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Good morning, ladies and gentlemen. Welcome to Cummins India Limited Q4 FY 2022-2023 Earnings Conference Call. We hope you are keeping safe and healthy. [Operator Instructions]I will now hand over the call to Mr. Ashwath Ram, Managing Director, Cummins India Limited. Thank you, and over to you, Mr. Ram.
Good morning, ladies and gentlemen. Hope all of you are doing well. I'm Ashwath Ram, Managing Director of Cummins India Limited. Mr. Ajay Patil, CFO of Cummins India Limited is also on the call with me. Thank you all for joining us on this call today.As most of you know, the CPCB IV+ norms will become effective July 1, 2023, for gen sets up to 800 kilowatts. I'm happy to inform you that the company is ready with its products to meet the new emission norms and is confident of offering the best-in-class products to its customers, which will continue to deliver superior performance and meet the new emissions norms.Now with the results; we are happy to announce that Cummins India Limited recorded the highest ever revenue and profits for the second financial year in a row, primarily driven by strong demand across various market segments and geographies and a conscious effort by the company on systematically managing costs and focus on improving profitability. I would like to share the financial results of Q4 FY '23 and financial year '23 through this call.Getting into the financial results for the quarter ended March 21 (sic) [31],, 2023, with respect to the same quarter last year, our sales at INR1,889 crores are higher by 29% compared to INR1,469 crores recorded in the same quarter last year. Domestic sales at INR1,396 crores are higher by 33%. Exports at INR493 crores are higher by 17%. Profit before tax and exceptional items at INR413 crores are higher by 69% compared to INR244 crores recorded in the same quarter last year.For the quarter ended March 31, 2023, with respect to the last quarter, our sales at INR1,889 crores are lower by 12% compared to INR2144 crores recorded in the last quarter. Domestic sales at INR1,396 crores are lower by 13%, exports at INR493 crores are lower by 9%. Profit before tax and exceptional items at INR413 crores is lower by 14% compared to INR479 crores recorded in the last quarter.Segment-wise breakups for the quarter ended March March 21 (sic) [31], 2023. The sales breakup segment-wise are in the domestic market, power generation sales were INR672 crores, a 43% increase over last year and 6% decrease over last quarter. Distribution business sales were INR483 crores, 31% increase over last year and 8% decrease over last quarter. Industrial domestic business sales were INR217 crores, 14% increase over last year and 36% decrease over last quarter. High Horsepower exports were INR207 crores, 2% increase over last year, an 8% decrease over last quarter. Low-cost power exports were INR244 crores, 31% increase over last year, 7% decrease over last quarter.For the year ended March March 21 (sic) [31], 2023, with respect to the last year, our sales at INR7,612 crores are higher by 26% compared to INR6,026 crores recorded in the last year. Domestic sales at INR5,562 crores are higher by 26%. Exports at INR2,050 crores are higher by 27%. Profit before tax and exceptional items at INR1,506 crores, is higher by 47% compared to INR1,028 crores recorded in the last year.Segment-wise breakup for the year ended March 31, 2023. The sales breakup segment-wise, domestic -- Power Generation domestic sales were INR2,555 crores, a 30% increase over last year. Distribution business sales were INR1,872 crores, a 26% increase over last year. Industrial domestic business sales were INR1,046 crores, a 16% increase over last year. Exports -- High Horsepower exports were INR897 crores, 11% increase over last year. New horsepower exports were INR952 crores, 40% increase over last year.With this, I now open the session for questions. Thank you.
[Operator Instructions] We take our first question from the line of Ravi Swaminathan from Spark Capital Advisors.
Congrats on a very good set of numbers. My first question is with respect to the Powergen business. If you can at an annual level, give a breakup of how much of the revenue is below 800 kilowatt and above 800 kilowatt? And how do you see the current prebuy scenario with respect to the Powergen sets, if you can give a through process?
Right. Typically, we don't classify as below 800 kilowatt and above 800 kilowatt. Typically, we are classifying the sales by high horsepower, which is above 500 kilowatt. So I don't have the data to just say what is above 800 kilowatt, but I can -- by empirical thumb rule kind of analysis, I can say that roughly about 20% of our sales are above 800 [ kw ].
And how do you see prebuying for the below 800 kilowatts ahead of the implementation of the norms?
The prebuy is pretty strong at this rate. And as a matter of fact, we are working literally 24/7 to meet the prebuy right now.
Got it. And what is the likely price increase that is going to be there with respect to the below 800-kilowatt engine prices?
