Cummins - Generating Power

The Cummins Group

Formed in 1962, the largest entity, Cummins India Limited (CIL), is the country’s leading manufacturer of diesel and natural gas engines.

CIL comprises of four business units - Engine, Power Systems, Components and Distribution.

CIL is a 51% subsidiary of Cummins Inc. USA, the world’s largest independent designer and manufacturer of diesel engines above 200 HP. Cummins Inc., the majority shareholder, is the leading worldwide designer and manufacturer of diesel engines from 16 HP to 3,500 HP.

The company has a country-wide network-20 dealerships, 450 service points catering 2,20,000+ customers and a strong presence in the aftermarket with over 6,27,000 engines in the field.

Cummins Inc USA is at the forefront of technological innovation and has been awarded a record 312 patents and the company spends more than $900 million on research, development and engineering for a third consecutive year. Cummins US also paved the way to carbon neutrality by powering the world’s first hydrogen fuel cell passenger train.

Industrial Business

Railways -

Supplies of Diesel Electric Tower Cars (DETC) thereby supporting Indian Railways in its 100% electrification of broad-gauge network. To support Indian Railways’ internation cooperation initiative, CIL supplied engines for export of rail equipment to Mozambique, Nepal, and Sri Lanka.

Mining –

Leadership position in 60 ton dump truck segment, made further inroads in 150 ton and 205 ton segment and expanded into new applications like the 100 ton excavator and underground mining dump trucks.

Marine and Defense –

Caters to the Indian Navy with custom designed and built fullyintegrated 1MW gensets for the Navy’s stealth missile destroyer vessel and survey vessels.

Oil and Gas –

Supplies gas compressors to the city gas distribution infrastructure.

Pumps -

Completed FM/UL certification testing of 5.9 liter and 6.7 liter engine platforms for the global fire pumps segment

Construction -

moved from mechanical to new-generation electronic 4-cylinder and 6-cylinder engines to address the onset of BSIV emission norms from April 2021 for Construction Equipment Vehicle (CEV) applications.

Compressor –

Supplies water rig compressors extensively for industrial usage.

Power Generation, Exports & Distribution Segment

Power Generation -

This segment houses the product that Cummins is a household name for – the genset.
Data Center, Infrastructure, Healthcare, Rental and Retail segments are the key markets for this segment.

It is estimated that 85-90% of gensets will be used as a back-up power source going forward. Hence, the next leg of growth for DG sets will come from increasing government spending in infrastructure (railways, roads, metro rail and defence) as well as industrial capex (telecom, data centres, hotels, malls, hospitals, educational institutions, etc.).

Exports -

This an opportunity to use the Indian company to supply to global clients – a trend of global MNCs to consolidate their global supply chains and use India as their export hub.

Distribution -

This segment caters to after-sales service. This is a business-critical area as Defense, Railways, Telecom, Hospitals, Data Centers etc depend on backup power to be functional at all times.

Growth Avenues

  • Indian Railways is set to achieve its target of 100% track electrification of broad-gauge network by 2023 which is driving demand for Diesel Electric Tower Cars (DETCs). CIL is exploring ways to partner with the Railways in evaluating hydrogen fuel cell solutions for Diesel Electric Multiple Unit (DEMU) and other short-distance mainline applications.
  • Coal India is planning to invest 87,000 cr by FY 2023-24 in projects related to coal evacuation and mining infrastructure. Also, commercial coal blocks are offered to private players to enhance productivity.
  • Increased opportunities for India-built tugs, barges and passenger vessels are leading to a surge in commercial marine segment. CIL has also received its largest ever order from Indian Navy for supply of 400 kWe gensets for anti-submarine warfare vessels.
  • Under the Blue Revolution Scheme, investments worth 20,000 cr are planned to increase fish production, including subsidies for fishing boat building industry.
  • Targeting an increase in the share of natural gas in India’s energy basket from 6% to 15% by 2030, Government plans to invest 4 lakh cr over next 5 years to develop gas supply and distribution infrastructure. This should create strong demand for gas compression engines.
  • Under “National Infrastructure Pipeline”, government has made an investment plan of 102 lakh crore spreading over the next five years, whereby more than 60% of infrastructure projects are from construction intensive sectors like Roads, Railways, Irrigation, Urban infrastructure and Ports. CIL is a leading engine supplier in the Construction equipment segment.
  • The roll out of faster and reliable 5G mobile network as well as expansion of Internet of Things (IoT) infrastructure offers growth prospects for Power Generation products. Especially in Asia Pacific and Africa regions, CIL has opportunities for growth in Telecom segment. CIL won a major deal in the Asia pacific region for the 5G telecom network upgrade in FY21.
  • CIL is also tapping into opportunities available in Industrial segments such as Rail, Marine amongst others in Asia Pacific.
  • While Powergen segment was impacted by COVID-19, segments such as Healthcare, Telecom and Rental offered growth opportunities.

