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Cummins India Limited Quarter Two Earnings Conference Call, Financial Year 2010 October 30, 2009

Moderator:

Good afternoon Ladies and Gentlemen. I am Manjula, the moderator for this conference. Welcome to the Cummins Conference Call. For the duration of the presentation, all participants' lines will be in the listen-only mode. I will be standing by for the question and answer session. Now, I would like to handover to Mr. Anant Talaulicar. Thank you and over to you sir. Thank you Ms. Manjula, and good afternoon Ladies and Gentlemen. I am very pleased to announce the CIL financial results for the July through September 09 quarter. Let me first speak to the numbers excluding Cummins sales and services, so that we can draw an apples to apples comparison versus a year ago. Of course, you have seen the numbers including CSS also, and so let me first talk to the numbers without CSS. We achieved a sales level in the quarter of 480 crores, which was a 39% decline in sales as compared to a year ago, which by the way was a historic peak quarter for us of 790 crores of sales. Also, quarter on quarter we declined 5% and here we had a special factor taking place, where I would like to remind you that our largest plant at Kothrud Pune had experienced an illegal strike and was not operational as of 15th of September. Were it not for this strike, sales would have been to flat to growing slightly, despite a 20% decline quarter on quarter in exports, which should tell you some story about the domestic comeback. As of October, we are back in production at Kothrud, although the illegal strike continues, we have been operating with a nonunionized work force and are achieving practically the same run rates as prior to the strike. Hence, I do not anticipate that special factor playing out this quarter. Our PBT was down 34% to 85 crores driven by the sale decline and that too on the export side. However, I would like to point out that we have been able to improve our profitability by slightly over 1% point, and I would largely attribute this to our 6 sigma based cost reduction and based elimination activity plus some tailwind coming from commodity reduction. The CIL results have been primarily negatively impacted by a very steep decline in exports of 80% compared to last year. So, exports in the quarter was 72 crores as compared to 345 crores during the same period last year. I would announce that we believe that exports are now near bottom although not as bottom, I do expect a slight decline even in the current quarter, but that should

Mr. Anant Talaulicar:

be the, I would say the bottom, and from there I expect exports to gradually improve through the year. Currently we are projecting somewhere in the ballpark of 10% improvement in exports in the next calendar year. I am particularly pleased with the way we have leaned the company and strengthened ourselves, and therefore I think we are well positioned to take full advantage once the global economy comes back. With that, I will pause now, and turn it over to your questions. Moderator: Thank you very much sir. We will now begin the Q&A interactive session. Participants who wish to ask questions, please press *1 on your telephone keypad. On pressing *1, participants will get a chance to present their questions on a first in line basis. Participants are requested to use only handsets while asking a question. To ask a question, kindly press *1 now. First in line, we have Mr. Manish Goel from Enam Holdings. Please go ahead. Good afternoon. Sir, can you give us revenues from spares and services for the quarter and the first half? The sales for our spares were approximately 100 crores. For the quarter? For the quarter. For the first half? You mean to say only spares, right? Yeah, only spares. Okay. I mean this is now CSS, right, which is part of CIL. Okay. That is what we are talking about. We are at a run-rate of about 100 crores per quarter. Okay, and can you give us revenue breakup in terms of powergen, industrial, auto? Okay, so as I look at it, just tell you that roughly 50% of sales in this quarter was power gen. 30? 50.

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Mr. Manish Goel: Mr. Anant Talaulicar:

Sure. I think let me remind you, few quarters ago you will recall Manish that exports had almost grown to 50% of our portfolio. Right, right. That has tanked 80% now, and so exports now only comprises 15% of the portfolio. Yeah. So, this is largely domestic 85% and powergen 50%, our industrial business is about 15%, and auto is about 10%. Rest is spares. Okay, and how are we seeing recovery in industrial space, say in mining, in construction, railways? I would say that all of our industrial segments, the ones you mean, never really saw a slowdown. All through this overall GDP slowdown, these particular segments were very robust because they are driven by infrastructure. The only segment that really got impacted, the only industrial segment that got impacted was construction. Right. And that continues to be soft, although I would say improving. Okay, but are we seeing any revival in the construction space? Yeah. In fact, there was, I would say, back in the OctoberDecember quarter of last year, we practically saw no sales in the construction segment, you know, and that obviously was a correction, the channel correction that you might say, but still now we are back seeing fairly good level of sales. Our construction portfolio, out of the industrial tends to be in the ballpark of about 15%. Okay, and sir, as far as your margin improvement is concerned, no doubt on basically including CSS, the margin improvement looks fairly high from say 15 odd percent to 18% largely due to improvement in raw material price, but if you probably look at excluding CSS the margins have improved by 1%, so this is largely due to

