenges to meet the demand from domestic and export segments. High commodity cost inflation continued throughout the year. Cummins India employed tactical pricing actions and continued efforts of cost containment and reduction to help mitigate impact of commodity inflation. We continue to leverage our global integrated supply chain to meet demand from customers for domestic and export segment. Now I would like to share the financial results for Q4 FY '22 and full year FY '22. For the quarter ended March 31, 2022, with respect to the same quarter last year, our sales at INR 1,468 crores were higher by 19% compared to INR 1,231 crores recorded in the same quarter last year. Domestic sales at INR 1,046 crores were higher by 7%. Exports at INR 423 crores increased by 66%. Profit before tax and exceptional items at INR 244 crores is lower by 1% compared to INR 245 crores recorded in the same quarter last year. For the quarter ended March 31, 2022, with respect to the last quarter, our sales at INR 1,468 crores were lower by 14% compared to INR 1,701 crores recorded in the last quarter. Domestic sales at INR 1,046 crores was lower by 17%. Exports at INR 423 crores were lower by 4%. Profit before tax and exceptional items at INR 244 crores were lower by 24% compared to INR 320 crores recorded in the last quarter. I will now walk through the segment-wise breakup for quarter ended March 31, 2022. The sales breakup by segment are domestic. Power Generation domestic sales were INR 471 crores, 33% increase over last year, 6% decrease over last quarter. Distribution business sales were INR 369 crores, 10% increase over last year, an 18% decrease over last quarter. Industrial domestic business sales were INR 191 crores, 29% decrease over last year and 34% lower than last quarter. Exports, High Horsepower exports were INR 203 crores, 50% increase over last year, 5% increase over last quarter. Low Horsepower exports were INR 187 crores, 97% increase over last year, 14% decrease over last quarter. For the year ended March 31, 2022, with respect to last year, we had record sales at INR 6,026 crores, higher by 42% compared to INR 4,256 crores recorded last year. Domestic sales at INR 4,416 crores were higher by 42%. Exports at INR 1,610 crores increased by 40%. Profit before tax and exceptional items at INR 1,027 crores is 27% higher than last year.
Segment-wise breakups for the year ended March 31, 2022. The sales breakup segment-wise are as follows: Domestic, Power Generation domestic sales were INR 1,959 crores, which is 77% increase over last year; distribution business sales were INR 1,484 crores, a 23% increase over last year; industrial domestic business sales were INR 899 crores, 21% increase over last year. Exports, High Horsepower export sales were INR 808 crores, a 23% increase over last year. Low Horsepower export sales were INR 681 crores, a 51% increase over last year.
As far as Cummins India financial guideline for financial year '23, the company expects the current trend of sustained growth across multiple industries and segments. Demand outlook from various end markets continues to be positive. The company continues to work on stabilizing supply chain and parts supplies. We are closely watching the impact of high inflation, geopolitical events unfolding in different parts of the world and their impact on demand and the supply chain as a consequence. Considering these uncertainties, the company will not be providing any guidance for FY '23. With this, I now open the session for questions. Thank you.
[Operator Instructions] Our first question is from the line of Sandeep Tulsiyan from JM Financial.
Yes. First question is pertaining to the margin, specifically gross margin. What we have observed in the current quarter, the mix between domestic and exports is usually treated with export. It's more like 70-30 versus the usual run rate of 75-25, what we have. But despite that, we've had almost 100 to 150 basis points margin contraction at gross level. So would you be able to guide us, had this mix change not been there, the gross margin decline would have been even sharper? So to what extent have we taken pricing action? And when this mix normalizes in the coming quarters, do you foresee the gross margin pressure to continue? And if any price hikes you would take, maybe, say, during the end of quarter are not fully impacted, if you can guide on those lines, please?
Yes. So Sandeep, very good question, and this is the question which has been our continuous battle now for the last almost 4 quarters, and we think this battle will continue for at least a few more quarters. So the commodity rises are unprecedented, and the rate of growth of commodities has been unprecedented. And so the biggest impact on the margins has been because of the commodity increases. We have been able to partially offset some of those because of the mix, as you mentioned, because of some of the price increases that we have passed through because of cost reduction activities and cost containment activities. But the overall lag between when we keep increasing prices and as a market leader, we are the first to increase prices. And that of catch-up with the commodities, in my view, is roughly about 1 quarter, 1.5 quarters. So we are playing a catch-up game, and that directly is flowing through into the bottom line. The -- what -- we do think that once commodities start stabilizing, and it's already started stabilizing in certain commodities, we think that the price increases will have an opportunity to catch up. But I'm not really optimistic of that happening immediately because there is still a lot of instability as far as global commodities are concerned.
