Guest Author: Dhruv Rathod
Outline
About the company
Cummins India Limited is a leading manufacturer of engines, power generation systems, and related components in India. It is a subsidiary of Cummins Inc., a global power solutions provider headquartered in the United States. Cummins India has been operating in the country for over five decades and has established itself as a trusted name in the industry.
The company’s product portfolio includes a wide range of diesel and natural gas engines, power generators, turbochargers, filtration systems, emission solutions, and other related technologies. These products find applications in various sectors such as automotive, power generation, industrial, mining, marine, and construction.
Business model
Any business starts from the supply side and Cummins India has a strong supply side. They source raw materials from different sources to make price competition and get good quality raw materials at cheaper prices.
They need castings, forgings, and different varieties of metals. There is a high requirement for electrical components which they source majorly from Indian markets. They need Gaskets and lubricants.
These raw materials are brought to their factories which are majorly in 5 cities in India which are Pune, Phaltan, Dewas, Jamshedpur, and Kothrud.
Cummins India has its business coming from four major segments:
- Power Generation:
This segment contributes more than 30% of Cummins India’s revenue. It witnessed robust growth from segments like manufacturing, hospitals, and data centers.
In this segment, they are very dominant in the High horsepower and Ultra high horsepower generators and it’s very important to be noted that these products are higher value and lower volume products.
With the emission norms getting more stringent in FY24 due to the implementation of upcoming CPCB 4+ norms tentatively, the company is focused on developing and bringing best-in-class products for its customers.
The company gets advantage of the strong parentage of Cummins USA to introduce advanced products.
This segment comprises Ultra high horsepower (UHHHP), High horsepower (HHP), Medium horsepower (MHP), and Low horsepower (LHP).
Higher the power more critical the usage. For example, a UHHP genset would be used in a data center, and the lower the horsepower the lesser the critical usage. Higher the power higher the value and the lower the power higher the volume.
2. Industrial Business:
This business contributes to about 15% of the top line. This segment caters to Railways, Mining, Marine, Oil and Gas, Pumps, Construction, etc.
Indian railways is set to achieve its ambitious target of 100% track electrification of the network by 2023 which is driving demand for Diesel Electric Tower Cars (DETCs) which are used in the installation and maintenance of overhead electric lines.
India achieved record coal production at 777 Mn tonnes in FY22. This has led to a favorable impact on the heavy earth moving machinery (HEMM) in which Cummins is a critical technology supplier.
The rapid expansion of city gas distribution infrastructure witnessed record growth in the supply of compressor engines.
Leading engine supplier in the constriction equipment segment. Cummins has moved from mechanical to new generation electronic 4-cylinder and 6-cylinder engines to address the onset of BS4 emission norms from Apr 21 for construction equipment vehicle applications.
3. Exports:
Strong demand for Powergen and Cool pacs was evidenced in FY22 and the same is expected to continue from Europe, Latin America, and ME regions. So, they produce gensets in India and export them to other countries as they get strong cost advantages in India. The export business delivers better realization and improve margins compared to the domestic market.
4. Distribution:
This is dependent on the sale of all other segments which are mentioned above it is basically an after-sales service. There are a lot of unorganized players who could have done the maintenance but because of the new norms, the products are very difficult to maintain and only the company itself can do servicing. It has been seeing strong demand for maintenance of data centers and commercial realty.
Business characteristics
Note – These are standalone numbers.
The business saw very sluggish revenue growth and depressing margins. Keeping aside FY19, the company saw single-digit growth and even degrowth in topline given a low capital expenditure done by the government and also a very sluggish private sector capex.
Now the Private capex as well as government expenditure seem increasing and this is leading to strong revenue growth and a stronger margin improvement.
The management guides the EBITDA margins to be healthy in the range of 15-16% as they are controlling over their costs and they guide to increase margins by 100 bps annually.
The ROE has also been improving and it went to about 21% this year. This was due to an increasing PAT margin.
What drove margins and growth in the past?
One can attribute the FY22 growth to two factors which is a low base due to the pandemic and the external environment improving.
When we think about the external environment, Post pandemics market segments like Pharma, Hospitality, and Residential realty are bouncing back after a downturn. Strong growth in the Powergen business pertaining to the strong growth in the end-user markets. The company has taken more orders than its capacity to cater to data centers.
The distribution segment is dependent on past sales and demand there has been pretty strong. The number of service calls the company get has been increasing be it the number of requests for maintenance or setting up new gensets it is at record high levels
The electrification of railways has been another advantage to the company where they got their tender approved at the end of quarter three and govt has a deadline for electrification by 2023.
What will drive margins and growth in the future?
Lead indicators of IIP showing growth, India witnessing capex cycle pickup should be a structural growth driver.
Data Centers – India is seeing a transition toward data localization. Via different schemes and verticals, this seems a structural theme by the government. Initiatives are taken by RBI regarding payment data storage. This mandates storing sensitive information locally. The government has come up with Project Meghraj which plans to set up 33 data centers & Cloud infra in India.
Management aims to get over 300 – 400 Cr business from the rail segment on account of high demand from Indian Railways and timely execution to meet 100% electrification targets by 2023 which is driving demand for diesel-electric tower cars.
Introduction of CPCB 4+ emission norms which are very stringent and that will help Cummins as its products are superior. It has launched new products power gen, industrials, distribution and exports market.
Cummins India is expected to benefit by supplying generators to power the 5G towers of leading telecom players in the entire Asia Pacific and will be sole supplier and manufacturer of Genset
Management
Steven M. Chapman is chairman of Cummins & has been with Cummins Group for 35 years. He has held various leadership roles across geographies & has also served on the global Cummins Leadership Team and its predecessors since 2002.
Ashwath Ram is MD of Cummins since Aug 2019, he joined Cummins USA in 1991 and in 2008 joined India operations and has taken up various roles.
MOAT
Strong Parentage – Cummins India enjoys strong parentage and it becomes easier for Cummins India to access new and better products. Cummins USA plans to spend about $1 bn spent on R&D on new technology and advanced products.
Diverse product portfolio – As the company grew they always kept the customer-centric approach and to cater needs of different customers they kept different products for different geographies so this product basket allows them to enter new geographies and cater to multiple industries.
Low cost of production – Cummins India benefits from cost advantage in India. They have state-of-the-art plants in India which enable them to make superior products at lower cost structures. As the global markets find substitutes for replacing China Cummins India is a prominent player to do so.
Extensive service network – Cummins is an undisputed leader in High horsepower and Ultra High horsepower gensets and the key catch here is any local vendor can repair the low horsepower gensets but not the high horsepower ones.
Risk
Existence of Private Entities – Cummins USA has private entities in India and there is a possibility that they can give profitable businesses to these private entities and enjoy the entire profits rather than giving it to listed entities and dividing profits with minority shareholders.
Primary Demand for Gensets Decreasing – The peak power demand deficit in the country has come down by 16.2% over the past 13 years, India had a power deficit of 16.6% in 2007-08. So, the essential need for a power genset reduces not necessity but is important for backup situations.
Limits on Diesel genset – The changing environmental laws have limited the usage of diesel generators.
Slowdown in Government and Private Capex – The entire business depends on the capex done by the private and public sectors but in the environment where these sectors slow down their capex the business of Cummins might be impacted.
Related Party transactions – Essentially not a risk but related party transactions have been taking place in the past and have been going down. One needs to have a clear understanding if these transactions are genuine.
Disclaimer: The views expressed by individuals are personal and do not represent the opinions or official stance of any firm, organization, or entity. The information provided here is for informational purposes only and should not be considered as investment advice.
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