What are business strategies the company intends to maintain the growth momentum of FY2004?
We laid out a strategy Road map three-four years ago. Based on this we have taken actions. Some of the actions are:
Going forward our growth strategies would be driven by:
Based on the combination of the actions already underway and our belief that the Indian economy is on the way to recovery and that yearly growth in Indian GDP would be around 5% to 6% we have set an internal target of maintaining a double-digit growth over the next 2-3 years.
The exports in the Q1, FY2004 have shown a significant increase over the earlier quarters. Is this performance expected to continue? What are the export opportunities the Company is looking at?
Our exports that had dropped over the last one-two years are on their way to recovery. Though these are nowhere near the historical levels, we expect to see exports increase over the previous year in the near future. Based on the market indications we expect to be back on the run rate required to hit the historical export levels by Q3, CY 2004. However, this growth would not be linear and would be in stages depending upon Cummins’ ability to switch over from high cost manufacturing plants to India and our ability to take on the additional requirements.
We believe that though exports would be area of growth, we do not want to downplay the importance that we lay on the domestic market. Our export strategy is based on export of engines, component and full gensets. It is an expansion of the earlier strategy of export of only engines. We have indicated that we are looking at exporting Rs 100 crores of manufactured components over the next three years.
We do see the Indian Operations playing a major role in overall Cummins operations. However, this would depend upon our ability to act as a reliable and cost effective supplier to meet the world requirements. We will have to compete with other low cost manufacturing bases of Cummins in China, Brazil, etc. We do not see a significant threat from China in the next two-three years as the plants in China have to concentrate on meeting the domestic demand.
Our Exports would be built upon:
In addition, various Cummins plants are sourcing components from India; these are purchased directly by them from Indian Suppliers. The annualized purchases at present are to the tune of US$ 75 Million. This has a potential to grow to US $ 200 Million. Many of these suppliers also supply to CIL. CIL is benefited due to lower procurement costs due to global volumes.
What are the margins on the Incremental Export sales?
As we are looking at becoming a long-term player in the export market, we need to ensure that we remain competitive with other international plants from China, Brazil, etc. The margins on the incremental export sales would be comparable to the margins on the domestic business, however, the traditional margins on exports cannot be expected as these sales were opportunistic sales, where as our current strategy is to become regular supplier to Cummins for higher volumes.
The transfer pricing policy is being reviewed by the Board to ensure that we are able to add maximum value to our various stakeholders and yet remain within various regulatory requirements.
What is impact of the increase in the diesel prices on Company's business? What is the Company doing to counter this?
The increase in diesel prices has increased the cost of generation for the Customer. We have seen a reduction in sales of spare parts due to the reduction in usage of the DG sets by customers
The company has modified its engines in order to enable them to run on alternative fuels such as SKO/LDO there by reducing the cost of generation.
Due to the reliability of the diesel genset generated power, customers with critical power dependent processes continue to prefer generated power.
What are implications of the Electricity Act 2003 on the Company's domestic Powergen business?
The act would see a significant change in the way the Powergen business is conducted in the future. However, we do not see any adverse impact on our Powergen business in the next two-three years - that is the time, in our estimate that would be required to convert the intent into reality.
We are looking at the Electricity bill to provide opportunities for growth in the Powergen sector. These opportunities would be in the areas of Distributed generation, Captive power plants (upto 10 MW) for meeting localized requirements, Peak shaving opportunities. We are studying the implications of the Act and are in the process of working out the strategies.
What would be the impact of the natural gas finds on the Liquid fuels based powergen business?
The impact of huge gas finds would be dependent upon the ability to deliver gas at the consumption points. The pricing of gas would be crucial in determining the viability of gas as on option to other liquid based fuels - there is not enough clarity on this at present. The ability to deliver gas to the main consumption points is an issue and we are not certain about the timeframe in which this would become a reality.
However, in three-four years gas would become a critical factor in terms of a growth opportunity for the Company. We already have a range of Gas based engines. We are presently working on enhancing this range in order to improve efficiency. We would then have a product range that would enable us to maximize the opportunities made available by gas. We do see gas replacing a portion of the Diesel based market in the long term.
What are the prospects of for Industrial Business of the Company?
At present, the Industrial business has a turnover to the tune of Rs 160 Crores. This business has been growing at more than 30% over the past three years. However, this growth cannot be expected going forward. Our engines are used for various applications in Mining/construction, compressors, Marine, Railways, Defense. All these sectors are expected to see growth in the coming years due to the emphasis given on infrastructure. We expect this business to grow in double digits over the next two-three years.
What is the impact of increase in steel prices on CIL Margins?
While there is an impact of this on material costs, the cost reduction initiatives underway would be would offset this impact.
What is the status of the cost savings initiatives and what are the savings expected from this initiative?
The TurboKaizen initiative launched last year, has resulted in identification of projects and ideas which would translate into savings to the tune of Rs 100 Crores over a period of three years. The savings would come significantly out of material costs (through value engineering, indigenization) and process and quality improvements at supplier end (reduction to number of suppliers leading to economies of scales). The rest of the savings would come from conversion costs and administrative expenses.
However, over same period of three years, these would be set off to some extent due to the inflation related cost increases, pressure from customers and hence, the entire cost savings initiatives , in any case, would not reflect in the bottom line.
In view of the expected growth in the Domestic & Export business, are significant investments envisaged in the Plant and Facilities?
We have been investing on a steady and selective basis in past. We have the necessary infrastructure in place to meet the increased demand without significant investment in plant and facilities for the next two-three years at least.
What are plans of the Company’s plans to utilize the significant cash reserves? Is there any share buyback in the offing? Can you tell us about your dividend policy?
We continue to be on the look out for opportunities that could add value to overall Cummins operations - through joint ventures, alliances, mergers and acquisitions.
At present the Company has no plans to buy back any shares.
The Company's dividend policy continues to be guided by the business needs and available opportunities and is reviewed by the Board regularly.
What is the current position of Cummins Auto Services Limited?
We believe that we have made a right decision in investing in Cummins Auto Services (CASL).The business is new, exciting and challenging. There is potential of growth in the business provided it is done with the right business model. Though, presently CASL continues make losses, due to various actions taken in the last six months these are lower than plan. We are looking for various business models going forward however we have not yet put in place a robust business model. We expect this to be finalized by the end of the year. This should help in containing the losses and improve the performance.
What is the proposed role of the Engineering facilities that Cummins intends to establish in India?
The basic purpose is to utilize the facility for research and development for all Cummins products. The investment is being made by Cummins Inc. and CIL has no investment in this. The management would under the control of Cummins Inc.
The statements made above are based upon the data available with the Company, assumptions with regard to global economic conditions, the government policies etc. The Company cannot guarantee the accuracy of assumptions and perceived performance of the Company in the future. Therefore, it is cautioned that the actual results may materially differ from those expressed or implied above.