Cummins India - Annual Report - 2007 - 2008

CUMMINS INDIA LIMITED

ANNUAL REPORT 2007-2008

DIRECTOR'S REPORT

The Directors of Cummins India Limited have pleasure in presenting the Forty-Seventh Annual Report and the Audited Accounts of the Company for the year ended March 31, 2008.

1. FINANCIAL RESULTS:

During the year under review, net sales turnover was Rs. 23,308 million (Rs. 2,331 crore) as compared to Rs. 18,408 million (Rs. 1,841 crore) during the previous year (27% higher). Exports and other foreign exchange earnings were Rs. 7,420 million (Rs. 742 crore) as compared to Rs. 6,197 million (Rs. 620 crore) during the previous year (20% higher). Profit after tax was Rs. 2,807 million (Rs. 281 crore) as compared to Rs. 2,420 million (Rs. 242 crore) for the previous year (16% higher).

2007-2008 2006-2007 (Rs. '000) (Rs. '000)

APPROPRIATION OF PROFIT:

Profit before taxation 3,960,032 3,460,023

Net Profit for the year after tax but 2,806,910 2,420,468before tax on proposed dividend

Tax on dividend 154,790 122,839

Dividend 910,800 792,000

Transferred to General Reserve 701,728 605,117

Balance carried to Balance Sheet 3,154,023 2,114,431

2. DIVIDEND:

Your Directors have recommended a final dividend of 130% on the equity share capital of Rs. 396 million for the year ended March 31, 2008, in addition to the interim dividend of 100% declared on January 30, 2008, aggregating to 230% for the year.

3. CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Financial Statements of Cummins India Limited and its subsidiaries, associates and joint ventures as at March 31, 2008, have been prepared in accordance with Accounting Standard 21 (AS 21) on Consolidated Financial Statements', Accounting Standard 23 (AS 23) on Accounting for Investments in Associates in Consolidated Financial Statements' and Accounting Standard 27 (AS 27) on Financial Reporting of Interests in Joint Ventures', issued by the Institute of Chartered Accountants of India. As required by Clause 41 of the Listing Agreement with the Stock Exchanges, the Audited Consolidated Financial Statements are attached and form part of the Annual Report.

4. SUBSIDIARIES:

Cummins Sales and Service India Limited: (CS&S)

The sales and other income of CS&S for the year ended March 31, 2008, was Rs. 5,321 million (Rs. 532 crore) which includes Rs. 53 million earned from disposal of Suraksha Stops' by CS&S during the year as compared to Rs. 4,794 million (Rs. 479 crore) during the previous year. CS&S declared a dividend of 375% during the year ended March 31, 2008, as compared to 183% during the previous year. The paid-up share capital of CS&S is Rs. 60 million, which is held by your Company. CS&S is engaged in the business of sales and after sales services for engines and generators manufactured by your Company.

Cummins Auto Services Limited: (CASL)

Sales and other income of Cummins Auto Services Limited (CASL) for the year ended March 31, 2008, was Rs. 71 million (Rs. 7 crore) as compared to Rs.42 million (Rs. 4 crore) during the previous year. CASL is engaged in the business of retailing parts and accessories for commercial vehicles.

Annual Reports of subsidiaries:

The Company has obtained approval of the Central Government vide letter dated April 9, 2008, under Section 212 (8) of the Companies Act, 1956, exempting the Company from attaching the Annual Report of its subsidiaries for the financial year 2007-2008 to this Annual Report. However, the Annual Report of the subsidiary companies and related detailed information will be made available to shareholders /investors of the Company on request. Further, the Annual Reports of the subsidiary companies will be kept open for inspection by any investor of the Company, during business hours on any working day at the (i) Registered Office of the Company and (ii) Registered Office of the concerned subsidiary company.

5. AMALGAMATION OF SUBSIDIARY COMPANIES:

The Board of Directors of your Company, at their meeting held on January 30, 2008, have approved the Scheme of Amalgamation for amalgamating Cummins Sales and Service India Limited (CS&S) and Cummins Auto Services Limited (CASL), Subsidiaries of the Company, with the Company, subject to the necessary approvals and sanction by the Hon'ble Bombay High Court. The amalgamation will help the Company capture synergies in marketing, sourcing and after sales support and would also offer opportunities to reduce administrative costs.