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Mr. Manish Goel:

only cost cutting or you have seen raw material price benefit in the engines business also? Mr. Anant Talaulicar: Mr. Manish Goel: Mr. Anant Talaulicar: Mr. Manish Goel: Both factors, 50:50. 50:50? Yeah. Okay, and as far as your entry into lower range is concerned, last call you mentioned you have introduced 7.5 KVA generator. Yes. So, how has been the response, and how is the competition shaping up? I had actually mentioned that we were going to launch the 7.5 and 10 KVA diesel generators, so that is this quarter, the current quarter, so there was no impact on the numbers that you are seeing. However, as we speak, we are taking orders for that product, and shipping product. So, these are largely sales in the domestic or you are looking at exports also? Both. We are looking at both, and we are very excited about the product because it will be the most compact product in the country in this range. It will also be the quietest product and of course certainly very dependable as Cummins typically is. And these engines which are required for gensets are manufactured by Cummins or they have been outsourced? This has been outsourced to Simpson. Okay, but you are not looking to set up a manufacturing facility for small engines? No, not for this range. And what kind of volumes you are expecting, and what is the price point for this genset? Price point is close to 2 lakhs per unit, and the volumes would be in the first year, probably, somewhere in the 5,000 to 10,000 range. Sorry, 2 lakh rupees per unit, you said.

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Mr. Manish Goel:

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Correct. And volumes you said? Is 5,000 to 10,000. In the current year? I would say in the next calendar year. Okay, and sir, as far as your 525 KV range is concerned, one of the domestic players have launched engine in that space, so how are you seeing competition, and are you seeing any pricing pressure. No, not really. We are really concerned about the domestic competition for that rate. Sure, fine, thanks a lot sir. I will get back to you. Thank you. Thank you very much sir. Next in line, we have Mr. Umesh Gupta from Dalal & Broacha. Please go ahead. Hello? Yeah. Just one question on your exports. You mentioned this may be the bottoming off the exports, so could elaborate this and tell us what makes you think like and whether the markets or your parent is giving you indication on this thing. that you this any

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Mr. Anant Talaulicar:

Yeah, absolutely, those are the indications that we are getting from the parent and the market. Essentially, most of our exports are into the power generation market. These are generator sets in all the way up to 2000 KVA and also the smaller units. There, we have seen over the last year now correction happening in our channel and currently those inventories are fairly low, and I think as you are aware most of the international markets, the western markets, have kind of bottomed out. It is not getting much worse, and in fact there are some signs of hitting bottom to slight improvement. So, based upon on that, we expect also that we have hit bottom. It can't get much worse anyway, we are down to 72 crores, right. It can't go much worse than that.

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Okay, and for the Q3, you are saying it could be about 80 to 85 crores, right, 10% sequential growth? What are you quoting here? The exports that you mentioned that in Q3. I am sorry, let me correct. I miscommunicated. I was saying that for the next fiscal year, we expect the 10% growth in exports. And for the rest of the year, how do you see the exports? I would say that for this quarter we are talking about, exports will continue to decline some but marginal, okay, so the 72 crores may come down to about 60 or so, and then from thereon we expect a growth trend. And for domestic also if you could take us through the business outlook? I would say that domestically if you look at this fiscal year as compared to last fiscal year, we should see about anywhere from 10% to 15% growth rate. Okay, thank you. Thank you. Thank you very much sir. Next in line, we have Mr. Sanjay from DSP Merrill Lynch. Please go ahead with the questions. Good afternoon sir. My question is relating to the profit margin. I understand that you have explained it possibly once. If you can quantify again for us how much of this margin is because of raw material cost and how much of it is sustainable going forward that we will get sir? I would say it is 50:50, so we said about 1% improvement in margin, so you know half point would be sustainable. It depends upon what happens to commodities. We are seeing indications of some increase in commodity pricing already, but I guess time will tell, you know, depending on the demand supply situation overall in the global market place. Because commodities are globally driven. You might be having some kind of inventory or something. There must be some kind of lag impact or something like between commodity prices and your margin, so what do

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Mr. Sanjay:

