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he industrial business could be the next big growth opportunity for Cummins. “Historically, the power generation business has been the mainstay for Cummins. We expect the industrial business to catch up, as railways, road construction and defense sectors are expected to see a surge in investments,” says an analyst. In 2QFY17, sales in the industrial segment grew 36%, marking third consecutive quarter of sharp sales growth. The growth was led by a surge in investments in roads and railways. 

Cummins India has had a better time back home with domestic sales growing at 18% in FY16, despite a challenging competitive environment. “We feel optimistic because our industrial businesses are linked to infrastructure, and this is where the government has really stepped up in the last couple of years. We have seen very strong action in the road segment particularly, and that has really helped our construction segment. I think the overall market there has expanded by almost 30-40% and our sales have commensurately grown. Sales have probably exceeded the market growth because of our share improvements,” added Talaulicar during the earnings call.

The management has maintained its guidance of 8-12% growth in domestic business in FY17. During the September 2016 quarter, the power genset segment grew by 5% on a higher base and the management believes that multiple drivers are in place for future growth. While the demand for LHP and MHP gensets would be driven by retail and realty, the HHP gensets, which is the biggest revenue contributor to this segment, is seeing an increasing demand from data centers and healthcare, apart from retail and realty. 

The company faces competition from players like Perkins in the medium and high horsepower segments. Kirloskar Oil Engines has also recently entered this segment, but customers’ unfamiliarity with the company in this segment would make it difficult to compete in a market where customers cannot take a chance on product reliability. For instance, 60% of Cummins’ volume come from repeat customers. The UK-based Perkins started its operations in India in late 2015 at its Aurangabad plant, but may find it tough to compete with Cummins, which boasts of a strong dealer/service network and 400 touch points. 

The management is not too worried about the growing competition. “As you know we have the largest scale in the country. We have localised products. We have very strong supply base, very strong engineering team and of course, global parent that is very strong. So, with all of that we feel confident,” said Talaulicar in the last call. Cummins is one of the few multi-national companies in India, which houses the global research and development center in India. Cummins does global R&D in Pune, the spend on which is equally shared between Cummins Inc and Cummins India. As on FY16, Cummins India’s royalty outgo stood at #44 crore or 1% of FY16 sales. In 2012, Cummins India had announced that the incremental new technology exports would be manufactured by an unlisted subsidiary of the parent. Analysts say that it should not have any material impact on Cummins India’s revenues, given the potential of its existing product portfolio and the latent demand in the domestic market. 

Cost Conscious 
The company has maintained its operating margin at 16%, even with cuts in pricing amidst intense competition. But in recent quarters, the major drag on margins has been slowing exports that fetch higher margins and higher contribution from the low-margin LHP and MHP gensets. The management says that it has been tackling these issues by bringing down product-specific costs. Over the years Cummins has managed to improve efficiencies through accelerated cost efficiency programmes aimed at reducing direct material spending, cost reduction in indirect materials and Six Sigma. These initiatives have helped Cummins reduce its material costs by 2-2.5%. Historically, the company has controlled its costs well whenever margins are under pressure. Even this time around, analysts believe that the company should be able to save 100 basis points on costs and protect its margins. 

Cummins India has a better ROCE and operating margin profile when compared to most of the MNCs in the BSE Capital Goods Index. It’s return on equity, which measures how efficiently a firm is using shareholders’ money stood at 25% in FY16. The company’s revenues are estimated to grow at a CAGR of 11.52% over the next three years, while net profit is expected to grow at 13% during the same period.  

 Analysts feel that Cummins