Yes, it's going to be dependent on the node and the complexity of the changes that are on each of the nodes, I would range between 20% to 50% is where the ballpark of how much we think prices will increase.
Got it, sir. And compared to the Powergen business, the industrial business growth on an annual basis has been relatively softer. Any reason behind that? Is there any weakness [indiscernible]?
Yes. As a matter of fact, there are some pretty solid reasons why the industrial segment in India has been lagging the Powergen segment, mainly because construction has been -- was pretty slow in the beginning part of last year, and has a begun to recover in the last 2 quarters. Rail also has not been as strong as it has been in prior years, primarily driven by the move towards electrification. And we are lagging as far as getting some of our new products still introduced in those markets. I would say those would be the primary 2 reasons why -- even though we have had growth, the growth is not as exciting as the growth in the Powergen markets.
Got it. And with respect to the export market, LHP has grown faster than the HSP categories. Any reason behind that? And overall exports has it come back to pre-COVID levels in terms of demand, in terms of market demand normalization as a trend?
Yes. I think LHP has grown faster, because the volume is in LHP. And as we introduce new fit-for-market products over the last 2 years, those products have gained more and more acceptance, so we are able to do better in multiple regions around the world. So the combination of that has led to a greater growth than in the high horsepower segment where we always had the right kind of products for those units.
So these new products are in newer geographies or in existing geographies, and overall export, what kind of steady state growth should we expect?
The products, which we introduced, which we call the fit for market products -- these were the fit for market 2.0 products. They are there in almost all nodes and for all markets. So it's a combination of new products with more growth in each of the markets is the way I would put it.I think as long as the global markets fold out, we should continue to see steady growth in the exports market, even though we are subject to the global trends of economy and slowdown in different regions. So notwithstanding that, I think with the kind of products that we have and the fact that we are going to continue to upgrade and continue to try to launch new products which are fit for market 3.0 is what we're going to call it now, I think we continue to see that there is demand around the world, which we should be able to capitalize on.
Got it. [ Last ] question is distribution, revenue mix between Powergen and Industrial, if you can give?
Distribution mix between Powergen, again we don't classify the distribution business by Powergen and industrial. It's very difficult to provide that kind of information. The way we classify it is, we classify by parts, by rebuild, by service contracts and miscellaneous. So that's the way we try to look at the distribution business. But since Powergen is a big chunk of the aftermarket from a service perspective, I'm pretty sure it's got a major contribution as compared to industry.
Thank you. Ladies and gentlemen, in the interest of time and fairness to all participants, kindly restrict questions to 2 per participant. If you still have more questions, please join the queue afresh.We will take the next question from the line of Parikshit Kandpal from HDFC Securities. Please go ahead.
Hi Ashwath. So my first question is on prebuying again. So in Q4, going by the number, it doesn't look like there's too much of an impact of prebuying. So either -- so we can resonate out in 2 ways, either the demand is not so strong, and the second thing is that, though we are expecting a price hike of 20% to 50%, but the demand side -- consumption side market is still expecting that this much of price hike may not be absorbed. So can you give me some more clarity on this, whether the prebuying will come in, in the first quarter, or how is the market picking up the pricing ahead of this cutoff date?
Certainly, the prebuying in this quarter, which is the first quarter, is quite strong and that should be seen in our future results. How the market will drop the prices is something which is still -- which is still to be seen. But our experience in markets around the world, it depends on the overall market demand and requirements. So for example, in the automotive market, there is typically a strong prebuy and then there is about 1 or 2 quarters where the demand drops by 30% to 40% and then everyone readjusts to the new prices and it picks back up again and moves on.Now it depends on the situation in our market, so it's not very, very clear how that will go on. So at least the prebuy is strong at this rate, but we expect that once the transition happens, once the deadlines are cutoff, the demand does not go away, if you need a generating set, you need a generating set. You don't just wait for it, and you can't postpone some of those purchases. So we do expect demand to bounce back as long as the economy continues to do well, is the way we are thinking about it.
Okay. And second question is on the energy transition. So we have been making a lot of announcements and have been at the forefront of making a hydrogen tieup -- Tata Cummins JV. So just wanted to get a sense, anything, have we chosen a timeline or strategized for the listed entity in terms of the transitions from the projects [ housed ] in the listed entity.
So I don't have anything to announce at this stage. All I can tell you is we are in advanced stages of negotiation to tie up with a few big partners, and that is not preventing us from bidding on projects and continuing to move ahead as the opportunities arise. But yes, stay tuned, we are trying to kickstart some pretty large projects.
