BESS launched as new product narrative.

Given the budget tax incentives for data centers and direct/OEM orders, how is the data center pipeline building out in the next 1 or 2 years?

Data center pipeline is building out very well. The tax incentives have been announced recently and we are yet to see the impact, but there is a lot of movement in the data center market in India with some announcements. For the next 3 to 4 years, we do anticipate positive movement in the data center segment in India.

What has been the contribution of data center in 9 months on the numbers? Also on gross margins, what explains the strong gross margins versus the big uptick in other expenses?

Data center contribution overall stays around 25% of the Power Gen revenue on an average because it's lumpy. On other expenses, we have a onetime true-up. Some quarters before I had spoken about a true-down which was a benefit, and this time there's a true-up. Overall for the year, this will even out.

Is the true-up onetime or recurring, and how much is the quantification of that amount?

This is onetime for this quarter. Roughly INR50 crores.

How is the inquiry pipeline from data center compared to the start of the fiscal?

The data center space in India has hyperscalers (Microsoft, Google, Amazon) and co-located players. Comparing now versus start of the fiscal, there are some more new announcements coming in from the hyperscalers, so more activity on that end. On the co-located players, it's been steady - good inquiries at the start of the fiscal continue to be so throughout the fiscal.

On exports, can you break this up geographically to understand which particular geographies are impacting the overall exports? And given parent capacity is used up in the American region, are you getting demand for data center from other geographies?

On the exports side, there's no particular trend from any market. For the last quarter we saw revenues increasing for Asia Pac and Europe and the other markets did not really grow as much. Demand for data centers today is growing hugely in 2 markets - the United States and China - and in both those places, Cummins is serving those markets locally.

On exports, which regions are showing resilience and which are facing significant headwinds? How is the product mix changing in low HP, high HP and gensets given the tariff perspective?

The markets which grew for us in the last quarter were Asia Pacific and Europe. The other markets, not so much, but this keeps changing quarter-on-quarter. On product mix, high horsepower grew a little better for us than the low horsepower in this quarter, but that also keeps changing depending on end market demand. Tariffs largely impact U.S., where there was a recent announcement which brought the tariff percentage down. Our exports go to various regions - Asia Pacific, Latin America, Europe, Middle East - which are not places where tariffs have impacted us.

Can you explain the product life cycle of existing platform and upcoming next-generation technologies and R&D focus, especially around emission norms beyond CPCB IV+ over the next 3 to 5 years?

In Power Gen, we just underwent a huge emission norm change of CPCB IV+. All the way up to 800-kilowatt hour the entire product range has changed for the entire market. For the next few years below 800-kilowatt hour we don't see any other emission norm coming in, and above 800-kilowatt hour there is nothing on the horizon yet. From a product life cycle perspective, our belief is that diesel power backup is one of the most reliable backup powers available. We spend R&D efforts evaluating battery energy storage systems, but for now diesel gensets remain the prime backup.

Can you share the breakup of domestic and Industrial business by segment - Low Horsepower, Mid Horsepower?

From a Power Gen business perspective in Q3, Low Horsepower was INR67 crores, medium range INR229 crores, heavy-duty range INR112 crores, and high horsepower INR594 crores. In the Industrial business, construction was INR129 crores, rail INR104 crores, marine had very good execution at INR92 crores, and the rest is mining and compressor business.

Can you explain the improvement in gross margin both sequentially and annually, and what exactly is the INR50 crore onetime impact related to?

There has been a lot of effort to improve gross margins over the years - working with suppliers on material costs, some onetime supplier benefits, and the sales mix which is defined by market demand. Those are the 3 factors. The one-timer is a true-up of the management cost charges - we had a true-down benefit some quarters earlier and this time it's a true-up. Over the year, it will even out.

What explains the continuing weakness in the industrial business this quarter?

Industrial business weakness is largely from construction activity being down. Two reasons: road construction is not at the pace it was the same quarter year before, and there were delayed monsoons in October so excavator sales did not pick up as much. Construction is the largest contributor. Everything else is more tender-driven so it keeps changing quarter to quarter.

Quarterly gross margin is at almost 20-quarter high near 38%. Given inflationary pressures in copper and aluminum, how are you coping? Are customers in a position to take incremental cost hikes after CPCB IV+ cost hike, and was there any inventory liquidation effect?

Gross margin is at historic highs. Product mix is playing there along with our own effort to improve material cost and some onetime supplier benefits - the supplier benefits and mix are not repeatable. Material cost improvement actions will continue. On commodities, iron and steel are more stable, but copper has been inching upwards (around INR1,320 per kg) and our associate company alternator business gets impacted. Ideally everyone passes these to the market with some delay - it's a challenging situation.

Any pricing action that you have taken across nodes in the domestic market?

No, we haven't.

Distribution sales is at all-time high at 31% of total. What is leading to this trajectory, given CPCB IV+ electronic content has not contributed materially yet?