Management

Chairman - Steven M. Chapman
Managing Director: Ashwath Ram
The compensation for the MD Mr Ashwath Ram was 2.4cr in FY21, which for the size of company seems on the lower side. CIL does not have a Stock Option Scheme and no severance fees are payable to any Director.
CIL has contingent liabilities of ~55crs of which 49crs is related to duties and sales tax.

Promoter Holding:

FII Holding:

RISKS

  • In light of rising pollution levels, particularly in metros and large cities, the draft electricity Bill states that the electricity distributor shall ensure uninterrupted (24×7) power supply so there is no requirement of running diesel generating (DG) sets.
  • The Draft Bill further states consumers using DG sets as backup power shall endeavour toshift to cleaner technology (such as RE with battery storage) within 5 years of the date ofpublication of the Amendment or as per the timelines given by the State Commission – the timelines are still ambiguous.
  • Onus to lower DG set consumption on DISCOM: The Bill mandates the distribution licensee to simplify the process of providing temporary connections to consumers for construction activities or any other temporary usage.
  • Domestic Powergen forms 27% of Cummins’ revenue and the Distribution segment (28% of rev) drives growth from the installed bases of the Powergen and Industrial segments creating a risk to the company’s primary operations.
  • The industry was prepared for engines to be upgraded to a better emission standard, but the reaction to this was not taken well. We await the final proposal on this Bill.
  • Cummins has multiple private companies in India and there is always a possibility that the more profitable businesses be diverted to the private companies rather than through the listed entity.

FINANCIALS:

https://www.screener.in/company/CUMMINSIND/

DISCLOSURE:

I am personally interested and have advised clients on this stock. Please do your own due diligence before investing. I may change my views at any time.

24 Likes

Good post indeed written comprehensively.
Some additional points which comes to my mind

#It could manufactures engines up to 4500 HP

#Its Gen-Set range is 7.5 KVA -3750 KVA

#They have installed cumulative 4000 MW worth Gen Set as of 2019 FY all across the country and most of these are under AMC contract for which they would get revenue over the entire life cycle of the product

#Gen-sets are exported to UK/ USA/ China…export revenue is 30% of total revenue

#They have engines which can run on Alternate fuels such as natural Gas, Ethanol blend , Bio diesel, etc

#They have a concept of Recon (Reconditioned) or remanufacturing.
Once an engine reaches it’s terminal life and requires a complete overhauling…they buy back this engine and sell the customers A recon or remanufactured engines at a subsidised rate immediately…no down time …and the customer can use it the next day…

#Cummins Inc -USA is a leading producer of Electrolyser …electrolyser can split water in to hydrogen …hydrogen is the fuel of the future .
Cummins also has engines to run on Hydrogen…

Discl: was holding CIL stock …sold during pandemic …trying to re-enter again.

5 Likes

Few points from my side.

  1. We need to understand that 60% of the revenue of Cummins India comes from Engines supplied to Genset market. The power deficit in India has reduced from 16.6 %( 2007-08) to 0.4 % ( 2020-21) hence the need of more reliable and fuel efficient engines for genset market has reduced. There below 60 Kva segment is dominated by competitors like Kirloskar, Mahindra, Koehler, JCB and Greaves. The Engines of Cummins are relatively expensive due as the engines after CBCP-2 are electronic.
    There is a fierce competition in the HHP ( High Horse Power) segment with Kirloskar, Perkins, CAT and SUPERNOVA started taking small portion of the pie.