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Mr. Sanjay:

you think and where do you think, I mean, by what time do you think commodity prices will start hitting to margin sir. Mr. Anant Talaulicar: Mr. Sanjay: One quarter lag. Okay, okay, and sir, can you give some sense of your individual businesses, powergen, and industrials, how the segments grew during this quarter, and what is the prospect going into next quarter in the domestic market? I would say that we are seeing very good recovery. We are seeing improvement in sentiments in the market place across the board. Power generation, industrial, and auto, and in this of course industrial was largely not impacted as I mentioned earlier. So, these are largely government based spending, so they were not impacted by the slowdown in India. Auto of course saw a very sharp fall, but now we are seeing an extremely robust growth in auto. In fact, our auto business has more than doubled as compared to last year, and that is on the back of this JNNURM, the urban renewal scheme, which is a stimulus based scheme in the country, where all these government run bus fleets are being renewed, so that has been a very positive impact, plus I think you know we are seeing that Tata Motors share is improving in the market place, and they tend to work very closely with us, and our share in their portfolio has also increased, so as a result, auto certainly has been a good new story for us. Although I would say in the quarter, the overall heavy commercial segment is still about 5% down as compared to the same quarter last year, although I expect that this quarter will be better than lat year of the same quarter. Now, as far as power generation goes, telecom has been a robust segment all along. It did slowdown some, but that was only a slowdown in the rate of growth, so telecom has continued to grow all through this period. Those are the smaller generators, typically powering up the cell-phone towers. Aside from that, we are seeing a pick-up in manufacturing sector. We are seeing in the IT sector, so pretty much across the board, we are seeing now recovery in power generation. Okay, but still is it declining almost 5% to 10% year on year basis? Correct. Okay, and you would say that power generation while it is declining 5% to 10%, probably in the quarter or so, one will start seeing some kind of 20% growth because of the base effect as well as the sequential recovery.

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Correct. Okay, and industrial is growing at about 10% to 15%. Correct. Okay sir. On this JNNURM, which has boosted your auto sales and it has doubled in the current year, do you really expect the same thing to come in, in the next year as well, so do you think the auto segment may come off quite substantially in subsequent years? Yes. So, it may decline going into next year? No, I don't expect that because you see this JNNURM scheme will continue into next year. What we are seeing now is only phase I. Okay. Yeah. I mean, even in fiscal 2011 also the benefits of JNNURM will continue? Correct. Okay, and sir, are you seeing some more customers like Eicher or something like that buying engines from you directly and that is why your direct, I mean, non-CNG business is also picking up in some way? Correct, absolutely. We are in fact Asia Motor Works which actually you know is a new entrant is exclusively using our engines, and so we are seeing recovery in their demand. Eicher is using Volvo, Eicher is using our engines in certain ranges, and Ashok Leyland is using our engines. So, pretty much all the major OEMs are using Cummins Engines. Sir, is it possible for you to give us some sense like out of the total auto revenue, how much would be CNG engines and how much would be other engines sir? Well, as you look at the CIL portfolio, currently the majority is CNG. Okay, how much would it be still, is it something like 80%?

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70:30. Okay. 70% CNG, 30% diesel. Okay sir, understood sir. questions. Welcome, thank you. Thank you very much sir. Next in line, we have Mr. Askshen Thakkar from Enam Securities. Please go ahead. Sir, first if you could just share some working capital and cash and debt on balance sheet? Okay, actually, the working capital has been a very good new story for us, lot of good work taking place in that area. Our days sales outstanding has come down significantly, so just to give you a sense of it, just about a year ago, our day sales outstanding was in the 80s, okay, and currently, we are running in the 40s, so it has almost halved, days sales outstanding, so therefore even in a slowing scenario relatively speaking, we have been very proactive in terms of collection. That has certainly helped cash flow. Okay. Same story holds true for inventories. Our inventories have come down quarter on quarter, okay, and have hit now a low point so far at least in the last 4 or 5 quarters. Cash, we continue to generate positive cash flow, and we have actually, the cash position has almost reached about 700 crores, almost close to 700 crores. Okay. So, we are in a very good shape. The balance sheet is looking excellent. Sir, the second question is that you mentioned that for year as a whole domestic business should grow at about 10% to 15%, and given that you are now introducing some new products plus some of your key segments have started to revive, any guess, any ballpark as to how much next year should we grow by? About the same, I would say. sustain that growth trend. We should be able to Thanks a lot for taking my

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Actually, do you think we will be probably be able to reach our high teen sort of a growth that we used to see a few years back again in the domestic business. Yes, optimistically yes, yes. Okay, and on the export front sir. Just wanted to understand, in this quarter we have seen a 23% sequential decline. Yeah. So, as we understand in Kothrud, we would have also catered to the exports markets, right? Absolutely. So, just I am not very certain because if Kothrud is stabilized, why would the next quarter sales be down sir? Demand based. Okay, so demand is not there, and you are saying FY '11 should see another 10% growth? Correct. Okay, sir then, just one question if your cash flow is so good. Last year we have seen your dividend payout, etc., being increased, this year, if our cash flows are so good, any such plans being contemplated? Yes. Okay, so we could probably see another one time dividend. One time or whatever, we will certainly maximize dividend. Maximize dividend, alright. We are also looking to increase our capex investments. To fight the slowdown, I would say, we would sustain about 100 crores of capital investment. Next year, we are looking to practically double that. Okay. As you know, we have announced our mega site in Phaltan.