Okay. And just lastly, sir, on the 800 kilowatts, as a percentage of this year's revenue potential, what will be approximately the -- up to 800 contribution to the revenue?
In the power generation business, like I mentioned, the below 800 kilowatts is roughly about 80% of what we sell. So I would think that is roughly the proportion. But I don't have the exact numbers with me right now, but we should be able to calculate that and provide some clarity in the future.
So this business will [ go on a ] 20% to 50% price hike. So Powergen and domestic up to 18% will be almost 20% to 50% price hike?
That is correct.
We will take the next question from the line of Mohit Kumar from ICICI Securities.
Congratulation on a very good quarter. First question is on the -- as you answered the [indiscernible]. Can you take the listed entity to have a fairly large role to play in the hydrogen opportunities? And can you expect some localization in the -- let's say, 3- to 5-year horizon?
Certainly, the [ listed ] entity also has a large part to play in the new energy journey, and we have been bidding for multiple projects within that space. We are trying to figure out the best path to enter the market. And yes, certainly, we have been in India for 60 years, and it's clear to us that we cannot be successful in India if we don't localize and manufacture in India. But the best part to market where the best incentives are, what's the best way to do that, I think that's -- those are the kinds of decisions we are working on today to try to figure out how to do that.
Understood, sir. My second question, you spoke about 3.0. What does it mean? And what are the kind of new products you're looking to introduce? And if you can just detail out the [ additional ] market, it will be very helpful?
You are asking about fit for market 3.0, right?
Yes, yes, definitely. Yes.
Okay. So fit for market is our attempt when we originally launched the Powergen product into the global market, we launched one, what we called a one brand or one class of products, which was designed for the -- meets the requirements of all markets around the world. These were based on the best-in-class kind of designs, which were most sellable in Europe, et cetera. What we found out over the years is that different regions and different markets require customized products where some features are not required in some areas. Some features are overengineered for some areas. So we began adapting the product and launching products, which are suitable for very specific regions and markets.Like, for example, for some parts of Africa, why do you need a block heater, whereas it's required in Northern European countries or in America. So things like that, we began fine-tuning features and performance for specific markets. And that we then launched it for market 1, when we went on to 2, where we made more changes and now getting the third iterations where we are fine-tuning to target and to look at different market segments within those regions to be better at.
Thank you. We take the next question from the line of Renu Baid from IIFL Securities.
If you can just give some inputs in terms of, when you commented on CPCB IV and the kind of prebuy, this transition will also make certain nodes unviable under the current regime, which are under CPCB III. So are you expecting any particular load,specifically could be the [ 1,010 kVA ] or so, see a significant jump during this transition, post transition period, which is outside CPCB IV. And what would be your view in the HHP growth segment for '24?
So in the below 800 kilowatt, pretty much every product is undergoing very, very significant upgrades. All our products are now going to be electronic products and all products are now going to require aftertreatments,that is 2 significant different changes which are coming to the products, which is what contributes to most of the change in cost. Along the way, we have made our products lot better than what they used to be, when they were pure mechanical products, because these electronic engines, were able to control the efficiency of the overall systems a lot better than we used to do with mechanical systems. And with that, we are also able to improve the power density of the product pretty significantly. So those are the kinds of things which we are doing to continue to provide more value to the customers.As far as the High Horsepower is concerned, certainly during those transitions, there could be the higher-end loads in high-horsepower where if the pricing of 800 kilowatt product turns out to come to be -- pretty close to 1,000 kilowatt products, customers may prefer to buy the 1,000-kilowatt product getting more power for the same kind of money. So certainly, the demand of those kinds of products could increase and some peripheral nodes would decrease.But we have planned for all of that. We have set up capacity, significant capacity. We continue to keep enhancing and increasing that capacity, the loads in those areas, the -- even the CPCB II products, they continue to be exported and sold in international markets. So we don't see us taking out demand from one area and moving into other areas. So we have sufficient capacity to cater to all those changes. So I don't see those as hindrances, I see those as opportunities to be able to do more.
Sure. Sir, secondly, under the CPCB IV regime, the entire approach towards distribution aftermarkets, and go complete CKs with SARs [indiscernible] satellites and electronic engines is coming in. So how has Cummins geared it's feet on the street to capture a higher share of this recurring income base on the new installed base?
