Diesel Engines

Cummins India Ltd – Diesel Engine Producers

Cummins India Ltd is an Entity of Cummins Inc, which is offering products and solution from 1919.

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(A) About

Cummins India Limited is a part of the Cummins Group in India, is headquartered in Pune since 1962 and is the country's leading manufacturer of diesel and natural gas engines for power generation, industrial and automotive markets.

Cummins India Limited has a country-wide network of 20 dealerships with over 450 service points that provides products, services, and after-market solutions for uptime of Cummins equipment and engines to customers in India, Nepal, and Bhutan.

Furthermore, Company caters its products and solutions different verticals such as Railways, Marine, Mining, Trucks, Agricultural, Construction and oil & gas Infrastructure.

(B) Journey

(C) Shareholding Pattern - Cummins India

Cummins India Limited - Shareholding Pattern
Cummins India Limited - Shareholding public and Promoters

(D) Executive Management

(i) Steven M Chapman - Chairman

Steve M Chapman is heading the position of Chairman of the company. He is also on the board of Carthage College, Axalta Coating Systems Ltd. and Zao Cummins Kama.

He previously occupied the position of Group Vice President-China & Russia at Cummins, Inc. and Vice President-Emerging Markets & Businesses at Cummins Westport, Inc

Further, Mr. Chapman received an undergraduate degree from St. Olaf College and a graduate degree from Yale School of Management.

(ii) Ashwath Ram - Managing Director & CEO

Ashwath Ram is appointed as Managing Director and CEO of the Company w.e.f August 17, 2019
for term of 3 years.

Mr Ashwath first joined Cummins in Columbus, Indiana, USA in 1991 and since that time he has led business unit operations as well as key strategic transformations for the Engine Business and Power Systems in India.

He completed his undergraduate degree in Industrial Engineering from Purdue University (USA) and master’s in business administration (MBA) from the Kelley School of Business at Indiana University (USA).

In FY21, Ashwath Ram Received a remuneration of Rs 2.40 Crore which is 0.06% of sales and 0.34% of profit.

(E) Business Portfolio of the company

Cummins India Ltd is Subsidiary of Cummins Inc, USA. Cummins India is engaged in the Manufacturing and selling of various industrial Equipment and Components . However, The Company has an advantage from its parent company Cummins Inc, that helps in utilizing the optimum R&D and innovation in the its products.

Meanwhile, The Company comprises of three businesses –

  • Engine Business (serving the Construction and Compressor segments with Heavy, Medium and Light Duty engines),
  • Power Systems Business serving Mining, Marine, Rail, Oil & Gas, Defense
  • Power Generation, and
  • Distribution Business.

(F) Product Segment

(i) Engine Business Unit 

The Engine Business Unit designs and manufactures state-of-the-art diesel and natural gas powered engines. The business also offers new parts and remanufactured parts and engines.

Cummins India Limited - Products in Engine Business Unit

(ii) Components Business Unit

The Components Segment consists of four businesses with key technologies for delivering integrated solutions: Cummins Filtration, Cummins Turbo Technology, Cummins Emission Solutions and Fuel Systems.

Cummins India Limited - Products in Components Business Unit

(iii) Distribution Business Unit

Cummins Distribution Unit provides sales, service and support to our customers across India.

With 21 authorized dealerships, 120+ dealership branch offices, and more than 450 service touch points, Cummins employees have the technical expertise and experience to deliver high-quality repairs, planned maintenance and upgrade solutions.

Additionally, This network of more than 3500 Cummins trained engineers and technicians handle service of 5,25,000 engines on the field and over 2,00,000 off-highway customers in India, Nepal and Bhutan.

(G) Revenue Breakup of The Company

(i) Segment wise Revenue Breakup

Cummins India Limited - Segment Wise Revenue Breakup

75% of revenue has been generated from Domestic, in which 33% of sales constitute about power generation, 25.45% of sales comes through Distribution business. Whereas Industrial Business contributes 15.42% of share revenue.

Meanwhile, under Export High horse power and Low Horse Power constitutes approx. 25% of Business to total revenue.

Power Generation - Revenue Split

Cummins India Limited - Power Generation Revenue Split

Power Generation segment contributes 33.60% of revenue in the company. However, Power Generation segment generates sales from diverse industries such as Manufacturing 26%, Residential 19% Commercial 23%, as shown in the above image.

(ii) Geographical Wise

Cummins India Limited - Geographical wise Revenue

The mix between domestic and export is usually treated towards export its more like 70:30. But in FY21 Cummins India reported ~73% sales from Domestic. On the other hand, Exports accounted for 27%.

In fact, the Export business delivers better realization and improved margins compared to the domestic market.