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Sure. That project is in a bit, we slowed it down some, although never stopped it, but now we plan to accelerate it based upon what the strength you are seeing in the domestic economy. Okay, and one last question sir, this impact of this strike, worst case what could be the impact on Cummins because The worst case is already behind us, that was what you saw in the last quarter. It was about 70-crore topline impact, about 20 crores bottomline. Now, just so I am clear it was not loss sales and loss profits, so it is a timing issue, so we will catch up with it this quarter. Okay. And as far as impact to Cummins, I would say this is a very positive impact because I think in my view anyway we are going to change some negative behaviors which will only help the company long-term. Okay, but you dont foresee any wage renegotiation happening, which will increase your salary cost going forward? No, absolutely not, it might go the other way. Okay, and sir, just observing that the tax rates for the last two quarters have been sub 30% for the traditional Cummins business plus CASL, what should be the effective tax rate for the full year, roughly? About 32% to 33%. Well, first half has been about 27%. I think it is a function also of mix, exports mix. But exports have been low in this quarter, so we pay higher tax. Yeah, so now we are going to see higher tax coming forward. Okay, alright sir. Thank you sir. That is it from my side. Thank you.

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Moderator: Ms. Madhu Chanda:

Thank you very much sir. Next in line, we have Madhu Chanda from Kotak. Please go ahead. Yeah, I have two questions. First is in the last conference call, you said that there is a distinct improvement in the domestic business whereas export continues to be lackluster. Between last quarter and this quarter, is there any noticeable change either in any pocket of your business? I would not say there is a noticeable change. We are continuing to see a positive trend in terms of domestic pickup and a continuing slightly negative trend on the exports front. I mean the exports have gone down compared what you had expected at the end of Q1. We had expected this, but this has gone down. What has been the positive surprises, I may just rephrase my question in the last one quarter, in the environment that you operate in? I would not say that we have been positively surprised at anything, you know, mostly things have been anticipated. Okay, any particular sector which is really coming out smartly, some color if you could throw on that. Other than auto, which you have already talked about. No, I think, I would say manufacturing in general, we are seeing now strengthening. There is more optimism and therefore more willingness to invest in capacity. This is what we are seeing currently. The telecom sector has continued to strengthen and the realty sector is the only one that is most sluggish. I think there has been more correction will happen there, both commercial realty as well as residential realty, and in the auto, now we are seeing more strengthening at the upper end of the horse power range, so people are now starting to invest, are investing in the larger trucks, larger tractor trailers, so we are seeing a lot of strength in the 180 horse power segment, which I see as a very positive sign. It just shows that sentiments now are more wide in the country. On the export, is there any enquiry for the new products or you had planned to get into the low KV range also in exports at one point in time. Is there any progress on that,

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once the dust clears, and if the parent also starts sourcing more? Mr. Anant Talaulicar: Yes, absolutely. So, you know, I think we touched upon one example earlier which is the 7-1/2 and the 10 KVA generators. These are also targeted to export markets. In fact, we have designed the world product, which is the same product specification, we will serve India as well as the other countries, and we are very optimistic about it. It is a very cost effective package compared to all the competitors globally. Cummins has low market position at that particular range since we had not offered that low size of product, so there is tremendous upside opportunity in my view. Aside from that, we have launched a 5.9 liter engine based generator at the 160 KVA range, which until recently was being covered by much larger engine, an 8.3 liter engine, so it makes it a much more compact, cost effective, and higher power density package. We are very excited about that one also. So, those are a couple of examples on how we see exports, you know, how we see growth in exports despite the overall let us say slowdown. Product basket basically is going to expand from FY '11, that is very likely? That is right. What will be the impact on margin. Basically, you earn a much lower margin on exports compared to the domestic sales, right, any sense on the margin as a result of this? As you go down in the product range, your margin typically declines. Yeah. However, it is more of a volume game there. So, it has a good positive impact on the PBIT line, and I would not say that our exports margins are substantially worse than the domestic. They may be so at the gross margin level, but then we don't have all the marketing expenses associated with the domestic. Right, right, right. So, on the net bottom line basis, they are comparable. Okay, thanks and all the best. Thank you.

