Cummins India

To our esteemed shareholders,
 
 As we look back at the financial year 2008-09, and all that our Company
 has accomplished during the year, we are pleased to note that the year
 was yet another remarkable one for Cummins India Limited (CIL), which
 despite significant challenges, remained steadfast in delivering on its
 Brand Promise of Dependability. For this, I would like to thank our
 customers for providing us with opportunities to serve them better, our
 suppliers for their support and long-term partnerships and our
 shareholders for their investment and confidence in the business. Most
 importantly, I would like to recognize our employees who made all of
 this possible by living the Cummins Core Values.  I would also like to
 recognize the advice and guidance provided by our able Board of
 Directors and the commitment of our stable leadership team.
 
 As we share with you the performance of our Company in the financial
 year 2008-09, the allegiance to our four- fold strategy to achieve our
 Companys business objectives is clearly evident. As we take you
 through the business highlights of the year, you will note that the
 strategies that were implemented four years ago maximize our success
 not only during good times, but also during difficult times and are
 helping us emerge stronger than ever.
 
 I am pleased to announce that despite hyperinflation in the early part
 of the year and the global economic downturn in the later part, our
 annual sales grew by 23% to Rs. 2,861 crores, and the corresponding
 profit before tax grew 32% to Rs. 523 crores, excluding Cummins Sales
 and Service India Limited and Cummins Auto Services Limited. Our strong
 full year performance is attributable to concentrated focus on waste
 and cost reduction programs, productivity enhancement
 
 initiatives, strong partnerships with our suppliers on value
 engineering, careful but continued investments in new products and
 capacities, and conscious efforts towards working capital reduction and
 cash management. Six Sigma, which is in its ninth year at CIL, has been
 the consistent approach towards driving these improvements.
 
 In line with our Mission of creating wealth for all stakeholders, we
 disbursed a special one-time dividend of Rs. 2.40 per share of Rs. 2
 each (120% of equity capital) in December, and an interim dividend of
 Rs. 4 per share (200%) in February. Finally, based on the strength of
 the Companys financials, the Board has recommended a final dividend of
 Rs. 2.60 per share (130%).
 
 Allow me to elaborate on the deployment of our four strategies, which
 are in their fifth year of vintage:
 
 Domestic market share leadership
 
 The first of our four-pronged strategy is to sustain and grow the
 market share leadership we have built in India over the last forty
 seven years. Our future rests in the hands of our customers. This
 strategy has been devised keeping their success paramount.
 
 In last years annual report, I shared with you our company-wide
 initiative of Customer Support Excellence (CSE), which inculcates in
 every employee the practice of placing our customer first and providing
 real value to our customer. I also shared three ways in which we
 planned to accomplish this - Through the Lens of the Customer (TLC),
 Repair Event Cycle Time Reduction and Customer Focused Six Sigma. This
 year, taking the initiative forward, we have established our Customer
 Experience Philosophy and a set of Customer Experience Standards, to
 help align and accelerate our customer focused journey of becoming a
 truly customer centric organisation. We have aligned the Customer
 Experience Philosophy with the Company Vision of Making peoples lives
 better by unleashing the Power of Cummins. The standards by which we
 measure the success of our customer service initiatives are:
 
 Safety - The safety and well being of our customers and employees is
 our first priority.
 
 - Create and maintain a safe working environment
 
 - Take care of and report any unsafe condition immediately
 
 - Use all required safety equipment every time
 
 - Follow all our safety policies and procedures
 
 - Alert customers to any safety issue that may arise
 
 Accuracy - We do the job right. We perform with precision and ensure
 error-free interactions with each customer.
 
 - Listen carefully to ensure true understanding of the customers needs
 
 - Pay attention to every detail of the transaction or work process
 
 - Provide correct and complete information - know
 
 where to obtain correct information if needed
 
 - Ensure the customers thorough understanding of the transaction
 
 Responsiveness - We are accessible to our customers and always ensure
 that their experience with us is efficient and timely.
 
 - Acknowledge all customers promptly
 
 - Demonstrate a sense of urgency and agility in addressing the
 customers needs
 
 - Manage customer expectations through effective communication
 
 - Keep all commitments - notify customers immediately regarding any
 unforeseen issues
 
 Partnership - We care about the long-term success of each customer and
 strive to build trust- based relationships.
 