  2. The AMC of Genset are not manage by Cummins they have channel partners such as Powerica, Sudhir and Jakson.

  3. Recon business has not grown in India as the refurbished Engine cost almost 60% the cost of a new engine.

  4. The chances of bagging the from India railways is erased as GE has bagged it for Diesel Engines and Alstom for Electric Engines.

  5. The pie for the Generator Van engines for Shatabdi is now shared with Kirloskar ( KOEL) as well.

9 Likes

I had a different view on the subject and it is always good to have opposite views so that we all members can learn from each other’s views to our mutual interest.

I may be completely wrong in my views since it is just based upon my own analysis and analysis many times could go wrong if the macroeconomic parameters don’t fructify.

(1) Narrowing down of peak power deficit may have very little effect on overall demand for Gen-sets for the reasons as mentioned in following paragraphs.

(2) Gen-sets are required for either as a prime source of power requirement or as a Back-up/auxillary power.

As a primary source of power , it is required at several places where there is no grid connection available - we still have a long way to go in terms of transmission , distribution , transformers and these locations donot have proper grid connections such as construction sites- and construction sites could be anywhere and Could be of any type- Real estate , commercial complex, Road construction, infrastructure projects of all kinds, construction of new factories / plants of any industrial sector.

As a back-up or auxillary power source to ensure uninterrupted power supply -somtimes
Gen-sets coupled with UPS… it is required almost everywhere and the requirement could be huge…Industrial process, metallurgical process, telecommunication - telephone towers, data centers- data storage ,online management systems, medical facilities-life supporting systems, emergency equipment, commercial establishments, including retail stores, offices, hotels, and airports.

(3) we may have narrowed the peak power deficit today because we went on adding electricity generation capacities , but at the same time we have not grown much over last 12 years in terms of our Industrial output, Capital Goods, Construction, Mining . etc …so the electricity supply was in excess of demand.

Moreover, in spite of increased Power generation capacity , power disruptions do take place at various parts of country due to different reasons.

But if the expected economic growth, Capital goods expenditure, Industrial growth especially manufacturing, mining , construction , infrastructure development fructify as expected, then
The Indian diesel genset market which generated $816.0 million revenue in 2021 and would grow at a CAGR of 9.4% during 2021–2030. The key factors responsible for the growth of the market include the advance of the manufacturing industry and rising demand for power for construction projects.

Giving an analytical report on Genset demand outlook for 2022-2030 for India. Also another report on global demand forecast for 2022-2028.

(4) While, this is only Genset out look, but there are some unique applications of Cummins/ CIL Engines- which very few people are aware of - which Cummins has a leadership position in India.
(a) Diesel as a fuel has served its purpose over last 100 years…but the time has come for a change- diesel produces 16 times more carbon emission than Natural Gas- methane which has just 1 carbon atom.
CIL parent - Cummins Inc has a division called Cummins Westport is a world market leader in alternate fuel engines - Engines to run on Methane, CNG, LNG, Biogas/Bio methane. .
In fact Cummmins Westport had passed on the technology to CIL and today CIL is able to manufacture these engines …in fact 15,000 CNG Low floor buses in Delhi , Mumbai, Pune , Ahmedabad are running fitted with CIL manufactured CNG Engines… B-Gas, B- Gas plus, C- Gas … they are supplying to both Tata Motors and Leyland. So this is automotive Bus application…but again the product is limited to only city application.
What about long distance Covering trucks Where CNG filling stations are absent …they have the answer - LNG engines.

(b) Cummins engines are also fitted in many earth moving equipments - construction machinery, Excavators, Front end loaders, Dumper tipper, Bulldozer’s, Backhoe loaders…their customers are BEML and a few others in the sector.
Again Govt of India has taken an initiative to replace all Such earth moving equipments prime movers diesel engines with LNG engines for cutting down diesel emissions …and also save in diesel which is a part of Crude imports …
Not only they would buy only LNG / CNG vehicles/ equipments, but the existing fleet is to be replaced with LNG engines and Cummmins India has been entrusted this work In Coal India’s Coal mines and Cummins has already started the retro-fitment work for coal India / BEML.