Yes. Yes. So firstly, 100% of the engines are covered by our distributing system during the warranty period. And because these products require lot more sophisticated tools and technologies to diagnose, monitor, as well as to repair and fix, the entire distribution system has been upgraded with those tools and technologies, which is not really available. The mechanical product could be pretty much serviced and repaired by anyone. And now that that just goes away.But what we are offering customers along with the ability to be available 24/7 and be online and have all the tools ready and available, including parts and service capability, we're also offering packages which extend warranty, which provide more support and service features, 24/7 kind of support as well as extending the warranty, which then gives the customer the comfort that they don't have to worry about service in any manner. And so they see which are -- or they stay within the fold of Cummins for longer periods of time.
Sure. And further to this, sir, overall, can you just share some of your inputs and comments on how are you seeing some of the end segments within Powergen, Industrial behaving in the next 12, 18 months? Especially end market demand outlook, if that can be shared, it will be very helpful?
Yes. As far as segments are concerned -- the segment -- I continue to mention in my previous 2 calls, that data center, infrastructure, hospitality, hotel and now the manufacturing continue to remain very, very strong. You are seeing even commercial and residential realty start to slowly bounce back and get stronger. So when I look across segments, I'm continuing to see, in proportion to the growth of the GDP, the segments continuing to hold. So all those segments which are contributing to the growth of GDP are contributing to demand [indiscernible]. So that's the way I'm looking at it.As far as the industrial markets are concerned, construction is the one which has bounced back pretty strongly and which is -- what is going to help us to continue stronger growth. Mining and defense, which were strong in the previous couple of quarters. They have been flat, but they are now starting to again see signs of growing again, because demand for coal, demand for steel, et cetera, continue to rise. And so we're starting to see some of those segments start to increase.Rail has been steady, though it's not been growing at the aggressive pace for us. We are still in the qualifying stage for some of our new products in that space, and we think that only after those products are qualified and are being sold, will we start to see faster growth in rail products.
Thank you. We will take our next question from the line of Rajesh Kothari from AlfAccurate Advisors.
Congratulations Mr. Ram for a great set of numbers. Super delivery and execution. Just 2 questions. One is on the profitability side, how do you see this year considering that raw material costs are now cooling down? So how do you see that, that's the first question?
I think we've been able to leverage that. So if you look at the last couple of quarters, with the price increases that we have been -- we have put in, we have been able to overcome the significant commodity increases that we had in the past. And as those commodities have started to come down, we have been able to improve our profitability and better -- we've also managed to control our costs during that same time period. And so the leverage of volumes, as well as managing costs well is what is leading to better profitability numbers?
No. So my question is how do you see next 12, 15, 18 months, considering that RMC remains soft.
Right. So what we have endeavored to and what we have been saying for the last couple of years is, our ambitions as a company are to grow at twice the GDP and to continue to attempt to increase our profitability by 100 basis points year-on-year. Now it's easy for me to come out and make that kind of statement, it's a lot more complicated on the ground to continue to maintain that momentum on improving profits. But we think the changes in the technology are close monitoring of our costs, the softening of the commodities. I think all of those will enable us to fold or even maybe attempt to improve the profitability level from the levels we have reached so far.
Great. And sir, second question is, you said that currently, prebuying this quarter, of course, looks very strong. So what would be your average capacity utilization, say, in last year, FY '23?
Of the manned capacity, we are almost at 90% utilization of our manned capacity. But if you look at installed capacity, we are anywhere from 60% to 65% utilized on that, and so there is room available for us to grow further, without making significant capital investments. And we are also making some balancing investments. Those investments are ongoing, because there are certain nodes, where despite having so much capacity, we are still running out of capacity, and we are not able to meet market demand in certain nodes. So on those kinds of nodes, we are actually increasing capacity going forward.
So is it therefore fair to assume that, considering the prebuying right now, at least currently, as of now, which is extremely strong. Therefore, there can be strong double-digit kind of a volume growth compared to FY '23 because of this pre-buying kind of thing?
I wouldn't say compared to the entire year, but certainly compared to previous quarters, the demand is strong enough for us to have significantly better quarter. That's because -- if you read the CPCB IV regulation, we will not be allowed to make CPCB II products after July 1. We have only this quarter in which to do the maximum production of prebuy, and whereas our -- the customers can be sold the product all the way till December. So we expect that even if we maximize and even if we do a very strong prebuy, the market will still run out of inventory pretty close to before December.
Oh, I see. Understood. Sir, are you saying that you might have to basically fill the channel at least for this quarter up to July kind of thing till the timeline, so that they at least have inventory up to December to cater to the market?
Yes. So that's the attempt which the company is working on.