 - Treat every customer with courtesy, respect, and dignity
 
 - Look at each customer interaction as an opportunity to build trust
 with the customer
 
 - Constantly learn about customers and help them identify their needs
 
 - Always be on the lookout for ways to further assist each customer in
 achieving their objectives
 
 The success of TLC hinges on the following four concepts:
 
 - Looking through the lens of the customer - This is a simple, yet
 profoundly important concept to truly understand how customers
 experience what we do and how changing our perception and processes can
 influence their overall experience positively
 
 - Everything Speaks - This describes our physical environment as seen
 by the customer, and forces us to re-examine every detail from a
 physical facility appropriateness standpoint
 
 - Creating a Wow - Making sure that the way we deliver customer
 experience is special by implementing a consistent Customer Experience
 Philosophy and a set of Customer Experience Standards
 
 - Set customers and employees up for success -
 
 Capable processes must be engineered in place to ensure consistent and
 positive customer experiences that build customer loyalty
 
 Customer Experience Improvement Teams have been formulated at each of
 our businesses and functions, to help identify customer experiences and
 take improvement actions. Moments of truth that were captured through
 the customer experience mapping exercises have identified a few areas
 of improvement, which we are committed to addressing. While CSE is
 certainly relevant to employees who come in direct contact with
 external customers, it is also as relevant to employees who are
 servicing other employees (internal customers). I am confident that
 with increased focus on the customer and successful implementation of
 the CSE initiative, our customers will reap opportunities like never
 before.
 
 We also concluded the year with the 78lh invitee to our most innovative
 customer interface program - Voice of Customer (VOC). Under this
 initiative, each month, our
 
 Distribution Business invites a customer to our premises to address a
 broad group of cross-functional managers. Thereafter, our employees
 along with the involved OEM and Dealer teams, work on translating the
 customer feedback received, into an actionable plan with measurable
 improvements. As is the case with any problem resolution in our
 Company, Six Sigma is used as the primary approach for making
 improvements.
 
 Even as the global slowdown began showing its impact towards the end of
 2008, demand in certain segments of our Industrial Business maintained
 momentum. The rail segment bagged a prestigious order to supply our 14
 litre NTA855R engines for four wheeler Over Head Equipment cars. We
 further secured a breakthrough order for supplying 50 litre K50 engines
 for powering Diesel Electric Multiple Units to run in Sri Lanka. The
 Marine segment bagged an order to supply 38 litre main propulsion K38
 engines for Catamaran Survey Vessels for the Indian Navy. In addition
 to these, Cummins supported the Indian Railways ambitious project of
 developing the railroad
 
 Exports
 
 While the domestic market contributes to a major portion of our
 revenues, a significant part of the pie relies on exports, which makes
 it our second strategy to focus on. The relatively low cost and high
 talent base that we have in India, creates huge opportunities for the
 entire range of our products and services in overseas markets, using
 our parents distribution channels. We were fortunate that despite the
 global slowdown, exports demand continued to remain strong in all the
 segments through 2008-09 and hence export revenue grew 80% (excluding
 Cummins Sales and Service India Limited and Cummins Auto Services
 Limited) over the previous year.
 
 We developed and launched the Tier II emission compliant 50 litre high
 horsepower engine with a modular, high pressure common rail fuel
 system. The first batch has been well received by the customers.  This
 gives us the confidence that this would be a good long-term growth
 opportunity for us as market conditions improve.
 
 We identified opportunities for exporting the 8.3 litre C series engine
 for the power generation market initially to South East Asia. The
 product, developed by our local team in conjunction with its
 counterparts in Singapore, is currently undergoing design validation
 
 trials. Regular supplies are expected to start in the second half of
 2009.
 
 Our new line of generator sets based on the X3.3 engines of 30 to 38
 kVA at 50 Hz and 30 to 35 kW at 60 Hz, witnessed great demand in the
 exports market.  The genset range provides an economical and reliable
 power solution to a variety of prime and standby applications for small
 businesses and the telecommunications market. During the year, we
 received over 2,300 orders for these gensets, generating revenues of
 approximately Rs. 32 crores.
 
 At the beginning of the year, our Power Generation Business launched
 the NT & NTA855 coolpac for exports. Available in the range of 415 bhp
 to 535 bhp, the product is used for power generation applications
 globally. Since the launch, over 500 units of the product have been
 sold, yielding revenues of approximately Rs. 24 crores.
 