Mr. Tulsiyan, do you have any more questions?
Yes.
We'll take our next question from the line of Parikshit Kandpal from HDFC Securities.
Congratulations on a decent quarter. So sir, if you can give some sense on the average order size, which was before COVID. So if I compare like-for-like, what kind of pre-COVID and now would be the price increase? Because what we hear for some of your competitors, not your competitors, but companies that have 19% to 20% kind of price hikes over the last 2 years. So I just wanted to understand for us like how much would be this quantum.
I can't give you the exact numbers because it differs by market segment, by type of product, et cetera. It depends on the impact of commodities. But certainly, they have been in the double digits, is what I can at least give you an indication. So it's been large. And...
Do you think...
I won't confirm that because we continue to pass through increases, but certainly they are pretty large.
Okay, okay. Sir, my second question is on the last call, you had highlighted that you were doing some demonstration projects and pilot projects on hydrogen for both Northeast and steam locomotives. Any tangible or measurable outcome using out of this? And how do you intend to grow this segment related to green hydrogen or clean energy? So if you can quantify some measures qualitatively also will be helpful.
Certainly, we have participated in a lot of tenders. Some of those tenders are in final stages of negotiation, and we are quite well placed to do well in those tenders. The number of tenders is increasing, but it's -- these are all in -- the deployment of all of these are in the 2 years to 4 years kind of range. So none of these projects -- their projects are complex enough that it doesn't get implemented in less than 2 years' timeframe. But we are certainly actively participating.
And what would be the cumulative size of all these standards, if you can just quantify since you are participating in the tender?
It depends year-on-year. These are in hundreds of crores, but it's not -- I can't give you one number. But I would say, so far, if you take a timeframe between '24 and '27, there are already contracts worth nearly INR 1,000 crores plus have already being tendered. So it depends how many we will win, and there are many, many variables between now and us closing those deals.
Okay. Sir, just last question on this electricity amendment, which happened earlier, just a couple of months. So [indiscernible] last time, you had said that you were presenting a light paper. You were in discussions with the government and bureaucracy. And so any sense on how this thing will shape up now? So over the next 5 years, how do you see the industry on the genset side? The power gen side, how is it evolved? And what would be the impact of this, if you can just highlight for us...
So the most important thing, which we were interested in, is the tightening of emissions because if -- as we were speaking to the government, they are serious about a clean air. Then the best way to get cleaner is to have tighter emissions and which is why we have been pushing aggressively to move to CPCB-4+. And so the draft and the timing and the notification of that has already come out. Certainly, certain ministries, not all ministries work in cooperation with each other. So certain ministries have gone ahead. And despite us submitting white papers on the advantages of tightening emissions, the advantages of moving to newer technologies and the overall impact of gensets on the environment and on the supply of power, the power ministry has gone ahead and released the draft saying that people should not be using as many diesel gensets in certain markets.
But that has not impacted our business. As a matter of fact, ever since they announced that, they also guaranteed 24/7 power, and you've seen what has happened as compared to promises versus the reality on the ground. We have seen increased demand across pretty much every segment. We certainly, all that -- those notifications by some of those agencies, it doesn't directly impact business. It does push certain customers and certain markets away from diesel into some of the other technologies we sell, like LNG and PNG. So it's positive from our perspective, some of these notifications that have come out. So I just see it as a win-win for us, whatever has come out so far.
Our next question is from the line of Renu Baid from IIFL.
I'm not sure if I missed your initial comments. My first question is broadly in the current environment towards Russia-Ukraine war and significant liquidity tightening across global markets, including India. What are you seeing in terms of bottom-up demand momentum, of course, leading to end markets and customers, specifically on the export market and also the domestic market, if you could share your views. Are you also seeing project delays, risk cost of CapEx guiding slowed down? Or do you think the broad momentum is still intact?
Yes. To, first, answer the very broad global view is that demand is not slowing down. Demand continues to remain pretty strong. As a matter of fact, supply chain is a bigger impact to our growth rather than actual demand from multiple segments. As a company, Cummins has a pulled out of Russia, and that certainly has a -- it doesn't have such a big impact on our India business because the Russian market was a smaller market for us, but it does have a limited impact. But overall, as of today, demand far outweighs our ability to supply, and it's not going down either in India or in other parts of the world.