Understood. Understood. Understood. Great, sir. So I think just to conclude, everything looks by and large, being except, of course, this global recession [ fears ], those macro headlines are always there. But otherwise, across the parameter, you see most of the user segments, the domestic exports, your fit-for strategy, everything by and large looks green rather than amber.
I would say, from an overall perspective, yes, I would say -- I would agree with that statement. But when we stratify it and look at it regionally, it's different, it's mixed. Europe, for example, is flattening out. We are seeing Africa start to pick up a little bit, but Africa is a much weaker market for us. Latin America is kind of doing okay. If you look at Asia, some countries in Asia are doing well, and some are not doing as well as we would have anticipated. So it's a pretty mixed picture right now. And that's why it's very difficult to predict that everything is going to be wonderful. There's a lot of variables at play right now.
Thank you. We take the next question from the line of [ Rushabh Shah from O3 Securities ].
Hello, am I audible?
Please use the handset.
Congratulations on a great set of numbers. I have a couple of questions. The first is for Cummins, what is your view on green hydrogen electric going ahead in the future?
So from an India perspective -- for hydrogen is very strong. The reason is that India has no real oil of its own. So we import our oil, whereas we have a lot of sunshine, we have a lot of arid land and a lot of space. So we are able to produce green energy. And once we are able to produce green energy and that gets up to scale, suppose the renewable energy as a percentage of the grid is greater than 35%, the grid starts to become very unstable. in the sense that you can't store this energy. So it's very expensive to take the energy, create it and just store it in batteries. It's not practical at least as of now, the way the technologies exists.So the only other option is to take a lot of that green energy and convert it into hydrogen and then use that hydrogen and then store it as ammonia or create green ammonia or then use the green hydrogen as a transportation fuel, use it in decarbonization. So we are well placed to be able to do that as a country. How quickly we can do that is a lot dependent on the speed at which the hydrogen infrastructure can be set up -- and I do not think that the 3- to 5-year journey, I think it's a 10- to 15-year kind of journey is where Cummins is -- based on the current situation of how much raw infrastructure is in place.
Okay. Sir, you mentioned transportation. So what are your views on using the hydrogen [ product ] has been for transportation on a shorter distance versus the larger distance?
For the shorter distances, batteries can be used, but batteries are quite expensive. And for longer distances, batteries are absolutely not viable. So the only answer is hydrogen. Hydrogen today, there are 2 technologies for mobility. The first one is fuel cells, which are 100% pure hydrogen needs to be used there, 99.49% levels of purity of hydrogen is required to drive fuel cells. And fuel cells are very expensive. They are 5x -- the fuel cell electric vehicle is 5x the cost of a conventional diesel vehicle as of today. So we have come up with a solution called hydrogen internal combustion engine, which sort of addresses this issue. We are able to burn hydrogen in the combustion engine we already have with newer designs, and we are able to solve that problem.It still does not go away from having to create a base hydrogen infrastructure and being able to supply hydrogen to -- for these mobility applications, which is why I said scale deployment can only happen in a 5-year plus kind of timeframe.
Thank you. We take next question from the line of Sangeeta Purushottam from Cogito Advisors.
This is Andrey, Sangeeta's partner. I have 2 questions.
Sorry to interrupt. Sir, please use the handset, we are not able to hear you properly. Thank you.
Yeah, can you hear me now?
Yes, please go ahead.
First, can you just tell us what is the pattern of seasonality in your sales? So if your sales is [ 100 ], how much happens typically in Q1, Q2, Q3 and Q4. And I wanted to understand the relative outperformance of Q3 versus Q4 in that context?
Yes. So from a Cummins perspective, for us, Q4s are typically the strongest because -- sorry, Q3s are typically the strongest, because the global economy works from a January to December kind of timeline. And so as budgets get closed out globally, most of the buying takes place -- most of the accounts try to maximize their scale for the year in Q3. And then Q4 is typically a lower quarter because, as people are coming back from Christmas and the economy really starts to pick up only by the middle of January and then it starts to pick up momentum in February and March. And then the Q1 of the financial year is also a reasonably strong quarter, because it's the peak of summer in India, and that's when the Powergen sales are the maximum. And then the quarter after that, is the monsoon season, so it's likely to see a bit of a dip. That's typically the way it works.
Right. My second question is a very long-term question, and that relates to the future possible obsolescence of diesel gen sets, because diesel costs will keep increasing because of the increasing regulatory norms and other competing technologies like solid oxide fuel cells possibly will start decreasing in terms of cost. So at some point, these cost curves will intersect. In which case, your product mix will change, and I wanted to know what is your thinking in terms of the interplay between yourselves, between your parent company and Tata Cummins if it were to come in, as to who will do what in this scenario?