So if carbon emission is to be tackled all over the world by phasing out diesel engines which we have already started doing it with CNG/ LNG/ Bio Methane, Green Hydrogen , Cummins India has the first movers advantage - it has the entire range of applications not only for Genset , but also for Automotive, Industrial, Stationary, earth moving equipment applications.
To that extent Cummins inc have expertise for both producing Hydrogen gas and also hydrogen Fuel engines …

As regards to AMC, as an best industry practice , most OEM’s sign off AMC contract with their customers, and customers make payments Directly to the OEM . The OEM makes payment to their channel partner for rendering scheduled services. So there is a scope for their revenue from AMC…

On Recon/ remanufacturing process , Though the concept is a good one, however it has not created much customer interest …Indian customers would rather do the reconditioning in local workshops , they don’t mind Downtime, Dont mind waiting for a week for overhauling. …since they are not operating to the full Capacity.
But they Cummins do have a well established practice /business in USA, where it is very popular since USA customers are very sensitive to down time . …their tight operating capacity and when they are getting a recon engine ready made with warranty as good as new one…and the remanufacturing is done by the same process by the same OEM.
With engines getting complex day by day, and economic activity calls for less down time …
Perhaps Recon could also become popular In India too in coming days.
I am attaching quite a few articles which would be interesting, educative , informative…

https://www.motorindiaonline.in/cummins-bags-dtc-order-for-3125-cng-engines/

https://numerical.co.in/numerons/collection/5946673ad8be26ec238ced67

Discl: Cummins India Limited (CIL) is under my watch list, since the entire capital goods sector was sick for the last 10-12 years … now the outlook appears good.
I was an investor earlier …during pandemic I exited…
Thanks to Basumallick to have started a post on Cummins India so that we can communicate with each other on Development in view of renewed industrial activity , thrust on renewable energy, alternate fuels and carbon emissions targets.

5 Likes

Cummins is trading at a PE of late 30’s for a sunset industry for most of the business. There hardly has been any rise in EPS from 2013 onwards.

However Cummins India is expected to benefit by supplying generators to power the 5G towers of leading telecom players. That too not just in India but also China, Malaysia and Philippines. This is because Cummins’ operations in China and Japan do not manufacture these gensets. Though I am not sure this or any new tech like their work in Hydrogen work will be via the listed entity. In all likelihood it could be diverted to unlisted entities.

This in my opinion is a major red flag.

Yes, I am aware of the press news attached which is of 2016…
However from the latest news article which is of 2020 attached in my post above , CIL is going to be the sole supplier and manufacturer of the Genset of 5G roll out for the entire Asia Pacific.
But , we have to wait and see actual on the ground development.

On flat EPS , I would not single out Cummins India …because the entire Capital goods sector are under pressure and EPS flat or negative for the last 10-12 years for most Capital goods stocks… Look at Siemens, look at ABB, L&T, Thermax, BHEL, and many more such stocks.

What I am watching out is their sunrise portfolio of alternate fuel Gas engines , LNG engines, and the applications are huge …right from Gen set to automotive to earth moving equipments…which is now more relevant in view of the current carbon emission drive …which in fact CIL has its own manufacturing unit. . In fact the CNG/ LNG Engines for Buses / Earth moving equipments were all being handled by CIL since 2008- and not by subsidiary.

5 Likes

Govt issues New Emission norms for DG sets

As per the government, the emission coming from the DG Genset is one of the major contributors to air pollution in major urban centres in India.

Until now there were three different emission standards for Gasoline, Diesel and CNG/LPG Gen-sets.

Now the notification calls for one common emission norms for Generator sets which means that there will be one standard pollution norm for all types of power generators.

The New notification includes Hydrogen and Ammonia as fuel.

No others fuels could compete with hydrogen for emission norms.
So companies like Cummins Inc have a division called alternate fuel engines. Cummins India will have an advantage in getting this technology from its parent Cummins Inc

Cummins Inc has many wholly own subsidiaries in India. As per my understanding, Cummins India (listed entity) manufactures all mechanical (read old tech) engines whereas new age electronic engines are manufactured and sold under wholly owned subsidiary. So before jumping to any conclusions, please check if listed company is beneficiary of any new technology or not.