But do you see a risk cost slowdown in the coming 2 quarters? Or are you saying it's more about the liquidity adjustment and the end market demand environment that drove us to that extent?
I think for the products that we serve, they're coming out of a multiyear low. So we don't see too much of a setback or a correction there. And with many of the nations, which are -- have a positive impact due to commodities like the Middle East, like some parts of Latin America, even some parts of Africa, they are benefiting from higher commodity prices and can actually able to buy more products. So we are seeing demand continue to remain strong.
Okay. So the question is if you look at the segment numbers that you highlighted, a sharp sequential drop in the industrial business segment, while you did allude last quarter that we do see a sequential drop in the business volume, but the 30% kind of sequential drop seems too alarming and large. So if you could give some color in terms of how the subsegments have performed within industrial. And how should we look at the growth across a lot seeking verticals within the industrial business in hand.
Yes. So if you look at it, there is -- typically, the Q4 in most of our segments dropped as the government and many of the other customers close out the years and then close all the buying before the end of the year. The strongest quarter of the year is typically Q3. But when you look at the full year, you can see that despite all of those challenges, we have continued to grow even in the industrial market. As a matter of fact, we have grown 21% over the previous year.
Now when you look at it quarter-to-quarter comparison, the segments, actually, we are -- we have seen a slower pickup in the construction and compressor segment. The compressor segment is, of course, very cyclical, and it is dependent on having the right amount of water table, which means if there is -- if it's too dry, then the compressor segment drops. If it's too wet, the compressor segment drops. And as of now, it's too dry, and so the compressor segment is down a bit.
Construction came very, very slow out of the gate at the beginning of this year. And we do expect construction to pick up pretty strongly, do a bit of catch-up and then bounce back. As compared to last year, last year's similar quarter, it was down very significantly. But all indications tell us that our road construction increases, and they come back from -- right now, they are struggling between 30 to 40 kilometers a day. Their ambition is to do over 100 kilometers a day. So as they start ramping up, construction, this market will start to pick up. The same is true in rail. The rail was the last to come out of the COVID cycle as far as ramping back up. And it's starting to scale back up. We had some timing issues as far as delivery on some of those products. So we could have done a little bit better than what we did in rail and some of the other segments like Defense and Marine, but we think that demand will continue to be strong, and it's our ambition to do better this year than we did last year as well.
Sure. And last related question here would be, if you look at the rail segment, railways have noted large tenders for locomotives and on departed trains, more on the rolling stock now investments are coming back. So how is Cummins space in terms of its new product launches, which were planned somewhere for this calendar year? And do we have any proxy related to some of these large projects, which are in pipeline?
Certainly, the biggest one I can talk about, which has got a multiyear positive impact on us, is on the electrification of rail. And so we have won our first tender there. This is a breakthrough, and I think it bodes well. Of course, we have to deliver well. The products have to perform well, but it bodes well for future growth demand. This was something, which has -- multiple years of investment have gone into developing some of these technologies. So it will -- we need a little bit of time before it starts to convert itself into a strong growth area for us. But the other parts of rail, the traditional parts of rail have now started to revive again, and they seem going pretty strong.
And on the new products, which you mentioned, the rail, what could be the size if you look over the 3- to 5-year perspective? How large can it contribute in terms of revenue terms to the relative business?
I mean our ambition is to get over INR 300 crores, INR 400 crores out of just that -- those products. Now how it pans out, how quickly the electrification of those products happen is to be seen. But certainly, we are pretty ambitious about how much potential that those products have.
Our next question is from the line of Rajesh Kothari from AlfAccurate Advisors.
I think decent results in an otherwise challenging environment. My question is, just like in the industry segment, can you also give a little bit more insights into the -- in the power gen segment, particularly on the data center side, what kind of traction we are seeing, are there any other many large projects which are coming into this and also more insights into the distribution side of the business?
Sure. So Certainly, demand is incredibly strong. Like in all other segments and all other parts of our business, Q4 tends to be a weaker quarter than Q3. But when you compare Q4 of this year versus Q4 of last year, which was also not a COVID-impacted quarter, you will see that we have grown pretty, pretty significantly with almost like something like 33% growth over the last year. So demand is strong across multiple segments, whether it's High Horsepower, Medium Horsepower. Pretty much across the board, demand is strong. Data centers, the potential is huge. We are booking lots of orders. There are -- we have many more orders than what our capacity is today. So there is no problem with orders at all. Data centers is going to -- the boom in data centers is not going to last for just 1 year. We see it as at least a 5- to 8-year growth, double-digit growth opportunity in data centers. We are very, very strongly positioned. Every major data center player, we have the opportunity to serve them and apply products to them. Also in the market segments like industrial, pharmaceutical, hospitality, yes, media, residential realty and commercial realty, we are starting to see all of those segments start to bounce back pretty strongly. It's right now a supply-constrained environment in many of the High Horsepower nodes. Low horsepower nodes right now this quarter is the peak summer quarter. And again, we have a strong demand there. We have pretty good growth there. We have better growth in Low Horsepower than we even did in Q3. So we think that we are pretty well positioned in the power generation space to have a strong year this year.