Further, New products meeting most of the stringent pollution emissions compliance (CPCB IV compliance) will provide a runway for growth and gaining market share.

 (H) Manufacturing Facilities

Cummins India Limited - Manufacturing Facility

(I) Distribution Network

The company has wide network of over 120 dealership branch offices and 450 service touch points in India.

Although, The Company network offers a strong team of more than 3500 company trained engineers and technicians who handle service events of 5,25,000 engines on the field, Although it's serving over 2,00,000 customers across various markets in India, Nepal and Bhutan in off-highway segments.

(J) Cost Structure

(i) As % of Net Sales

Cummins India Limited - Cost Structure as % Net Sales

64% of expense has been incurring on Raw Material. Whereas, Employee Cost covers the proportion of 11.69% of the Net Sales.

Apart from that, The management has done significant work on cost management, and once commodity prices stabilize, operating leverage would come into play.

(ii) Raw Material Expense

Cummins India Limited - Raw Material Expense

(iii) Employee Expense

Cummins India Limited - Salaries, Wages & Bonus Expense

Over the years, Salaries and Wages expense has increased consistently. Although in 2021 Salaries and wages expense increased by 0.40%.

(K) Market Share

Market Share of Power Gensets players

Cummins india Ltd is having the highest Market Share in Power Genset Industry.

However, The Indian diesel genset market is set to grow to $1,831.2 million by 2030, at CAGR 9.4% (2021-2030)

(L) Financial Parameters

Cummins India Limited - Financial Parameters
  • Over the Past 10 Years, Cummins India registered a mere 3% CAGR Sales return.
  • Even, on the PAT side, similar growth has been registered of mere 2% CAGR over the 10 Years.
  • The management expects the current growth trends to sustain and demand from end markets to remain robust.
  • The Management stated that it will continue to work on Stabilizing supply chain and power supply solution to register good growth in upcoming years.

DU Pont Analysis

DU Pont is very Unique method to understand ROE of the company. in Simple words, DU Pont tells efficiency and effectiveness of the company in sub parts that are PATM%, Asset Turnover, Leverage.

Over the past 10 years, PAT Margin increased from 9.85% to 13.65%. Whereas, Asset Turnover also improved from 1.72x to 0.94x.

On the other hand, Financial Leverage also improved from 1.90x (2016) to 1.41x (2022). so after analyzing, It can be said that Company is moving towards effectiveness and efficiency.

(M) Management Discussion and Concall Highlights

New Launches

  • During the Year, Company introduced some innovative and techno based products in Power Genset Segment. Company Launched PSO Controller For Low Horse Power range of 82.5 - 125 KVa.
  • Furthermore, Under Exports Business, Co has Launched B3.3 and QSB7 Gensets.
  • Although, the company launched Compact 50 kVA genset for a special purpose Defense application.
  • On the other hand, Company expanded the Distribution Business unit by adding Clutches, Fillers, BSIV Long Blocks, Coolants For the Highways verticals.
  • The company has forayed into FM/UL certified pumps segment, and is planning to expand product portfolio with high-speed engines for export opportunities.
  • It also added a new Original Equipment Manufacturer (OEM) in FY21 and delivered record growth in gas compressors to the city gas distribution infrastructure
  • Over last 2 Years, CIL took Price hikes in the range of 13%-15% to reduce the marginal pressure.

Business Outlook

  • The CIL has Strong Presence in Power Genset Industry. The segment is on strong path of recovery focusing on enhancing current products, particularly in medium and high horsepower (HP) range. Further, Power Generation Business is mainly dependent on demand from data center, manufacturing, pharma, healthcare, commercial reality.
  • Company established a strong aftermarket presence that is servicing 6,27,000+ engines in the field.
  • Cummins is working in the way to fulfill the overall demand from each n every sector because of ongoing infrastructure development .
  • Apart from that, CIL moved from Mechanical to new Age Electricals Gensets to address the onset of BSIV for construction equipment vehicle applications.
  • For the export Business, Cummins India tied up and confirmed major deals for the supply of Low KVa Gensets for 5G telecoms companies in Asia Pacific to ensure the roll out of faster and reliable 5G mobile network as well as expansion of Internet of Things.
  • Company has quoted that, for the locomotive it has participated in a lot of tenders. Meanwhile some of those tenders are in final stages of negotiation.

Concalls-Q4FY22

  • In Q4FY2022, Company reported -13% sales at Rs.1468 crores vs Rs.1701 cr in 3rd quarter.
  • On the geographical side, Domestic sales degrew by 17% and Export Sales grew by 76% on QoQ Basis.
  • In term of Domestic segment wise performance, all segments has been reported negative.
  • The Power Generation reported -6%, Distribution business reported -18% on QoQ basis.
  • Moreover, in the industrial segment too company reported negative sales of -34% due to lower demands from the diverse industry.
  • Under Export, High horse power business recorded +5.5% sales, whereas Low horse power reported negative sales of ~14%.