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Moderator: Mr. Nayanesh: Mr. Anant Talaulicar: Moderator: Mr. Jasdeep Walia:

Thank you very much ma'am. Next in line, we have Mr. Nayanesh from Tata Mutual Fund. Please go ahead. My questions have been answered. Thanks a lot. Thank you. Thank you very much sir. Next in line, we have Mr. Jasdeep Walia from Kotak Securities. Please go ahead. Hi, my first question is you talked about your supply of engines to OE customers as far as CVs are concerned, could you tell us any other company which supplies engines to OEs? As you look at the auto market, the medium and heavy commercial vehicles market, I believe we are the only independent engine manufacturer in India. Okay, so there is no other company with the capability to manufacture? No. Why do you think it is so difficult to enter this market? It is highly capital intensive. Could you elaborate? To set up a plant for example, we are looking approximately at an investment of 400 crores. Then, to develop an engine we are probably talking two or three amounts that amount. So, it is a highly capital intensive industry and it is highly technology intensive, okay? Okay. So, therefore, that is why Cummins has such a strength in the global market place because of the kind of scale we have and the core competence that we have developed over the last 90 years. In our range, we are the largest independent engine manufacturers in the world. In good times, we have made as many as close to million engines a year. There is no other player who can claim to do that. Understood. My second question is if you consider the domestic engine market, could you segment the market in terms of various product categories, as in low horse power, mid horse power, heavy duty, very high horse power engines, and could talk about the competition in the market

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in terms of market shares of each of the players in these markets? Mr. Anant Talaulicar: Okay. As you look at the different sort of horse power or KVA ranges, I would say that our low horse power, but just let me give you a broad number, I don't have the facts in front of me right now. Yeah, you could give me broad numbers, not a problem. Broad numbers are that our low horse power end, which would be about let us say 200 horse power and below. Less than 200 horse power. Yeah, less than 200 horse power would be approximately 25% of the portfolio. Your portfolio? Yes, our portfolio. No, I am talking about the market as such, like in low horse power segment, what is your market share, and where are other competitors of yours. Oh I see, so if you look at the power gen market place, and at the low horse power end, we probably have about 10% market share, so we are the No.1 player there. Who is the No.1? I would say probably Kirloskar in the organized sector, somewhere between Kirloskar and Mahindra, that is where we have the numbers in the lowest end, and then as you look at the mid range, this is where, mid range as well as the higher horse power, we are clear No.1 player. Okay. So, we continue to be stronger as you go up in the horse power range. What would be your market share here? In the mid range, I would share our market share would be somewhere 40% area, and in the higher horse power, we should be somewhere in the 60% to 70% area. And who is the second in competition in mid range?

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Again in the power gen industry, it is probably Kirloskar. How much market share would he have? I dont know, easy to check with them. Okay, understood, and what about the presence of unorganized sector or the fragmentation low horse power sector? That is there only in the low horse power end, you have the fragmented players in Rajkot, etc., and you know they have also a significant share of the pie. I would say roughly in the 20 odd percent range. And they are not present in the mid and high. No, they are not. Okay, that is about it, thanks. I think what happens there you know once you get into slightly the mid and high end, those are emissions regulated segments, so they require a certain technology investment, which the unregulated players are not able to bring. Understood. There is this player called in Sudhir in power gensets. Yes. Does he manufacture his own engines or they buy engines from somewhere? No, Sudhir is Cummins, okay, you think of Sudhir as Cummins. They are our partners. Okay, okay. They use our engines. Our alternators, our controls. We jointly design the product, and we jointly market the product. Oh, I understood, I understood. Yeah. Thanks a lot.

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Moderator:

Thank you very much sir. Next in line, we have Mr. Manish Jain from Axis Holdings. Please go ahead with the questions. Yeah, I just want to know in exports, when are we likely to see, I know it is a little long-term question. When do we aspire to see exports coming back on track of roughly, you know, 200 to 250 crores per quarter? That is very good question. If you ask me for my best estimate. Just rough, your personal guesstimate, it is good enough. I would say optimistically, it will be two years out, okay, optimistically, and more realistically, three years out. Thanks. Thank you very much sir. Next in line, we have Ms. Aparna Shankar from SBI Mutual Fund. Please go ahead. Good afternoon sir. Good afternoon. Just a small question, I mean, how much has been currency benefit for us during this quarter for this export? No real benefit. I think in fact in this quarter, we have been net importers. Okay, okay, thanks a lot sir. Welcome. Thank you very much ma'am. Next in line, we have Anoop Maheshwari from AK Stock Market. Please go ahead. Hello sir. Hello? I have a couple of questions. One of them is prior to the consolidation of CSS and CSLA into Cummins India, what was the parent company of these? CIL. I mean, CIL is still, I mean the same Cummins India only.