 The exports segment experienced its moment of glory when our Company
 received the prestigious Engineering Export Promotion Councils Star
 Performer Award for Export Excellence for the year 2008. This was in
 recognition of its outstanding contribution to Engineering Exports
 (Western Region) in the category of Large Enterprises. Winning the
 award for the 19th consecutive year has been a commendable achievement.
 
 Low cost producer
 
 The third strategy is to be 6 Six Sigma a low cost Producer in the
 segments in which we operate. To enable this, our primary approach and
 tool is Six Sigma. During the financial year 2008-09, we completed 248
 Six Sigma projects, which resulted in annualized savings of
 
 Rs. 76 crores. The year saw a significant increase in the commitment
 demonstrated by our employees to the Six Sigma methodologies, evident
 from the substantial increase in the number of Master Black Belts to
 12, Black Belts to 34 and Green Belts to 1500 across our Group
 Companies. Our commitment to our customers is reflected from the fact
 that out of the total number of projects completed during the year,
 over 35 were Customer Focused Six Sigma (CFSS) projects where the
 project leader is an employee of our customer. Further, to reduce the
 Total Cost of Ownership of our direct material spend, we undertook over
 50 Supplier Focused Six Sigma (SFSS) projects.  We view Six Sigma as a
 very strategic tool. Not only does it help improve processes that lead
 to zero defects, but also helps build leadership skills across the
 organisation and improves the culture to one that departs from biases
 and opinions, to analysis and data based decisions.
 
 This July we also re-launched Accelerated Cost Efficiency (ACE II),
 which is targeted to reduce the Total Cost of Ownership (TCO) of our
 direct material spend by 20% over the next three years. The initial
 initiative designated as ACE, which was launched in 2005, concluded
 this fiscal year. It had targeted a 30% TCO
 
 reduction in direct material spend over a 3-year period.  I am happy to
 report that we were successful in achieving 83% of the targeted
 annualised cost reduction, bringing a whopping Rs. 253 crores gross
 accrued savings to CIL. Since the launch of ACE II, we have achieved
 approximately 90% of our targeted cost reduction for the year,
 resulting in accrued savings of Rs.15 crores.
 
 Great place to work
 
 We believe that an organisations leadership quality and work culture
 determine the performance of the Company to a very large extent. Hence
 we see Great Place to Work not just as an HR initiative, but as a
 crucial business strategy. I am pleased to convey that our Companys
 guiding principles (Vision, Mission, Values) are firmly embedded in the
 DNA of our employees.
 
 The first and most important initiative under the Great Place to Work
 strategy is Leadership Excellence. We continue to invest heavily in
 improving leadership skills of our employees at all levels. 300
 employees were trained this year in our global Leadership Development
 System modules on setting the aim, coaching for
 
 development, championing change and valuing diversity. We are enhancing
 our mentoring program and in the process have established nearly 100
 mentor-mentee relationships this year. Furthermore, in order to enhance
 talent and help our employees take up bigger roles in the organisation,
 we have partnered with management institutes like SP Jain and the
 Kelley School of Business at the Indiana University, where we sponsor
 management programs
 
 all Cummins employees, individually and collectively.  Our Companys
 initiatives in the area continue to be channelized through our trust,
 Cummins India Foundation (CIF), whose efforts continue to converge into
 the three areas of higher education, energy and environment and local
 community infrastructure development.
 
 In the area of higher education, continuing to expand the scale of the
 Cummins Scholarship Program each year, we awarded scholarships to 30
 deserving candidates in 2008, doubling the number of grants from 15
 last year. Meritorious students from financially disadvantaged
 backgrounds are funded through their entire undergraduate degree
 education, in addition to providing mentorship and soft skill training,
 to ensure their all-round development, and equipping them to become
 effective professionals. In addition to the 30 students sponsored by
 the Cummins India Foundation, our employees also supported this program
 by individually sponsoring another 12 students on their own.
 
 In the area of energy and environment, we undertook to support the
 Village Energy Security Program of the government aimed at electrifying
 all villages by 2012.  Under this initiative, our Power Generation
 Business established a Distributed Generation Model for rural
 electrification of small remote villages / hamlets, with a pilot
 project targeted in the village of Kolha in Orissa.  We have worked
 with HSc Bangalore for developing the Producer Gas (or Biomass)
 Technology, and with IIT Bombay on biogas and bio-fuels for the
 project.  The Cummins Engine Research Facility (CERF) at IIT Bombay has
 extensively worked on this concept for over three years and we are
 poised to conduct this pilot shortly.
 