Growth Outlook

  • The Indian diesel genset market value is set to grow to $1,831.2 million by 2030, at a 9.4% CAGR between 2021 and 2030.
  • The market is dominating by Uttar Pradesh, as investments in its construction domain are booming.
  • Company witnessed that Q4 is 2nd weakest quarter of FY22. This was happened mainly due to supply constraints, Hyperinflation, and weak demand.
  • Company expect Power Segment will be the growth driver for the overall business. This is generally because of Data Dependency on Power.
  • Moreover, the Data Center Contributes 10% - 15% in the Power business.

(N) Strength and Weakness

Strengths

(i) Market leader in Power Generation

Cummins India Ltd is a leading manufacturer of diesel engines and power generator sets with a 40% market share in the diesel engines/gensets industry. It also has a strong presence in high-value and high-margin high HP gensets.

Moreover, The company has a strong technology and innovation track record, well supported by its parent, which helps it stay ahead of peers across changes in emission norms.

The segment’s order visibility continues to remain strong on the back of higher infrastructure spends, PLI investments, 5G and cloud based data storage driving demand for data centers.

(ii) Advantage from R&D focus of the Cummins Group

Cummins India is a subsidiary of Cummins Inc, USA – a global manufacturer of engines and other power generation products. CIL in collaboration with its parent company, Cummins Inc., USA introduces new products and improves upon existing products, which are tailored for the specific needs of the Indian market. CIL’s moat lies in the tech advantage from parent’s $1bn annual R&D.

The base tech from the parent can be customized with lower domestic R&D spends in India and sold as new age products. It benefits from Cummins group entities in terms of sourcing and sales of products at a payment of marginal royalty.

Strong R&D focus by the parent company coupled with marginal royalty payment ~1% of net sales as royalty p.a. during FY16-20 (~0.3% in FY21) helps CIL perform well

(iii) Beneficiary from huge growth in Data Centers

Cummins, being the largest player, is a major beneficiary providing diesel gensets of higher capacity with more local content to large data centers.

Each data center needs to be equipped with power backup system, which includes diesel genset as it requires 24*7 power. Thus, there is a huge underlying opportunity in the diesel genset market.

Usually, the medium-large data center would need high HP diesel genset as backup power where CIL is a market leader in the category.

However, The India data center market is expected to double its capacity in the upcoming years, which is driven by strong digitalization and increase in cloud adoption. India data center market size was valued at $4.35 billion in 2021 and will reach $10.09 billion by 2027, growing at a CAGR of 15% during 2022-27.

(iv) Focus on clean energy technology (mainly hydrogen technology)

Cummins India is well positioned to offer wide product offerings when mainstream diesel/gas power generation assets are phased out. Being a subsidiary of Cummins Inc, USA, the company has access to advanced technologies in the power technology business.

From advanced diesel and natural gas to the latest hybrid, battery electric and fuel cell options; the group has presence across diverse alternative offerings.

Additionally, Cummins provides the entire electrified solution from zero-emission transportation systems that can fully-charge in under eight hours to critical components like expertly integrated battery packs, which results in maximum performance and power, with reduced motor maintenance, service and fuel fees.

Cummins also offers a complete line of Hydrogen Fuel Cell Power Modules and compositions for every electric vehicle and power application. The company has operational technologies in battery, hydrogen fuel cell as well as hydrogen generation

Weakness

(i) Raw material price volatility

Faster replacement of diesel gensets : The evolution of battery technology poses a viable threat to diesel gensets even in the near to medium term. With the faster implementation of PLI scheme for battery manufacturing, government push can increase battery availability.

Big industrial conglomerates and foreign technology players are also planning to set up battery manufacturing plants, which can boost scale and reduce costs.

(ii) Deferred government spending on infrastructure

The large capex push by the government puts execution risk in different sectors. Since Cummins is related to these sectors for their power generation needs, slowdown in the sectors might impact its topline growth.

(iii) Slower global market demand

Slower-than-expected export growth is likely to result in below-expected margins. Stringent emissions norms in other countries may result in lower demand for HHP PowerGen engines and will require investments in new engines.

(iv) High competitive intensity:

The domestic PowerGen market is highly competitive with local players expanding the current portfolio and international players gaining market share. Global OEMs, as well as genset assemblers, are driving increased competition in exports markets.

(v) Rising raw material costs

Due to commodity price uprun seen over the past few quarters, the raw materials for CIL has gone up. In case there is a resistance from customers against price hikes, CIL will have to take margin cuts.

References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry’s Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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