3 Likes

For Cummins, energy transition is a three-stage transition. The expectation is that diesel will continue to grow till about 2030 after which it will taper off. Alternatives are either more expensive or have inadequate supply in this intermediate period.

In stage 2, will see the emergence of new blended fuels and migration to a partially hybrid economy and stage 3 will be of gradual migration to full EV or full cell-based genset and industrial solutions.

The US and China have had solid and stable grids for many decades and despite that business over
the years has continuously increased in these markets. Even technology is driving more demand as more data is to be stored. Despite the quality of power improving, demand for power generators has increased.

Coal earlier had ample supply but now it is limited. Gas power gensets and diesel power gensets are in high demand for industries that have to be operated 24X7.

Amongst public transportation, buses will move to electric very quickly, which we have already started seeing, and hydrogen will be effective in long haul applications.

5 Likes

A good article on Cummins Inc … the parent company.

Annually, Cummins supplies more than a million heavy-duty engines to power buses, Dodge pickups, Kenworth semi trucks, Bradley M2 Army vehicles, Siemens trains, fishing trawlers, mining machines and backup generators for data centres.

Linebarger created a New Power division at Cummins in 2018 to design battery and fuel-cell power systems and hydrogen generation technology that may supplant its diesel business by the 2030s. To shore it up, Cummins bought fuel-cell and hydrogen developer Hydrogenics, took a stake in Sion Power to develop lithium-metal batteries and started a joint venture with Chinese oil company Sinopec to produce hydrogen from renewable sources. Led by Amy Davis, New Power will initially focus on batteries and motors for light and medium trucks, and hydrogen fuel-cell systems for rail applications and stationary power generation. Long-haul hydrogen-fuelled power­trains for semis are in the works but won’t likely be a core business until the late 2020s, she says.

The US Clean Air Act of 1970, which forced diesel makers to clean up their products, ultimately boosted business for Cummins, which was rapidly able to bring cleaner engines to market. Linebarger expects a similar outcome as carbon dioxide becomes the enemy.

“I look at decarbonisation and say that’s a growth opportunity for Cummins, because now innovation is going to matter a lot,” he says. “Innovation is what we do—and then we don’t have to compete so much on the lowest price times a million units.”

6 Likes

I think this particular regulation will have very little impact in reality. Going by the current situation in various states, there is practically no chance that a commercial enterprise or a residential apartment or similar users of large gensets will do away with an emergency backup.

For example, in Calcutta, we hardly ever have power cuts. I can’t honestly remember when we had a power cut and yet every residential apartment block, mall, cinema theatre, office building etc have backup gensets.

Added: just saw this news after posting this… how on earth will the discoms guarantee quality of power in their current state?

4 Likes

2 Likes

image


image

3 Likes

Some updates:

Domestic data center opportunity

Domestic data centers are a space which is getting dominated by Cummins with over 80% market share. In fact, Cummins remains one of the only listed players in the fast growing DC space.

The G23 range of 2500-2750 KVA which were imported from UK earlier and now being made in India.

In global tenders, Cummins’ has started executing complete project solutions in domestic DC market, for large MNC customers.

National Green Hydrogen Mission (NGHM)

The target for the NGHM is to produce capacity of at least 5mn MT p.a. of green hydrogen by 2030, with Renewable Energy capacity addition of ~125 GW and total investment of Rs8trn.
Domestic manufacturing of electrolysers 2) Production of Green Hydrogen. ~25% of the funds under SIGHT are proposed as incentives for part A (domestic manuf. ~Rs45bn).

Cummins will partner the first PEM electrolyser for GAIL

Cummins will provide its proprietary PEM electrolysis technology to build one of India’s largest proton exchange membrane (PEM) electrolyser for GAIL at Vijaipur in Madhya Pradesh.

This project is expected to produce 4.3 tons of green hydrogen per day (equivalent to ~10 MW of electrical power input).

As per Cummins, the GAIL Green Hydrogen production project will be the first of its kind in the country and will pave the way for many such projects in future.

Cummins Inc. has supplied and commissioned more than 600 electrolysers worldwide with PEM and alkaline technologies across various use cases such as hydrogen refueling stations, industrial applications, gas grids, and energy storage projects.

3 Likes