Cummins lines up Rs2,000 crore capex in India for the next five years

Engine-maker Cummins India Ltd (CIL), part of the Indiana, US-headquartered $13.2  billion engineering major, posted impressive numbers in 2010-11. Net profit rose 33% to Rs591 crore on a 32% growth in revenues to Rs1,050 crore. The company has ambitious plans in the coming years to consolidate its position in the automobile & industrial engine segment and the genset market by investing RsD2,000 crore for capacity expansion near Pune. CIL’s chairman and managing director Anant J Talaulicar, who’s also the president of the components business of Cummins Inc, spoke to DNA on the way ahead for the company and how research and development is integral to its growth, among other things. Excerpts:

There has been a lot of talk about a slowdown in investment demand in the last two quarters, especially in the capital goods sector. How has CIL been affected, if at all?
We’re seeing some impact in the short term. But we have not seen a slowdown in our auto business. There is a deceleration in compressors used in water well rigs and in power generation there have been deferrals in some large projects like malls. People are putting off their capex plans, but we’re well-diversified and not dependent on any one sector.

Even global markets, especially Europe, have been a cause for concern. Your exports more than doubled last year and you’re looking at a 15% growth this year.
Overseas markets are a bit tepid now, but not as bad as during the downturn when they tanked. So I think we’ll be able to achieve our target.

Your domestic auto business accounts for just 7% of your topline. Has the number dropped over the years?
 No, it’s been in the 5—10% range in the last few years. Commercial vehicle engines are a fairly new business for CIL though we have been there since 1995 through Tata Cummins. When Tata Cummins develops a product, CIL takes that product, customises it and supplies it to other OEMs (original equipment manufacturers). Tata Cummins has developed what is called the 3.9 litre B series engine and a 5.9 litre engine that we fit with various parts and which is used in equipment such as backhoe loaders.

How about exports?
Domestic and export businesses have been at 70:30. It keeps varying a bit but this ratio will largely be maintained. Both will grow but we don’t see a dramatic shift in the domestic business in the next five years.

You mentioned there is no slowdown in auto. What are your plans in the segment?
The automobile segment continues to be exciting for Cummins India and we are very excited with the way the market has been growing. The growth in Indian economy will boost the overall commercial vehicle segment. With infrastructure improving, there is strong demand for bigger vehicles; hence there is a lot of scope for a company like us to grow. Currently, Cummins is the strongest player in the CV segment; along with this our component group company supplies to almost every OEM in the country. We sell in excess of 100000 engines every year in the Indian market. We are also working on exhaust gas recirculation. These are emission solutions which will be offered to automobile manufacturers. As 13 cities come under the bracket of Euro IV norms, there is a huge demand for such emission solutions.

What are the other projects you are currently working on, especially on the automotive side?
Cummins, in India, is currently working on the L series engine. Conventional truck engines are up to 6 litre. However, as the size of the trucks expands, there is a demand for higher end engines - up to 9 litre. Currently, we are working on an 8.9 litre engine for CV usage. It is a major project that we are working on at the new TCL (Tata Cummins) plant at Phaltan.  It’s a unique product offering from Cummins. We are currently prototyping the product and will be offering the product soon.

What are the prospects for the CV market?
We have not yet experienced any slowdown; however the cost of acquiring a truck has gone up. The situation is similar to 2008, when the demand slowed down. But I feel the truck industry will grow as the economy grows. In the long term the industry has brighter prospects.

What are CIL’s capacity expansion plans?
Cummins in India is expanding operations at Phaltan. Currently, three plants are operational and we plan to take this number to 9-10 in the coming years. Our plant one takes care of mid-sized engines like B series for the automotive division. The second plant is the rebuild centre, wherein we do the rebuilding of large engines used by different industries. The third one is the reconditioning plant, wherein we refurbish the used parts and components and sell them at lower costs. Fourth is the parts distribution center, which will be operational in August this year. The plant takes care of our distribution business. Fifth will be a power gensets plant, while sixth will also be on the generator side. Seventh plant will take care of our mid range horsepower engines between - 6L to 9L. Plant number eight will manufacture fuel systems for various applications, including off highway trucks. And our ninth plant will take care of large size engines ranging from 19L to 60L.

And how much will you spend on these?
We have lined up Rs2,000 crore capex for Cummins in India for the next five years. And currently we have utilised just 30% of that.

Do you plan to get into the passenger vehicle segment?
No, we have no intention of getting into the passenger vehicle segment. We are very happy supplying engines for CVs. We do not believe the passenger segment will be viable for our company.

How much does CIL contribute to the Cummins topline and where is it headed?
CIL has a very good opportunity to get a very good share of Cummins’ global topline, but it has to be earned. Currently, it (CIL) contributes about 10%, but I don’t see it rapidly growing. Cummins is also growing. In 2009, our global revenues were $10.8 billion and in 2010, $13.2 billion and this year we are looking at $17 billion, so I can’t say if India’s contribution will change much, it’ll edge up though.

What would be the linchpin of CIL’s strategy in the next five years?
We have a four-pronged strategy. First is our domestic market leadership. We have been here for 49 years and want to maintain and build our position in the auto, industrial and genset segments. To support that, we are launching new products and improving our service offering. Second is becoming a low-cost producer. We continue to look at waste elimination and cost reduction. We are in the 11th year of our Six Sigma programme and have trained over 1000 employees on personal productivity improvement. Third is maximising sourcing to our parent. As Cummins grows and becomes a competitive player we (CIL) want to play an important role in that. One such example is the SEZ (special economic zone) at Phaltan (near Pune), where we have low-cost manufacturing for exports. Fourth is to provide a great place to work to our employees. We have taken a lot of initiatives to foster leadership, bring diversity and innovate. For instance, four years ago, women representation was less than 5% in our workforce but today it’s 20% and by the end of the year it’ll be 25%.

How much do you typically spend on R&D?
 It tends to be about 2-3% of sales. Globally (for Cummins), it’s 3-4%. It’s about $400 million, which is a very large number and growing. We get that benefit here in India. We take a global product platform and tailor it to local customer needs. We have a centre at Kothrud (Pune) which employs about 500 people. In the next 2-3 years we’ll have 2,000 people there. We plan to spend $70-80 million in the next five years.

Do you develop products here for your parent?
That’s exactly the intent. There will be groups focused on CIL and also groups focused on our global needs. We have a separate company called Cummins Research & Technology in India which has 250—300 engineers. It does all of our analysis-led design for the global markets.