6. JOINT VENTURES:

a. Cummins Exhaust India Limited (CEIL):

The sales and other income of CEIL, a 50:50 Joint Venture between Cummins Filtration Inc., U.S.A. and your Company, for the year ended March 31, 2008, was Rs. 478 million (Rs. 48 crore) as compared to Rs. 339 million (Rs. 34 crore) during the previous year (41 % higher). CEIL Board of Directors have recommended a dividend of 105 % for the year ended March 31, 2008. The paid-up share capital of CEIL is Rs. 40 million. CEIL is engaged in the business of manufacture and sale of exhaust silencers and mufflers for Internal Combustion Engines.

b. Cummins Research and Technology India Limited: (CRTI)

The sales and other income of Cummins Research and Technology India Limited (CRTI), a 50:50 Joint Venture between Cummins Inc., U.S.A. and your Company, for the year ended March 31, 2008, was Rs. 308 million (Rs. 31 crore) as compared to Rs. 249 million (Rs. 25 crore) during the previous year (24% higher). CRTI has a Research and Technology Centre at Pune and is engaged in providing Information Technology Enabled Mechanical Engineering Development Services to Cummins Inc., its subsidiaries and joint ventures across the world.

7. CAPACITY EXPANSION:

Your Company has undertaken expansion of its manufacturing capacities to meet growing demand for its products. These include:

a. KV Engine Facility, Kothrud, Pune: Expansion of the manufacturing facility at Kothrud, Pune was commissioned in March 2008. This expanded facility manufactures mechanical and electronic KV series engines ranging from 750 HP to 2250 HP to meet the demands of power generation, marine, construction, mining and locomotive applications.

b. Power Generation - New Engine Plant, Kasar Amboli, Pune: A new manufacturing facility was commissioned at Kasar Amboli, Dist. Pune in January 2008, for manufacture of sub 160 kVA range of engines and for upfit & distribution of G- Drives for the Power Generation market.

c. Industrial land at Phaltan: Your Company is in the process of acquiring about 150 acres of land from the MIDC (Maharashtra Industrial Development Corporation) near Phaltan, in Satara District, Maharashtra, around 100 kms from Pune. This site will cater to your Company's future expansion plans. Your Company will also develop common infrastructure/ facilities like Sewage Treatment Plant (STP), Roads, Fire Fighting System, Water Tanks, Training Centre, Health Centre etc. for the entire land.

In order to facilitate better synergies, logistical convenience and cost benefits, it is proposed to sub-lease a part of the said land and common infrastructure/ facilities to 'Cummins' group companies (who are also suppliers, vendors and / or customers of the Company) on a need basis.

8. MANAGEMENT DISCUSSION & ANALYSIS / CORPORATE GOVERNANCE REPORT:

As per Clause 49 of the Listing Agreement with the Stock Exchanges, the Management Discussion & Analysis Report and Corporate Governance Report are annexed and form part of the Directors' Report.

9. CODE OF CONDUCT COMPLIANCE:

As per Clause 49 of the Listing Agreement with the Stock Exchanges, a declaration signed by the Chairman and Managing Director affirming compliance with the Code of Conduct by Directors and Senior Management, for the Financial Year 2007-2008, is annexed and forms part of the Directors' Report.

10. DIRECTORS' RESPONSIBILITY STATEMENT:

In pursuance of the provisions of Section 217 (2AA) of the Companies Act 1956, your Directors make the following statement:

(i) That in the preparation of annual accounts, the applicable accounting standards have been followed and there was no material departure from the accounting standards;

(ii) That the Directors have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as on March 31, 2008 and of the profit for the period April 1, 2007 to March 31, 2008;

(iii) That the Directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and

(iv) That the Directors have prepared the annual accounts on a going concern basis.