 Through CIF, we donated a community hall to the village of Kasaramboli
 near Pirangut, where our two new power generation plants are located.
 We also helped resolve a water crisis problem at Bhatkya Vimukt Jati
 Shikshan Sanstha (BVJSS), a school for abandoned street / tribal
 children in Wagholi, by exploring the options of water shed management
 such
 
 as continuous contour trenching, roof top water harvesting, bore
 recharging and tree plantation. The tree plantation drive was
 successfully carried out, as well as a hand-pump installed. Our
 employees continue to explore more sustainable water harvesting
 solutions there.
 
 Our Every Employee Every Community (EEEC) program encourages employees
 to volunteer four hours a year of company time, and more of their own
 time towards the betterment of the community, primarily in our three
 areas of focus. During the year, the four-hour or more community
 outreach program witnessed a high level of participation from employees
 across all our Group Companies. I am delighted to share that 346
 employees dedicated 5,769 hours towards various meaningful community
 improvement opportunities identified by our Company.
 
 Unfortunately, the year witnessed three large-scale
 
 natural calamities in areas where Cummins operates.  This included the
 earthquake in China, and heavy floods in Indiana as well as Bihar.
 Through CIF and voluntary employee donations, we endeavoured to provide
 some relief to the disaster stricken communities by donating, Rs.
 539,900 to the World Vision Fund towards the China earthquake, Rs.
 208,050 to Red Cross and Bartholomew County in Indiana, and a sum of
 Rs. 2,821,870 to the Tata Relief Committee towards the flood affected
 victims in Bihar.
 
 In Conclusion
 
 The year witnessed two major strategic business decisions taken by the
 leadership team. First was the sale of our generator rental business to
 Aggreko PLC.  Aligned with our long-term business strategy of domestic
 market leadership and to enable greater focus on our core business of
 designing, manufacturing and selling generators, we decided to
 
 exit the rental business. The sale of the business at Rs. 30 crores was
 profitable for the Company. The good news is that Aggreko will be a
 customer for our generators, engines, and alternators in India and we
 look forward to partnering with them as they grow their business in
 India.
 
 The second significant business decision was the merger of Cummins
 Sales and Service India Limited and Cummins Auto Services Limited into
 Cummins India Limited. Over the last few years, Cummins has been
 strategically working towards integrating its businesses to harness
 greater synergies and to build a stronger, more unified brand.
 
 Last year, we had stepped up the implementation of the Cummins Business
 Model and Cummins Operating System (CBM / COS) to accelerate our
 journey to becoming a Zero Defect Company. To help in this journey,
 we appointed functional excellence leaders in the 10 functions of
 Quality, Manufacturing, Technical, Supply Chain, Purchasing, Finance,
 Information Technology, Human Resources, Marketing & Sales, and Service
 & Support. Each of these functional leaders work across all the nine
 Cummins affiliated Companies in India to drive Zero Defect processes
 and to develop talent within that function.  This way, these functional
 leaders help all our businesses to become more successful.
 
 As you can tell from the above report, the year has been quite exciting
 and progressive, despite a few unexpected setbacks. As the external
 environment soured in the second half of the year, we were forced to
 take some tough decisions including delaying certain investments,
 freezing salaries and reducing the size of our workforce. I am pleased
 to say that our employees exhibited immense understanding and support
 of these steps. They have stayed focused on
 
 maximizing opportunities for growing sales and improving margins, while
 reducing costs, expenses, working capital and capital.
 
 I would like to assure our shareholders that while the external
 environment is difficult in the short-term, we do strongly believe that
 the medium to longer term prospects for Cummins in India are excellent
 and we are better positioned than ever to meet todays economic
 challenges. Our strong balance sheet, zero debt and respectable cash
 reserves offer us the financial resources to handle external shocks.
 Our strong customer relationships give us the opportunity to grow our
 businesses. Our technology and customer support systems are unmatched.
 Most importantly, we have an extremely talented and stable team that
 models the Cummins Values.
 
 I am confident that the consistent implementation of our four
 strategies while modeling the Cummins Core Values will ensure that we
 emerge from this slowdown as a stronger, Zero Defect Company. This is
 actually a good time to gain competitive advantages in the market
 place.
 
 I would like to thank you for your confidence and support. At this
 juncture, I rededicate myself and my entire team at CIL to our Vision
 of Making peoples lives better by unleashing the Power of Cummins.
 
 Sincerely,
 
 Anant J. Talaulicar
 Chairman & Managing Director
 Cummins India Limited