Mr. Manish Jain:

Mr. Anant Talaulicar: Mr. Manish Jain: Mr. Anant Talaulicar: Mr. Manish Jain: Moderator: Ms. Aparna Shankar: Mr. Anant Talaulicar: Ms. Aparna Shankar: Mr. Anant Talaulicar: Ms. Aparna Shankar: Mr. Anant Talaulicar: Moderator: Mr. Anup Maheshwari: Mr. Anant Talaulicar: Mr. Anup Maheshwari:

Mr. Anant Talaulicar: Mr. Anup Maheshwari:

Mr. Anant Talaulicar:

Correct. These two were 100% subsidiaries of CIL, and all we have done is now we have essentially merged them into that legal entity. Okay, okay, fine, and can you just say the performance of these two companies. CASL has been merged into CSS, that has happened some time back. Yeah. CSS results have been excellent. They have a grown at a topline of 17%, so they never really were impacted by the slowdown in India, and the bottomline has far outstripped that number, 77% growth in the bottomline. Okay, okay, and like what is the share of overall these two subsidiaries, like the total revenue of say Cummins India. The contribution from these two subsidiaries to that total overall revenue. Well, I think we have announced the results both including and excluding it, I think that is very clear spelt out. Okay, okay fine. My next question is like from the orders which we have got from the DC, basically 2500 buses, so out of the same, what is the margin basically we are getting from this segment for the CNG? I would, you know, we have not been announcing individual product margins for competitive reasons, but I would say they are very healthy margins. Okay, and like, as far as execution of the same is concerned, probably any, you can just say like how much would be this year and like the next year? I think this phase I part of it is approximately 3,000 to 4,000 engines. Okay. And then, we expect another phase to come into the next fiscal year, similar amount. Okay, okay. Okay fine, I will come in a followup question. Thank you. Thank you.

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Moderator: Mr. Misal Singh: Mr. Anant Talaulicar: Mr. Misal Singh: Mr. Anant Talaulicar: Mr. Misal Singh: Mr. Anant Talaulicar: Mr. Misal Singh: Mr. Anant Talaulicar:

Thank you very much sir. Next in line, we have Mr. Misal Singh from Edelweiss Securities. Please go ahead sir. Good afternoon sir. Good afternoon. I just wanted a breakup of your portfolio in terms of you know the horse power, low, mid, and high. Okay. Broadly. Yeah, broadly speaking, the low horse somewhere in the 15% to 20% ballpark, okay? Okay. Then the mid range is somewhere in the 20% ballpark, and the mid range we classify as between let us say 200 to about 350 horse power, and then we have a heavy duty segment which is somewhere in the 350 to 450 kind of horse power range, that tends to be about 10%, and then the rest is high horse power, which is anywhere from 40 odd percent. Okay, and in terms of the capacity expansion at Phaltan, can you just detail as to you know where exactly are you adding capacity, in which range exactly, that is the only capacity expansion that is going on right now right? That is correct, and this is going to be a multi-year expansion, you know, so currently what we are looking there is expanding our 5.9-liter engine which goes primarily into medium and heavy commercial trucks. Okay. So, we are getting ready to establish another incremental capacity of 60,000 of those engines. That should be in place by roughly October-December quarter of next year. Aside from that, we are investing in our rebuild center, basically this is through CSS, which is part of the CIL now, where we take engines that are already being used by customers and need overall the repairs, upgrades, we bring them to our shop, do that value add and send them back, so the currently facility is already at capacity, so we are expanding that now. We are moving and expanding it at Phaltan. power is

Mr. Misal Singh:

Mr. Anant Talaulicar:

Mr. Misal Singh: Mr. Anant Talaulicar:

Mr. Misal Singh: Mr. Anant Talaulicar:

Okay. Aside from that, we are also investing in a reconditioning operation, reconditioning both engines as well as generators as well as components, engine components. This is where essentially, you know, some components of your engine have worn out, rather than buying a new part, we sell a reconditioned part at a lower price, but at the same kind of warranty. So, this is kind of a new concept and it is going to be an emerging business for us, which we are investing in, and then the other project that we are now envisaging and we are implementing is the parts distribution center. This is existing center, but we are looking at expanding it and making it a lot more of a productive operation. So, those are the initial projects that we are looking at, at Phaltan. Okay, and you are saying this will involve the capex of about 100 crores in fiscal 10, and about 200 crores in fiscal 11, right? Not all related to this mega site. We are of course investing in our existing plants or let us say new products. So, if you strictly looked at the mega site, we are probably talking about 100 crores, out of that 200 that you quoted. Okay, okay sir, thank you. You are welcome, thank you. Yeah. Thank you very much sir. Next in line, we have Ms. K. P. from Enam AMC. Please go ahead. Good afternoon sir. Good afternoon. Yeah, could you just give us capex details for FY '10 as a company as a whole and for the next year? For fiscal year 10, it is roughly 100 crores. Okay. Next year, we want to step it up to 200 crores. Okay, and sir, you did mention that our domestic business next year can grow into high teens, probably say 15% to 18%, and same as exports by 10% in CY 10.