11. CONSERVATION OF ENERGY:

Your Company continues to conserve energy and improve energy utilisation through the following efforts and initiatives:

Kothrud and Nagar Road plants, Pune:

* Installation and commissioning of a WAM' Waste Heat Recovery System;

* Energy efficient lighting in the administrative blocks and stores;

* Installation of Engine Jacket Water Heat Recovery System at the Power House;

* Improvement in overhead lighting in the CNC Lathe section;

* Installation and commissioning of new and energy efficient 22KVHT panel & 1500 kVA transformer.

* Reduction in energy consumption and improvement in lighting lux level.

These energy conservation initiatives/ projects generated savings of about Rs. 15.85 million (2.88 million Kwh units) during the year. Additional energy conservation measures being implemented at the Company's newly commissioned plants include:

KV Engine Facility, Kothrud

* Natural lighting during day time at upfit and dispatch area;

* Use of energy efficient lighting i.e. metal halide lamps in the shop;

* Energy efficient air conditioning cooling system for the Engine Assembly area;

* Installation of two Capacitor panels to have power factor unity to get maximum rebate in electricity consumption bill.

Kasar Amboli Plant:

* Energy efficient lighting on the shop floor;

* Saving in kVA demand as well as cable losses through a Real Time Power Factor cum Harmonic Filtration system (RTPFC);

* Saving identification through an Energy Management System;

* Saving through natural air circulation and natural sun light on the shop floor.

12. RESEARCH & DEVELOPMENT AND TECHNOLOGY ABSORPTION:

Your Company is committed to introducing new products and improving existing products which meet stringent emission norms, have higher levels of performance and lower life cycle costs, to satisfy market needs.

The Technical Centre of your Company continues in its endeavour to reduce costs through indigenization of components and developing electronic controls & systems to improve fuel efficiency, performance and durability of the products.

A. Some specific areas of R&D initiatives undertaken by the Company are:

a) New Product Development: The following new Products were developed during the year:

1. 50 litre (1200 rpm) Tier-II emissions compliant engine for the oil and gas global market.

2. 8.3 litre engine for marine application and a new 14 litre engine for gas compression applications.

3. 5.9 litre (160 kVA) engine for Power Generation application meeting the current CPCB emission regulations.

4. Low cost 14 litre engine for Dumper application.

b) Full authority electronic engines were introduced for Power Generation and Industrial markets.

c) Various new ratings for engines for Industrial, Power Generation and Automotive applications were certified for compliance with emission norms.

d) A new state-of-the-art facility for measurement of gaseous & particulate emissions was commissioned at the Company's Technical Centre in Pune.

B. Benefits derived as a result of the above activities are:

Complete range of fuel efficient and emission compliant products were made available to customers in the shortest possible time, at significantly low development cost, thereby enhancing value to customers.

Improvement in quality, reliability, durability and performance of engines and critical engine components.

Significant cost savings through engine component indigenization and Six Sigma initiatives. Reduction in product development cost to enable profitable business growth.

C. Future plans include:

Continued thrust on indigenization, cost reduction and supplier partnership based waste elimination initiatives and alternate source development for various engine components.

Introduction of full authority electronic engines for the Automotive market.

Development of advanced emissions compliant engines for global and domestic Power Generation, Industrial and Automotive markets.

Installation and commissioning of Euro-IV level emissions measurement facility.

D. Your Company continues to focus on deriving the benefits of state-of-the-art technology assistance from Cummins Inc., U.S.A. With strong support from Cummins Inc., U.S.A., your Company is committed to develop advanced fuel efficient and emissions compliant engines to comply with forthcoming stringent, worldwide emissions regulations. Your Company is also committed to introduce environment friendly engines, running on alternate fuels. Your Company is confident of absorbing a wide and diverse set of technologies in Internal Combustion engines to effectively cater to the market dynamics.

E. Expenditure on R & D: The total expenditure on R & D was as follows:

2007-2008 2006-2007 (Rs. '000) (Rs. '000)

a) Capital 37,247 25,127

b) Recurring 269,692 187,819

c) Total 306,939 212,946

d) Total R&D expenditure as a 1.32% 1.16%percentage of total sales turnover

13. FOREIGN EXCHANGE EARNINGS AND OUTGO:

During the year under review, the Company exported 5,862 engines and 4,012 generator sets thereby achieving export earnings of Rs. 7,239 million

(Rs.724 crore).