Yes. So from that, it's pretty straightforward. As far as the power generation market is concerned, and let me talk about that market, we think that the lower end of the market will eventually get to batteries, the sub-25 kilowatt market will eventually get to batteries and Cummins has already invested in technologies to be able to cater to that. So as the timing of that becomes appropriate, we will be ready to transition into that space, including making investments in India to be able to do so.The above 25 kilowatt to even high horsepower range, we think is not going to be transitioned away in the Powergen market anytime soon. Are you -- it's a up to 2050 kind of timeline when we see that kind of transition happening. And we see above 500 horsepower not happening even beyond 2050, maybe 2070 is the time line by which those markets are at risk.And so for each of those nodes and segments, the company is making the right kind of investments to have that transition happen. The other companies which Cummins has, like Tata Cummins, they produce engines for very specific applications like the automotive application. When those products are used in the power gen space, they are still routed through the main unlisted entity. So that logic has always been clear. So the company is looking at the curves of how these changes will happen and then making the right kind of investments to ensure that we continue to maintain and improve our market position.
So at whatever future point of time, solid oxide fuel cells by example, were to become an increasing part of the consumption pattern, then Cummins will also participate -- the listed entity will also participate in the spec directly, rather than just through -- acting as an agent for the parent. Is that correct?
That is the way we have always thought about it, but I will not say that is the only way we will think about it. We will look at the best path to market for the overall company to reach the customer in the lowest possible cost manner. I mean, that path is something different from -- deal from the main legal entity, we will look at that. But as of now, we have not found any such avenues or options. So as of today, I can say that's the way we have done it for 60 years, and that's the way it's going to continue.
Thank you. We take the next question from the line of Rahul Gajare from Haitong Securities.
I have this question on the CPCB norms. With respect to the pricing increase, you've indicated that the expected price increase would be in the range of 20% to 50%. This is compared to what you had said in Q3, where we were expecting the price increase to be in the range of 30% to 50%. Now typically in an engine, and this clearly, I would imagine is the cost of the engine, which is about 70% of the Powergen. So is it right, then the effective price increase for the end consumer, reading the range of, say, 20% to 25%, is that the way one should look at it?
Actually, the effective price for the end customer is likely to be 20% to 50%. So it depends on the node and depends on how much of the Q4 -- the actual increase in the power train is likely to be anywhere from 50% to 100%. So how that translates into the gen set is what comes into the 20 to 50 kind of percent bracket?
I see. Okay. Fair. Now connected with this on the profitability. So with this cost increase and the price increase which is expected, do you see this will be margin accretive or margin neutral for engines below 800 [ kV ]?
We have always attempted to follow principles of pricing from a market perspective. And in those principles like I've stated, we are constantly trying to say what is the value add that we are bringing to the customer. If we can get better value add to the customer and improve profitability, that would always be our attempt. So to answer your question, we hope the technology and the features and the improvements that we are bringing in, will enable us to improve our profitability in all of these loads, because now we are no longer fighting on commodities, we are fighting on a very engineered and complex structured product. So we hope that that allows us to improve on the margins that we have.
We take the next question from the line of Mihir Manohar from Carnelian Asset Management.
Congratulations on a good set of numbers. Sir, actually, I wanted to understand, I mean, the CPCB IV+ norms getting -- kicking in, will we be able to cater to the U.S. geography or the LatAm geography, so that was my first question? Second question was, I mean, given the fact that the engines are now being upgraded. So what are the kind of sets or what are the kind of inquiries we are seeing, specifically with the export side, just because of the implementation coming in. So if you can throw some light, I mean, however are we trying to increase our market share, increase our presence in the overall export market, that would be helpful.
Sure. So with the CPCB IV+ norms, India has the tightest regulation in the world for power generation, which means these emissions are tighter than what in North America is called Tier 4 Final Regulations. And even in North America, they don't have these for standby gen sets that we have in India. So for the first time in the world, I think India will lead, as far as the tightest emissions in the world are concerned. So that certainly ensures that there are no products being sold anywhere which we cannot cater to. And certainly, our attempt around the world is to export more products out of India, not -- because we have an advantage from India, we have a cost leverage advantage from India.And as far as Cummins is concerned, Cummins has only 3 main manufacturing hubs around the world for these products, North America, China and India. And so India will continue to play a strong, if not stronger role in the future as far as exports is concerned. There are many product families that are only made in India and they cater demand around the world. So will CPCB IV+ help us do even more? The answer is, I think, yes. But those products directly do not help us today because they are of even higher emission regulation than what is required in, even the leading markets of the world.