Distribution business has been focusing on a few things - our asset base has been increasing over the last 2 years giving distribution more opportunity to service customers, and they have been working to get as many customers in the fold as possible. They have been working with customers in all segments - power gen, railways, defense, mining - and that is how you see this very broad-based growth deeply entrenched in our philosophy of delivering reliability.

Is GST rate cut leading to market share gain for branded players in aftermarket business, and any comments on CPCB IV+ electronic content leading to higher distribution growth?

On GST impact in the aftermarket business, no - we haven't seen any significant impact. On CPCB IV+, we are waiting to see all the gensets to come out of the warranty sales. Once they come out, then yes, not from an electronic content perspective, but because CPCB IV+ gensets are technologically far more advanced - all engines are electronic with after-treatment systems, telematics and sensors. Maintaining that and providing peace of mind is something we focus on, and yes it could lead to better distribution business growth.

You had flagged that in the initial CPCB IV+ period you would get more services revenue while unorganized channel learns. Have we reached the stage where market share could start going away to others?

CPCB IV+ completely is not out of warranty yet. 1st July '23 is when both CPCB II and CPCB IV+ were allowed to operate, and 1st July 2024 is when we fully shifted to CPCB IV with 2 years of warranty. We are still in the warranty phase for a large set of CPCB IV+. So that phase has yet not fully come and will likely come '27 onwards.

On the battery energy storage systems (10-feet and 20-feet containers) you launched, what is the addressable market in the medium to long term, and how are customers taking the product?

From an addressable market perspective, anywhere you need power is a possible market because BESS can be used for cleaner power, backup power, excess power needs or storing excess power from solar/wind. So it's a huge addressable market. We have been generating a lot of inquiries since launch. Sales are still very, very slow because most customers - large and small, residential realty, banks, large manufacturing - are evaluating how a BESS fits into their overall energy solution. Lot of interest, lot of inquiries, very slow sales.

On the outlook ex of data center for domestic Power Gen, how is each segment doing including commercial real estate?

Other than data center segments, manufacturing and infra have been doing well and continue to show good inquiries. Going forward, given the budget announcements, we believe these will continue. There has been a lot of movement in residential and commercial realty in the last few quarters which continues to show very good momentum and good inquiries. Those are the segments we expect to continue growing for us.

December quarter typically has global inventory destocking - beyond that, how are you looking at export outlook for the current calendar year?

The destocking did happen, it has become very normal now and we anticipated it. Demand is a little slow in pickup just yet.

On the Industrial segment, railways was soft this quarter - how has been new product development and ordering from railways, and broader Industrial outlook on when meaningful pickup happens?

On railways, do not read too much into this quarter - we got a lot of demand over the last few quarters and did very good execution before this quarter. It's tender-based business so it can be like this. Overall outlook on rail is very positive with new capex announcements in the budget. On Industrial, construction and mining have been slow - construction was hit by delayed monsoon and lower road construction (half the rate of previous year), but new incentive scheme has been announced. Mining tenders haven't picked up yet. Marine is the segment doing well as government brings investments.

Ferrous and pig iron has remained benign while broader commodities moved up - how have you seen competitive intensity changing, are domestic players still aggressive on pricing or has it eased?

No, competitive pressures seem to be the same. Very, very aggressive pricing and positioning by our competitors. So extremely aggressive, especially in the power generation space.

On competitive intensity, should we assume the effect is broadly inside the gross margins reported, or could this impact gross margins in the future as well?

For now, the impact of aggressive competitive intensity is baked into our gross margins because we look at this segment by segment and adjust accordingly. As of now, I don't see a humongous impact of this competitive intensity on the gross margin. The mix impact and onetime supplier benefit are the things more likely to impact gross margins.

Within Distribution, looking through end markets, which markets are firing more for you and the sustainability of that growth rate?

Segments that are growing - railways from an aftermarket perspective, defense and power gen. Everything else is contributing because we provide services to all customers in industrial and power gen space. Specifically, railways, power gen and defense have been growing. As asset base increases on the mining side, we will hopefully see more growth on that side as well.

On gross margins at 38% (up 300 bps Y-o-Y), how much is linked to one-off elements (product mix and supplier support), and is exports helping from a currency perspective that goes away from January?

Currency benefit, not so much. Mix is largely product mix - certain products earn us better margins, others don't, and it could be exports or domestic. The onetime benefit is not substantial - it is some basis points but it is not so much.

Who would you typically be competing with in the data center market?

We would be competing in the data center space with players who have products available in the above 2,500 kVA range. You can think of international players in that space - Caterpillar, Perkins and MCL for sure.

Over the next 1-2 years, would exports be faster growing than domestic, or will domestic always dominate exports growth for Cummins India?

We have more confidence on the domestic market because we have seen government infrastructure spend converting into actual projects on the ground with tenders and orders coming in. We understand the market, the players, the segments and the needs better. We don't understand exports market to that extent. So our confidence is more on the domestic market.