And sir, within the power gen, the data center kind of an opportunity or your current contribution to the sales in power gen would be how much approximately?
Right now, data centers will probably contribute anywhere from, I would say, about 15% -- 10% to 15% in that range. And we think that, that percentage will probably increase over the next few years. But the overall market is growing. So while that segment is growing well, other segments are also doing quite well.
Sure. And the color on distribution business?
Sure. So as far as the distribution business is concerned, the biggest component of our distribution business is part sales, and demand there continues to be pretty robust. The next biggest segment is rebuild engines. That market is slowly starting to recover. Again, when we compare to the previous year, we grew at 10% quarter-on-quarter. And as far as service revenue, which is the second largest portion of our revenue after parts, that was same as the previous quarter, indicating that there isn't any cyclicality. So the number of service calls that we are getting and the number of requests for maintenance, the number of people getting gensets ready for the summer months and for the peak months, that continues to be at a record level, and we think we could have done a little bit better where it had our supply chain being able to get us more parts, but the demand is not a problem even from a distribution perspective.
And sir, in exports market, particularly which markets are basically seeing high traction?
As a matter of fact, when I look at the numbers, every single market has done well. Asia Pac, as compared to the previous quarter, has done a little bit worse. That could be related to the China shutdowns. I think that was probably the bigger variable there. But other than that, we haven't seen too much of a slowdown. Q4, as I mentioned, is the first quarter for global markets. And what they do is they buy all the materials by the end of the year and then they take a shutdown for the year. And by the time they come back and they start scaling up again, you lose a couple of weeks in the quarter. So the Q4 for us from an exports perspective is typically a lower quarter just by design. But even if you compare our Q4 to the previous year, we have grown by something like 62%. So it's a great indication. And if you look at our order board, we are prioritizing a little bit on exports as compared to domestic. But even then, we are not able to meet unconstrained demand because of availability of certain types of semiconductors, certain type of parts capacities in the global site.
Great, sir. That's really detailed explanation. Just one last point from my side. I think probably you repeated this probably 5 to 7 times that it is a supply chain which is creating an issue compared to the underlying demand, which the ability to supply, that's where probably the constraint starts with and probably a better problem to handle rather than following demand issues. So in a normal environment, in terms of -- do you -- would you like to have any kind of an estimate that, otherwise, what kind of the underlying demand growth? How do you track actually underlying demand growth? So what do you do internally?
So we track demand by order bookings, right? So -- and I would say, at this stage right now, we are meeting anywhere from 80% to 85% of the order book for a particular month, which tells me that we are leaving anywhere from 10% to 15% on the table that we could have done better as far as exports is concerned. And domestic, it depends by segment. We have a greater problem in the High Horsepower area than in the Low Horsepower area. But again, the problems are similar.
Next question is from the line of Charanjit Singh from DSP Mutual Fund.
Yes. Sir, just in the domestic as well as in exports side on the power gen side, if you can tell...
Mr. Charanjit, sorry to interrupt. Yes. If you're on a speaker mode, can you switch to handset and speak?
Yes, okay. Hello, am I audible?
Yes, I can hear you.
Yes, sir. So sir, my question is regarding if we have to break up this growth in terms of the volume and value growth for Cummins India in the power gen or in the export market, what could that be? And from a volume growth perspective going forward in, FY '23, your commentary is extremely positive. But from here on, how should we expect the volume growth in the domestic power gen as well as an export? That's my first question.
The power generation growth is very directly proportional to growth of GDP and the growth of the economy. So as our economy keeps growing and becoming stronger, you always need more power. As our society becomes more affluent, they need more power. As their dependence on data or their dependence on information increases, they become more dependent on power. So as our economy keeps increasing, the demand for power generation will keep growing proportionately.