Foreign Exchange earnings and gross outgo (including royalty, dividend etc.) during the year under review were as follows:

2007-2008 2006-2007 (Rs. '000) (Rs. '000)

(a) Earnings 7,420,494 6,197,407(b) Outgo:- Raw Materials/ components 3,726,212 3,228,483- Capital equipment 80,736 61,289- Others 998,921 913,110 4,805,869 4,202,882

14. PARTICULARS OF EMPLOYEES:

Information as per Section 217(2A) of the Companies Act, 1956 (the Act), read with the Companies (Particulars of Employees) Rules, 1975, forms part of this Report. As per the provisions of Section 219(1)(b)(iv) of the Act, the Directors' Report and Accounts are being sent to the Shareholders excluding the statement giving particulars of employees under Section 217(2A) of the Act.

Any Shareholder interested in obtaining a copy of the statement, may write to the Assistant Company Secretary at the Registered Office of the Company.

15. DIRECTORS:

Mr. Anant J. Talaulicar was appointed as Managing Director of the Company for a period from July 29, 2003 to April 24, 2008. At the Board Meeting held on January 30, 2008, Mr. Anant J. Talaulicar was re-appointed as Managing Director of the Company for a further period of five years effective April 25, 2008, subject to approval of the Shareholders.

Mr. Pradeep Bhargava has been appointed as an Alternate Director to Mr. S.M. Chapman effective October 25, 2007.

In accordance with the provisions of the Companies Act, 1956 and the Articles of Association of the Company, M/s. Mark Levett, Venu Srinivasan and Glyn Price, Directors of the Company, retire by rotation and are eligible for re-appointment.

16. AUDITORS: The Auditors, Price Waterhouse, Chartered Accountants, retire and are eligible for re-appointment.

On behalf of the Board of Directors,

Anant J. TalaulicarPune: May 22, 2008 Chairman & Managing Director

Management Discussion and Analysis Report (Annexure to Directors Report):

1. Industry Structure and Developments:

1.1 Economic Trends and Implications:

India's GDP grew at 8.7 per cent during 2007-08. One section of economists feel that India's economic growth will slow down to 8.4 per cent by 2009 on the backdrop of higher interest rates and the country will need further reforms for sustainable high rates of growth.

FDI increased to USD 24.57 billion during 2007-08 as compared to USD 15.7 billion in 2006-07. Foreign exchange reserves stood at $ 309.16 billion for year ended March 31, 2008.

As per the Finance Ministry's annual report card on the Indian economy - 'The economy has moved decisively to a higher growth phase'. The outlook for 2008-09 is 'optimism, but with caution as the watchword'.

Investments are expected to grow, especially in the infrastructure sector given the continued focus on this sector by the Government.

A recent Mckinsey Report projects India's infrastructure equipment market to expand fivefold to revenues of USD 12-13 billion by 2015 from current levels of USD 2.3 billion in 2007.

The Government has identified infrastructure as a priority sector to sustain the momentum of the GDP growth rate. The investment goals for the infrastructure sector are:

- Power - USD 140 billion by 2010- Roads - USD 25 to 30 billion by 2010- Ports - USD 8 to 10 billion by 2010- Civil Aviation - USD 15 to 17 billion by 2010- Telecom - USD 22 billion by 2010

All these factors are expected to favorably impact the Company's business and indicate a promising future.

1.2 Power Generation:

India's power market is growing faster than most other countries. With an installed generation capacity of 123 GW, generation of more than 600 billion kWh and a transmission and distribution network of more than 6.3 million circuit kms, India has moved up three ranks, emerging as the fifth largest power market in the world.

India has experienced unprecedented economic growth over the last decade and is expected to continue to grow at the same pace in the foreseeable future. As has been demonstrated in every other developed country, the per capita electricity consumption is bound to increase with the projected economic development and decline in population below poverty line.

Power requirement projections over the next two decades demonstrate increasing opportunities in the power generation market. The estimated power required through the year 2031-32 is about 4800 kWh at a 9% GDP growth rate.

The demand is expected to shift to ratings higher than 2000 kVA in market segments such as Data Centres, Large Commercial Realty etc. The power generation market is expected to grow in IT, IT Infrastructure, Telecom, Auto, Auto Ancillary, Construction, Hardware, Manufacturing and Realty segments.