Thank you. We take the next question from the line of Nitin Arora from Axis Mutual Fund. Please go ahead.
Can you talk about on exports, how is the end market doing across Europe and, let's say, Africa, China, if you can talk about that? What's the outlook there?
Yes. So sequentially, when I look at it as compared to the previous quarter, it has dropped a little bit. And what I would say is across the board, when you see overall, it has dropped by 9%. But we have seen the largest drops have been in Latin America followed by Asia Pac. Europe has been slight -- as a matter of fact, Europe has been -- despite typically the Q2 being weaker, Europe has actually held on, which tells me that demand in Europe is not dropping at all. Middle East has also not dropped as much, and Africa has actually increased. So that's how the overall globe is looking like.
Okay. No, but given the trajectory now, do you think next year growing on this base is still possible, or how one should look at the growth aspect, if you can comment in terms of inquiries or pipeline? What's your best estimate there in terms of growth in the exports or we should see a decline here on -- because of the base?
I mean the kind of growth we've gotten between '22 and '23, I don't think that is sustainable. But certainly, growth is possible, and we are exploring more products, more options and more segments to be able to continue for the growth to happen. And India continues to play a bigger role in the exports market. So we do see that the opportunities are not really diminishing. So we are not -- at least we don't see this as that we have peaked, and so there are no more opportunities. There are quite a lot of opportunities and order [ books ] continue to remain full.
Okay. Now sir, just on your aspect of prebuying, which is not a sustainable way of looking at the business. I mean prebuy will come and will eventually go away. Can you talk about in your prebuying, which consumers are -- which end markets are buying? I'm assuming the data centers would not be doing a prebuy. I mean, a project business would not be doing -- would not be one in a hurry of a prebuy or they are and what end market is doing pre-buy where the confidence is coming look, the pre-buy will be heavy, which is not a sustainable thing. Eventually, it will fall off. Can you talk about which -- where are the segments which is where the pre-buy is coming?
The prebuy typically happens in a larger percentage in the lower cost, lower horsepower kind of loads, where if somebody is going to buy -- if somebody knows they're going to buy a genset in July or August they are like -- let me buy it or they're going to buy it early next year. They are like, okay, let me buy it -- let me prepone it by a few months, if it will save me 20%, 25% money. And those are not the kinds of markets which are so sensitive to emissions and those kinds of requirements. Specifically the consumer markets, the small buyers, smaller manufacturers, people probably -- the scale of the CapEx is large. Those kinds of people tend to buy during the prebuy.The big buyers, the people who get funding for CapEx, this is -- there's a very, very small fraction of let's a data center, it's a very small fraction of a manufacturing setup. So those kinds of consumers, those kinds of users don't tend to worry about prebuys, they buy as they need it. And they tend to finance things, so when you're financing something, then these percentages of increases don't really matter.
Thank you. We take next question from the line of Priyankar Biswas from Nomura.
So my first question is, sir, there has been price hikes that you had, of course, suggested. But even despite this price hike, and I'm not aware of any price cuts having taken place. So can you explain the reasons for why the gross margins have fallen sequentially? That's the first question.
Okay. Let me just talk about gross margin. Gross margin was falling mainly because of our impact on mix. And because we had a higher mix of our [ PGI ] product, and we also had lower sales of industrial, especially defense, marine and rail, those tend to be higher margin kind of products. So and construction, which tends to be a slightly lower margin as compared to the other business. So the combination of this mix is what led to a lower gross margin. That's the main reason.
And sir, what about the component issues that you had highlighted in the previous quarter, like especially like -- for electronic components, you had highlighted specifically for active components. There were some supply chain issues. So are these behind us, because going forward, we will be producing electronic engine.
These problems are not behind us. As a matter of fact, I would still say that we left lot of sales on the table, just because we were not able to acquire enough of these kinds of components. These problems are not going away easily, and while -- because Cummins has a global supply chain and a lot more leverage, they are able to get lot more of those electronic components than others. But we do not see this problem going away at least till middle of '24. But they are not really causing revenue loss. They are pushing out our ability to supply products and increasing lead times, et cetera.
So you mean '24 means calendar year '24 or meaning FY '24?
Calendar year '24 is by when we think a lot more capacity is coming into place, and that would help alleviate these problems we are facing. But these problems are -- they continue to exist.