From a value perspective, the value buckets keep increasing as the technology gets more sophisticated. So for the last 4 or 5 years, we have been on CPCB-2, which is what I call a mechanical technology, and we are getting ready to move to a CPCB-4+, which then transitions the product to full scope electronics and after-treatment kind of technology, which -- where there is a lot greater value-add, a company like Cummins can do. So that's the way I would probably answer this with the question you had. Demand continues to remain robust, and there are opportunities around the world for more demand.
And sir, on the export side, you have given the numbers for Low HP and High HP, how they have done. But if you can also give more granular details, especially on the High HP exports side, which geographies, I remember that it used to be really relevant in U.S. markets. So has those things change in terms of the High HP exports? And also on the Low HP exports, the -- we are doing it to the various distribution channels. So there, also, if you can highlight how the trends are being shaped and which [indiscernible]?
Yes. So certainly, the -- as far as we are concerned in the previous quarter, in Asia, I'll first talk about High Horsepower exports by region. In Asia Pacific, we sold about INR 73 crores worth of exports. In Latin America, we did about INR 33 crores. In Middle East, we did about INR 35 crores. In Europe, we did around INR 46 crores. And in Africa, we did nearly INR 16 crores.
If you look at Low Horsepower exports, we did about INR 64 crores in Latin America. We did INR 23 crores in Asia Pac. We did INR 46 crores in Europe. We did INR 36 crores in Middle East, and we did INR 18 crores in Africa.
Okay. Sir, lastly, from my side, now what we are dealing with the 3 power devices are becoming downturn. After the 1 or 2 quarters, we see this situation increasing. So while overall deficits continue to remain low in the power side, but [indiscernible] has become an issue. And here, the genset space gets more traction in the market. So any thoughts there in terms of how this scenario, which is panning out on the ground, maybe really start to keep the industry demand and then the requirement of genset, and there is overall growth changing when we touch on the Low HP is getting some benefits from that. But maybe from a year's perspective, if you can highlight more on this subject. Yes.
Certainly, as the economy keeps getting larger, the demand on power will be higher. And so automatically, we have products which benefit from that demand opportunity. The second aspect of this is that as we transition from thermal power to cleaner power, like wind and solar. There's a phenomenon called grid imbalance, which happens, which means you can use solar only during the day. You can use wind only when the wind is blowing. So there may be certain times when lots of power is available and then certain times when power is unavailable. And you can't just take all the power and store it in batteries because you couldn't afford it. The power cost becomes so great that it's unaffordable. So when these kinds of things happen, you continue to require balancing power generated through gas-fired gensets or diesel-fired gensets. And all of these kinds of phenomenon are likely to happen as our market also gets more sophisticated. We have seen this happen in Europe, in North America, in Japan, in China, and our hypothesis is that the same will happen in India as well.
Our next question is from the line of Harsh Shah from Jefferies.
I have 2 questions. If...
Mr. Shah, we are not able to hear you that clearly, sir. Please use your handset.
Is it okay now?
Yes, thank you.
Yes. Sir, my first question is that as the government is reducing the diesel engine usage, then a parent, new technology will come to the listed entity or the unlisted or you're not sure as of now?
I think all the businesses which are there in the listed entity will continue to remain in the listed entity. So power generation business as such remains in the listed entity. As far as if the power generation, for example, moves to different technologies, like PNG, LNG, hydrogen in ice, all of those technologies, which are already part of what is in the core, they continue to remain. What is to be done with some of the newer technologies, which have still not come into the country? That is something which is being explored to try to figure out what is the best path to market from an end-user perspective and from a company perspective to protect the intellectual properties rights, et cetera. So that's all being worked out right now. So I don't have a good answer of where it will lie, but our principles have always been that what has remained in the listed entity will remain in the listed entity.
Sure. And secondly, on the CPCB engine. So when do you think it will be effective in India, the upgrade?
I think 2023 has already been announced.
Our next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
So Ashwath, I have 2 questions. One, you did mention about the supply chain issues prevailing for the last 4 quarters. So if you could just help us understand the changes that we have made to our supply chain and when do you see these issues getting sorted out. That's question one. The second question is freight rates have seen a considerable increase and exports being a significant part of the business. Are we actually seeing an impact on our competitiveness for our product because the freight rates have gone significantly higher vis-Ã -vis somebody who is manufacturing locally?