Mr. Misal Singh:

Mr. Anant Talaulicar:

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Mr. Anant Talaulicar: Ms. K. P.: Mr. Anant Talaulicar: Ms. K. P.:

Correct. So, that would be more driven by our volumes or you think this is the value growth which will drive more? Largely volume. So, do we see any, I mean, rather volumes would be higher than our value, I mean, what I am asking is do you see any realization correction or something? No, I don't. So, primarily, it will be driven by volume still. Volume. Okay, and current mix of our sales includes low horse power range is something 15% to 20%, say next year 11 or probably say 12, do we see that this low horse power products going to be on a higher side? Yeah, yeah. So, do we foresee any kind of margin impact because generally our low horse power commands a little bit lower margin than our higher horsepower. Not material. Okay, and what is our current capacity utilization across our various facilities including Kothrud. Pretty low. Kothrud is at about 40% to 50%. Okay. I would say in fact as probably SEBI used the number across the board. So, across the board 40% to 50%? Yeah. Okay fine, thank you very much sir, and wish you good luck. Thanks.

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Moderator:

Thank you very much ma'am. I repeat again participants who wish to ask questions, may kindly press * followed by 1 on your telephone keypad. Next, we have a followup question from Mr. Gagan of BNK Securities. Please go ahead. Good afternoon sir. Good afternoon. Sir, I would first like to know what has been the reason for CSS bottom line growth being as aggressive as it was? Just a great management team, I would say. Could you basically, I mean, elaborate more on the nature of the business. It is not manufacturing, it is essentially sales and services? That is right. Let me just build upon that. So, CSS essentially sells our parts, right, for all the products that need to be repaired in the field, it provides services. Also, there are large customers. We call net worked customers, you know, people like HDFC or Reliance that have assets all of the country. Let us say 1,000 generator all over the country that we take contracts for maintenance. Okay. So, this is done by CSS. We also talked about the sole engine repair work that is done. All of that is done through CSS. Great sir. You have given an outlook for your, I mean, CIS business domestically growing at 10 to 15% next year, would you say CSS business would grow at the same rate or at a higher rate? I would say CSS is different from a product type business, so less cyclical, but not as high growth because in good times as you know, our product businesses have grown 30% even, but this tends to be much more steady in the 10% to 15% ballpark. Okay, you mentioned the first phase of JNNURM had around 3,000 to 4,000 buses going in for replacements. What would be the total scope and over what time does this program play out sir? If you look at the number of buses in India, that rightfully need to be jumped, I would say 40,000.

Mr. Gagan: Mr. Anant Talaulicar: Mr. Gagan: Mr. Anant Talaulicar: Mr. Gagan:

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Okay, and does the program itself envisage this much? It does, but the question is you know whether that will actually get implemented. What would your understanding of that be sir? I would say probably half of it. Half of it, and over what timeframe? Over two to three years. From now? Including the current year. Okay, and at your mega site, would that facility be treated as a mega project under the Maharashtra Government's norms? Yes. Okay, so you would be getting the same benefits that are applicable to mega projects at Phaltan? Yes. Okay. Sir, is it possible to know and understood, out of your genset business, how much is dependent upon on construction and how much on telecom? I don't have a number for construction. Telecom tends to give out 30%. 30%? Yeah. And industrial? Well, industrial is, a whole different segment that we look at outside of power generation. Okay. So, when we say industrial, these are engines, not generators.

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Mr. Gagan:

Yeah, I get your point sir. What I am trying to ask is could you sort of give out the breakup of sub-segments of your industrial business? Yeah, that tends to be, you know, basically compressors. Compressors that are used on a portable application for road building or on water well rigs, you do your bore drilling right into the ground. That if you look at the portable side, it tends to be around 10% of the portfolio of industrial. Okay. Water well tends to be somewhere in the 15% to 20% if it is a very cyclical market, so somewhere 15% to 20% it keeps bouncing back and forth. Okay. Construction tends to be about 15%. Okay. Mining is about 25%. Okay. Marine is about 10%, even 15% in good times. Okay. And oil and gas is about 5% to 10% and rail is about 10% to 12%, so that should give you a ballpark of all these different Right sir, right. Sir, considering the fact that there is a slowdown in the bulk of the developed world, and there is a fair number of very competitive Indian manufacturers there, and considering that we have got the NHAI programs coming up and various other infrastructure programs, how do you see that in terms of competitive pressure in terms of capacity creation by host of other companies in India? My view is that there will be growing interest in the Indian market on the part of the global players, and so you know you already are seeing it, you know, Daimler, you know, trying to look gain more of an entry. Volvo is tied up with Eicher aside from their own bus operation. Man has tied up with Force. International has tied up with Mahindra. So, you are going to continue to see that kind of a trend.