Okay. And sir, just one more question from my right. So like in the data center opportunity, so I have the opportunity to visit a couple of data centers. And of course, right now that Cummins products are being used, so that's one very positive thing. But for this, the high horsepower, what was surprising is that it seems those were imported. So is the data center opportunity so large? Are you generally importing -- I mean, if it's so large, ideally it should be locally produced. So any thoughts on that?
I think a few products continue to be imported and some of those have already been localized. Like I think in the last quarter or the quarter before that is when we launched what we call the QSK60 G23 product, which is the most popular products as far as data center is concerned, it's now fully localized. But there are some larger data center kind of products where there's this engine family called the 95-liter family that is only produced in one location at Cummins, which is in the U.S. just because of the significant investment required to produce that engine, it was not viable to produce it in multiple countries, but certain components of those kinds of products are also being now produced in India.So yes, to answer your question, I think the majority of all gensets sold in the data centers are being produced in India as of now. There will continue to be a few products which will be imported and sold. And even for those products, they're trying to figure out how to localize more of that. It's very clear to us that we have to localize as much as possible to be able to be -- to sell in India to be cost competitive and to improve our margins.
Thank you. Ladies and gentlemen, due to time constraint, we take the last question, from the line of Aditya from Kotak Securities.
Yeah, hi. Thank you for the opportunity. My first question was on imports and the prospects of India's [indiscernible] going up within the Cummins entity. Now two events have happened, which I thought have engaged your [Technical Difficulty]. The first thing that happened was [Technical Difficulty] from a U.S. perspective, investing in their own facilities for new production on the green side, putting pressure on [ space ] for the base products that we are manufacturing from them. And the second event that probably can happen is India and Canada having a free trade agreement, which will impact the competitiveness of our products in U.S. and Canada both, in a personal manner. I wanted to kind of [ gauge ] from you whether these are actual events that can help Cummins India grow exports for the base business in the U.S. and Canada? And if so, are you seeing anymore -- any increase in the pace of tender coming out from more geographies?
So certainly, as the CPCB IV+ products have been launched, the products from a readiness perspective can cater to all markets in the world, including the U.S. and Canada. Historically, quite a bit of manufacturing of some of these gensets has been in North America because of NAFTA and USMCA and those kinds of agreements. But more and more, there are many product lines, which are only produced in India, and those products are now then being exported to the U.S. to Canada and some of those markets. But as India has better free trade agreements with those markets, I think certainly, that will help us to sell more into those markets. But we already have a great cost advantage, and there are many products where the company pays the USMCA duty and still buy from India and utilizes in those markets. So I think going forward, as India sets up better trade alignments with some of those markets, it's going to be great for India, if we can do that.
Got it. Second question that I had was more on the distribution segment. For this year, you have seen it grow faster than the average growth of the company, about it being a lot more exposed to Powergen, where then you will see only electronic engines incrementally kind of coming in. Could you give us a sense that the distribution segment can continue to outperform the average company growth? So as you put up the [indiscernible] for the entire company, can distribution do meaningfully better on a recurring basis next 2, 3 years?
It's my [indiscernible] is at least a yes, and that's what we set about to do a couple of years ago to say that distribution is a business which historically has underperformed. It's historically underperformed the growth of the rest of the company. It has grown at about anywhere from 6% to 8%. And so we are underrepresented from our entitlement of what our share of the market should be and what -- how we should be supporting and servicing our customers, with both parts and service. And so we have been getting into the market and offering better product services and solutions, and that is what is causing an increase in growth rate and demand for that business. And we think that is absolutely sustainable, not just for 2 years, but for at least 5 years is the way -- at least I am trying to look at it.
Thank you, sir. Ladies and gentlemen due to time constraint, that was the last question. I now hand the conference again over to Mr. Ashwath Ram for his close. Over to you, Mr. Ram.
So again, thank you all for amazing participation. And as always, you -- always [ sensing ] with amazing questions. There was quite detailed engagement today, I thought from all of you. Cummins India believes that the strong demand in various end markets will sustain. However, because of supply chain challenges, which we continue to work through, you saw me talk about the complexity of this whole prebuy, as well as this transition that is happening. We remain cautiously optimistic about the short- to medium-term demand outlook.With the strong financial position that we have, we are very confident that we will be able to maneuver through this tough business time quite successfully. So I remain confident and I remain optimistic that we will continue to sustain the kind of performance that we have demonstrated in the past.With this, I close this call, and thank you, and I wish all of you safe and happy quarter. Thank you.
Thank you very much, sir. Ladies and gentlemen, 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, and you may now disconnect your lines.