So I'll answer the second question first. The answer is yes. To a certain extent, freight rates have more than doubled and there is no quick solution, which is available. And the increase on freight rates hits us 2 ways. It hits us on inputs of all imported supplies as well as imports of all commodities directly impacts us from a cost perspective. And from a selling perspective, there are 2 aspects, again. One is that you don't even get enough containers. And if you do get containers and you -- the costs are more than doubled. So certainly, the way it impacts us impacts our margins. That's what it impacts. It's still not significant enough to offset the advantages of productivity and cost that we have from India. So that continues to not be a factor because, wherever you produce it, you've got to get the material there. So that cost doesn't just go away from the overall system. But certainly, it makes it more attractive for certain countries who have treaties amongst themselves, like U.S. MCA treaties. So between Canada, U.S. and Mexico, it doesn't make it sometimes more lucrative to just buy stuff from Mexico, et cetera, into America. So there is a little bit of an impact there. What we have been doing from a supply chain perspective, we continue to focus on cost within our system. We continue to add more suppliers. We continue to keep strategic inventory. We continue to invest in new suppliers. So pretty much every strategy in supply chain could keep us going in ahead of the game is being deployed. There are war rooms and counsels being run in multiple countries to support manufacturing.
When do I see us get out of this? Honestly, I have no clear answer because every time we predict that, okay, now things look like they're getting under control, something happens, like COVID in China and China shutting down everything. No one had predicted that. No one had predicted that there's going to be a war between Russia and Ukraine, and this is going to last this long and have all of these impacts. So it's very difficult at this time to predict how long it will last. All of these variables have an impact on the overall global supply chain. So lead times are longer now, and certain commodities like electronics are still not available in the volumes that we would like. So I would say there is at least a couple of quarters before there should be better stability than what we have today.
Just one more question, if I may. So if I look at the portfolio of the India versus the parent, 78-liter is the one which is missing. Any plans of localizing it considering that this is -- the demand from data center is on a rise, and this is one category where we are seeing a significant increase in demand?
We keep looking at that certain components, which are used in those engines that are already being manufactured in India. So certainly, we keep looking at all options. And when the timing is right, when there's a right balance between demand and supply, those kinds of visions are usually taken by the company. We have the best cost base in India. So there is no reason unless if you have good demand and great utilization of not wanting to put more in India. So certainly, those kinds of products are being looked at.
We'll take our next question from the line of Sandeep Tulsiyan from JM Financial.
Yes. Am I audible? I think the line dropped last time.
Yes, Sandeep.
Yes. So I had a couple of more questions. First one was on the overall employee expenses. We've announced the VRS scheme a week or 2 weeks back. So if you could highlight in terms of the cost containment measures, what you have rolled out. How do you see -- foresee these measures to contain your overall employee cost? What kind of growth rate your employee cost will likely to see versus sales growth over the next 1 to 2 years?
So you can look at the way we have been managing employee cost currently. If you look at our employee cost, it's almost at the same level as what it was a couple of years ago. And the way we have managed that is through significant focus on productivity, significant focus on doing more with less every variable, both fixed cost and variable cost is looked at by the company, and we try to optimize those if you look at expenses on our books. Again, they are lower today than what they were a couple of years ago despite significantly greater volumes. So we are able to get leverage out of that. So this VRS and these kinds of schemes are schemes and opportunities provided to people who have worked in the company for a long time as we move towards greater automation, greater technology, trying to get greater productivity out of the same system and assets. These are the kinds of opportunities we are making available to some of the people to volunteer and take those options, and it helps us optimize and helps us improve on productivity, et cetera.
So just one contradiction there. Actually, if we look at the employee cost, it's very much in line in terms of growth with sales or actually grown higher in terms of sales over the last 5 or 10 years or so. That's the reason that question was there, what percentage or, in terms of margins, what kind of benefit you can check out of this to the extent.
Yes. But if you look at it as a percentage of sales, it actually dropped pretty significantly. When I look at the employee cost in Q4 of '19, '20 versus what it is in Q4 of '21, '22, we have got almost 4 percentage point drop. So that has only happened because we are focused on that and gotten greater productivity despite your annual increases in labor costs and other employee costs. Despite that, we have maintained the -- we have dropped the employee cost percentage as a percentage of the overall cost of the system.
Understood. So...
Yes, we continue to focus on that. So my point was not to say that this is not something we care about. Actually, we do care about it, and we talk about it all the time and there are dedicated teams who are focused on managing that. And the VRS scheme you referred is part of those kinds of exercises to keep looking at the structure continuously and trying to get better at it.