Mr. Anant Talaulicar:

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Would that, you know, let us say in a year or two's time materially impact your position in the market? No, we don't think so. Okay, and sir, just last question. This is something. This is an offshoot of what I asked the last time also. With the changing norms, I think you clarified to me. With the change in norms, the dollar value or the rupee value of a DG set increases by 50% to 70%. Does that mean that with similar volumes next year, you will be able to derive a 50% increment on the topline? No. Next year, the only market that is going to see an emissions tightening is the automotive market. So, you know, a smaller proportion of our portfolio, and also you know I probably miscommunicated if I said 50%, I probably meant 15% earlier. Okay, but would your exports not be affected by EPA norms being changed in the US? The EPA norms impact our heavy duty and mid-range engines, which are used on on-highway applications in the US. Okay. CIL does not participate in that export. Okay, and sir, if you could tell me when do CPCB norms change for DG sets in India? That is still under discussion. Tentatively 2012 but is not a firm number? Okay, and sir, do you feel that the power deficit in India which is being between 8% to 12% at peak load 15%, you know, over the next decade or so, will come down, does that imply that your revenue mix will change with less coming from power generation and more coming from industrial? No. I don't think so. On one hand, unless something dramatically changes in our environment, this power deficit is likely to stay, so while of course additional capacities are being put in place, the demand is also continuing to grow as India grows, so that is one factor. So, I foresee that, yeah, there might be some reduction in the deficit but the deficit as such will continue over the next 10 years.

Mr. Anant Talaulicar:

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Okay. Right, so that is one factor. Even if the deficit is totally eliminated, what typically happens in developed economies is you start having mandates to have standby generators in all facilities, whether it is a factory or a building or a hotel or a hospital, these are mandated by standards, safety standards for example, because no matter even if you have no power deficit in our country, the grid is never 100% reliable. You know, you have thunderstorms, you have monsoons, you have whatever, snowstorms in the Western world, so it is very common to have generators in every facilities as an insurance policy you might say, so we do not see sales of generators being impacted by this phenomenon. Yes, the running hours might decline. You know, that might impact CSS in terms of its service revenues, but product revenue should not get impacted. Am I correct when I say that your business is not going to be impacted because what you lose due to pure deficit narrowing out, you gain because backup demand increases. Absolutely. Okay, thank you sir. Thank you. Let us take one last question please. Sure sir. Thank you very much. The final question comes from Mr. Faizal Kumar from Quantum Asset Management. Please go ahead. Yes sir, there are couple of questions. First thing is during the H2, what is the targeted cost saving under this H2? About I would say 20 to 30 crores. This will be an annual recurring saving sir? No, accrued. Okay, and sir, just last question is, can you just give us the breakup of your order book? No, I cannot, I am sorry, for competitive reasons. No, in terms of quality, like earlier you used to give some qualitative nature of the order book.

Mr. Gagan:

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Mr. Faizal Kumar: Mr. Anant Talaulicar: Mr. Faizal Kumar: Mr. Anant Talaulicar: Mr. Faizal Kumar: Mr. Anant Talaulicar: Mr. Faizal Kumar:

Mr. Anant Talaulicar: Mr. Faizal Kumar: Mr. Anant Talaulicar: Mr. Faizal Kumar: Mr. Anant Talaulicar:

Approximately 1 month. Pardon sir? Approximately 1 month. Okay, thank you very much. Okay, with that, let me just summarize that obviously the sales decline has been disappointing, although I think it has been due to factors that are outside of this management team's control. I think the management team has done a very good job of doing what it could with the factors that it does control and actually improve the profitability of this company. We are continuing to invest in terms of new product development and in terms of new service offerings. We have a very strong and stable team at the top. We have an extremely diverse and talented work force. Our technology definitely is unmatched and backed by the global Cummins Corporation. Our distribution system also in India is unmatched. Based upon all of these factors, we have leading market positions in all of these areas of automotive, power generation, and industrial, and most importantly we are value based institution, and based upon that, I feel very positively about our prospects as the external environment gradually improves. So, thank you very much for your interest and involvement with Cummins. Thank you very much sir. Ladies and Gentlemen, thank you for choosing WebEx's Conferencing Service. That concludes this conference call. Thank you for your participation. You may now disconnect your lines. Thank you.

Moderator: