Expect domestic segment to bounce back in FY16: Cummins

Cummins India Q4 earnings were operationally weak led by an increase in cost of items across the board although revenue growth remains strong led by growth in exports.

In a CNBC-TV18 interview, Rajiv Batra, CFO of Cummins India shared his outlook on the company’s results.

Below is the transcript of Rajiv Batra’s interview with Sumaira Abidi and Reema Tendulkar on CNBC-TV18. Sumaira: This time around, your margins have seen a contraction in excess of 200 basis points for FY16. The guidance that you have laid out now is at 15 percent. So, this is lower than the guidance that you had for FY15. Are you not at all optimistic that things might be on the mend, that FY16 could be better or is the sense that the recovery could be more protracted? A: We always live on hope. And there is enough hope on the environment for us to believe that things are on the mend. Our guidance on revenue essentially has been that domestic revenues this year will recover. And if talking between 10-15 percent, that should really have an implication on our lines of performance because leverage then starts to kick in. The last two years, revenue has declined, and in fact this year, our revenue grew 44 percent on exports to almost Rs 1,700 crore. Domestic at Rs 2,600 crore, was still down by about four percentage points. So, that really is the basis for our guidance here. It says domestic should pull back. But we really want to see the numbers before we can hang our hat on it. Reema: In your conference call, you have indicated that on the back of higher pricing compared to peers, the company has lost market share in the domestic genset business or in the domestic genset segment. What was the extent of market share loss, where does it currently stand at and right now how does your pricing for the domestic genset business compare to peers? Are you still trading, are you still selling it at a premium? A: Let me put that question in perspective. You are now talking about the low horsepower segment. There we had brought in very robust offerings and state-of-the-art technology which more than fulfilled the emission requirements. That clearly was at a premium to where the rest of the market eventually turned out to be. And what we have done is we are working on solutions which are more fit for market and have realigned prices in the meanwhile. In the interim, we clearly lost the market share and now we have started to see that pull back in the quarter gone by. So, while we are not at the high point of where our market shares in this segment used to be, but clearly lots of progress has been made and very shortly we should come back to where we were albeit at lower margins. Sumaira: May you look at further price cuts from here? A: Essentially it would really depend on where the domestic market is headed. Sustainable demand situation should mean we should be doing just fine enough with having regained the market shares. But again, we have a premium in mind compared to where the rest of the market is because we do afford superior technology and better customer service. And therefore keep adjusting our prices based on what the environment is asking us to do.

Reema: But you have seen a recovery in the market share which was lost, at least in April and May. That is what you said, right? A: Yes, we have. This is again the lower end of the market and very clearly we have pulled back and we are very happy and satisfied with what we have seen. Reema: Any numbers that you can share? The quantum of market share lost as well as how much you have managed to recover it by and where does your market share currently stand at? A: You simply do not talk about market shares in forums like this. More internal to us, but I can tell you that there was a loss and it is almost recovered now. Sumaira: The big drag this time around on your earnings was the higher raw material costs. What might this be trending at in FY16? What is the sense that you are getting? A: For the quarter, material margins were down by about two percentage points and for the year were by about a percentage. There were obviously, some impact over the aligning our prices and on the others there were something which had favourably worked in the past which did not represent a continuing opportunity. But, our guidance has been that we should be holding margins where we are today, plus, minus one odd percent. Reema: What is interesting is that your export revenue guidance is at zero to five percent and after clocking in such a strong export revenue growth in the year gone by, we understand that you have indicated part of the reason is on account of base effect, a high base effect. But is there any other reason for what looks like a muted export revenue guidance compared to the performance of FY15? A: The base effect that we are talking about is something like 44 percent. We went up from about Rs 1,200 crore to about Rs 1,700 crore; Rs 1,722 to be exact. And when you have a 44 percent uptake rising on top of that, while possible, is something that you would like to carefully ascertain before we go out to the world at large and say we are going to grow on top of this one. Reema: So, it is only base effect? A: It is really the base effect and we do expect that we will certainly grow. But this really is talking about markets which are rapidly growing from 44 percent, to flex that market condition. Now, for that market to continue growing at this pace is something which we would like to just pause and then maybe come back to you next quarter.