Fair enough. Sir, another question on 2 specific verticals. One is in data centers. A couple of quarters back, we had one large order of INR 150 crores revenue what we had executed. And at that point in time, we had guided that every alternate quarter, we shall see one such order, but we haven't actually got -- saw that materialize at least in the previous quarter. So would you still maintain that kind of a guidance that 2 such orders can be done everywhere? And second was on railways within industrial. If you look at the numbers over, say, a 2- or 3-year period, we have seen a sharp contraction in that business, although you highlighted some new orders are won on the electrification side. But do you still foresee the transition from our 2 electrification as overall stagnated or kind of reduced the opportunity from railways, although we might grow on this new base, but overall opportunity size has contracted or that has increased. If oyu could just help us understand that.
So the last 2 -- see, the last 2 years are not a fair comparison at all because they are COVID-impacted years. And of all the segments that we participate in, rail is the one which is the -- we hit the worst. So they are bouncing back. So we should see some of the traditional demand come back. But certainly, the move to electrification as we migrate there, we see many more opportunities coming up over there. So we remain quite bullish and optimistic about rail. We are going through a transitionary period right now, but we remain pretty optimistic that things will -- we can get growth out of it.
Okay. And on the data center part?
Data centers, yes, some of these is just an execution timing issue. We continue to remain highly optimistic. Whether every quarter, we will get whatever, INR 150 crores or INR 200 crores order or not, it's difficult to say. But certainly, we will keep growing that business. And every year, we expect at least double-digit growth in that segment. So if in 1 year we have got an order and if you are expecting double-digit kind of growth in that, we have to get even more orders. So yes, there is a strong pipeline. I'm not sure about the exact timing of when we will execute there. But yes, you will see orders that had come in at pretty frequent intervals.
Our next question is from the line of [ Renjith ] from Mahindra Manulife Mutual Fund.
Yes. Sir, one clarification we would like to understand, sir. In future, when these -- the smaller MHP gets converted to batteries and that kind of technologies, so how will that work in terms of the IP rights and royalty payments? Will that be transferred to the Indian entity or we have to pay some higher royalty to do parent entity?
And as a follow-up, like tomorrow when hydrogen also comes, how are you going to structure these things? What is the thought process behind that? So as a listed entity, what we gain and how is that the whole voting will pan out?
First of all, these transitions are nowhere in the short term. The short term for power generation industry for transition is anywhere from 10 to 25 years. So at least in the near future, we don't see anywhere in the world that our scale of business has transitioned to batteries. But it can, 10, 15 years from now some portions of it.
Cummins has a lot of IP as far as batteries is concerned. And like IP for diesel engines is transitioned to the listed entity. In a similar manner, IP for batteries and some of those kinds of solutions like hydrogen ice, et cetera, will get transitioned to the listed entity. So there is no difference in the way of thinking, the same logic, which is used historically, which is just different technologies going into the same market. So the logic is similar. So what those percentages, et cetera, will depend on how much investment the parent has made in acquiring those technologies or spending on R&D, et cetera. So it cannot be compared to a technology, which has been in existence for 100 years. But the logic of the way company thinks about it is very similar to what has been done in the past.
Okay. Okay, sir. And another thing, like I don't know whether it's first been asked like what's the -- there has been talks regarding the restructuring of the Cummins India entities into a single legal entity. So anything on that which you would like to highlight or any time lines?
No, nothing as of now. These matters keep getting discussed continuously. And the moment we hear something, we will certainly keep everyone posted. But there is no progress as of now or anything I can announce at this stage.
Okay. And certainly, the industrial segment has seen a sharp Y-o-Y decline also. Q-o-Q, you can understand that can be something. But this sharp Y-o-Y decline, so is that something to be alarmed about? Or you believe that decision has done and it will come back in the next quarter or something like that?
Industrial segment has not declined year-on-year versus last year. As a matter of fact...
I'm talking about the 4Q.
That's right. So only in the fourth quarter, we have seen a decline. We still remain -- I think we've got very clear factors as to why we see that decline versus the previous quarter. If you look at the full year, you can see that we have still grown. And we continue to believe that even this year, we will see growth even as compared to last year. So we don't see any permanency in the difference you see between Q3 and Q4 or the comparison of Q4 last year and in this year. It's an anomaly according to us. We remain optimistic that we will do better this year than what we did in the previous year.
Our next question is from the line of Aditya Mongia from Kotak Securities.
The question that I had was more on revenues. And I'm trying to kind of see through the prospects of revenues to grow from here on versus what the business-as-usual scenario will suggest. So obviously, there are linkages to underlying factors such as economy. And I'm trying to kind of capture the alpha or the growth beyond that, that can happen because things are probably changing across segments. I'll start with power gen. As you rightly said, there are several themes that are going to play out in terms of there being a requirement for higher insurance, residential societies wanting more and more gensets. There'll be grid in balance, as you rightly said. There will also be, let's say, a prime over demand because of power deficit. There's a data center element, which I think is due to a part of power gen demand, maybe 20% or so. And then there are market share gains that can happen from CPCB4. Is the alpha that you can get, which is growth beyond what GDP would suggest, is this a meaningful number than in power gen for you if you see you from a 3- to 5-year perspective?
We think so because even globally, we have seen this trend work in multiple market segments, including in the automotive space where there is consolidation also happening, which means as people are migrating to some of the newer technologies, they cannot keep investing in some of the legacy technology. And so there is more consolidation happening as well. And so -- and when consolidation happens, the market leader has the greatest leverage. So there are opportunities. So we do see growth beyond the GDP as an opportunity for us.
Okay. And then I would want to think through maybe 1.3x is also possible for just total sell on power gen [indiscernible]?
Yes. We remain very bullish on power gen. So we think, globally, there are many opportunities. And we are -- we have many customers, and I think the potential for that market to grow is significant.
Understood. And the second will be my second segment for now. So let's say, the distribution. The fact that there is a deficit for usage where you go up and the fact that the electronic engines will become a larger part, do you foresee distribution segment growing probably as fast as your product portfolio?
Historically, distribution in India has grown at a lower rate than in some of our other markets because in other markets, distribution also does sales of new engines in the sales of some many different types of products. So we are getting into a little bit of that, where we are introducing more products beyond what are manufactured by our company into our distribution channel, which already exists. So those are new incremental areas of opportunity. Certainly, parts will continue to grow. And there is a long tail of on parts. So these products last for dozens of years. So you continue to serve historical markets, and you also continue to serve new markets with more complicated, more expensive parts for electronic kind of engines. The need for full service also increases. So if we have a certain percentage of our service market beyond warranty, that percentage usually goes up as the technology gets more sophisticated. So there's an opportunity to grow there as well. And as people get more environmentally conscious, the opportunity for rebuild and reconditioning products, which India has been a weak market, but globally has been a pretty strong market for Cummins, that also represents a very good opportunity for the distribution business to grow. So again, this is a business where we are aiming for and targeting at least double-digit growth year-on-year over here moving forward for many years, but there is a lot of fundamentals that we have to keep working on and build to be able to do that.
Understood. So rounded off on exports, again, the second question, how much alpha as you gave the breakup? Today, Europe is about 20%, 25% and U.S. is 0 or almost 0, North America. And there are new products that you would want to launch. Any sense of how strongly you can export grow? I know you subject to comment that you'll be disappointed if it doesn't double up in a certain time frame. Just some more granularity on when to start expecting North America and a greater part of Europe starting to contribute.
You can already see in the last few years that it's -- it has stagnated. It has dipped. And now we are beginning to grow it back again pretty aggressively. And the growth that we are seeing recently is driven by our improved focus, launching many new products, launching fit-for-market kind of products and then tackling the needs of individual markets rather than having generic products, which kind of cater to everything. So we think that by focusing on even the existing markets that we cater to, forget North America, with the complications of U.S. MCA, et cetera, it's a more difficult market to penetrate. But even the markets that we currently are serving, we think there is an opportunity to double, as I've stated multiple times. It's us to lose if we don't do that, and we are pushing pretty aggressively to get more growth there.
Understood, sir. So just to kind of summarize, I'll not ask another question. But let's say, GDP growth, 7%. The way we are discussing across segments. From a volume perspective, can the company grow double digit for a long period of time?
This market is certainly cyclical. So -- but there is no logical reason why it cannot grow at those kinds of rates. But I would be just speculating if I had any real insight on exactly at what volume rate it can grow. So we are not clearly giving you any guidance. All we are saying is that, as of now, looking for -- looking out in the next few years, the demand scenario globally looks quite optimistic. And we think that growth will happen.
Ladies and gentlemen, that was the last question. I now hand the conference again to Mr. Ashwath Ram for his closing comments. Over to you, Mr. Ram.
I'd like to thank all of you again for taking time to attend our investor call. These questions certainly help us to think about the way our investors think about our business. I remain cautiously optimistic about the demand for Cummins India. And I thank you for all your support, and wish you a safe and healthy year. Thank you.
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 now ending the conference call. You may now disconnect your lines. Thank you.