Power quality and its availability will be the key drivers for alternative sources of grid power like generator sets.

1.3 Industrial:

The increasing need for quality infrastructure in the country has led to burgeoning demand for power, ports, airports, roads, bridges etc.

Despite spiraling prices of steel, cement and other inputs, the construction industry is looking up because of this investment in infrastructure development.

1.4 Automotive:

After strong growth of more than 30% in the medium and heavy commercial vehicle industry in 2006-07, this segment remained flat to marginally negative in 2007-08, mainly due to the high interest rate regime and lower liquidity.

CNG engine demand continued to grow steadily as more and more cities made provisions for making CNG readily available for vehicles.

2. Opportunities and Threats:

Key Opportunities include:

Power Generation:

Huge opportunity spaces exist in the Power Sector, considering the growing gap between demand and supply.

Coal Bed Methane (CBM) availability is beginning to look up with several CBM blocks under exploration. This again is in a nascent stage and will offer opportunities for large power plants at the exploration site. Some companies in Central India and Rajasthan have reported CBM findings.

Demand is being driven by non residential construction, IT, ITES, retail and telecom sectors besides industry wide capacity additions and infrastructure improvements.

The Telecom sector will be another significant demand driver. Capacity addition by leading players is expected to increase demand in the 10 to 30 kVA range significantly.

Major investments in sectors such as Power, Roads, Ports, Civil Aviation and Telecom provide tremendous growth opportunity for the Power Generation Business.

Industrial:

India's earthmoving and construction equipment industry is on a strong growth path and has been growing at a compounded annual rate of growth of 40 per cent in the last three years. This momentum is likely to continue for the next 4-5 years, after which the industry is likely to grow at a more moderate pace.

Among the infrastructure development activities, road construction offers huge opportunity for the Company's products. Various phases of NHDP are lined up for execution in the coming 4-5 years. In addition, good growth is projected in Power, Railways, Real Estate sectors and activities pertaining to flyover and highway construction.

Engines are the most critical mechanical device used in producing motion or movement, and thus, these devices find application across many product categories. The Company will directly benefit as it manufactures engines which find application in major earthmoving equipment, road construction machinery, material handling equipment etc.

The continued focus by the Indian Railways on safety as well as an increase in the number of air-conditioned trains, will increase the demand for Rail engines.

The Indian Navy's Vessel Build program is firm up till 2012. The Company continues to be the preferred engine and generator set supplier for the Indian Navy.

Preference for Factory Mutual -Underwriter Laboratory (FM-UL) approved engines opens up new opportunities for the Company, allowing it to leverage its global product offering and local after sales support.

Outsourcing of drilling activities by large oil companies to private contractors, a segment which the Company has penetrated well, offers increasing opportunities to the Company.

The opening up of the mining sector and entry of multinationals in the mining and construction industry has fuelled demand for heavy-duty rear-dump trucks in the range of 100, 150 and 240 tonnes.

For High Horse Power (HHP) engines in mining trucks, the demand is clearly shifting from mechanical engines to electronic engines due to better efficiency. The Company sees a big opportunity for its products in this segment as well.

Automotive:

The Company has proactively engineered products which are compliant with stringent emission norms that are expected to be implemented from 2010 (country-wide implementation of BS III norms and 11 major cities with BS IV norms). This provides the Company with an opportunity to cater to a larger share of existing OEM customer demands, as well as with new OEM customers.

The improvement of road infrastructure and the shift to higher powered engines provides the Company with an opportunity to grow its share at the higher end of the market.

There is an increasing opportunity for the Company to supply its engines to global OEMs with whom it already does business and many of whom are likely to start operations in India.

The Company's product plans are on track to exploit the above opportunities.

Key Threats include:

Spiraling prices of steel, pig iron, cement and other commodities along with higher interest rates may lead to a moderate slowdown in the economy. Volatility in prices of crude oil, fuel and commodities remains a key challenge. The Company will continue its focus on Six Sigma and Value Engineering programs to reduce cost of components and the production process.

The capacity of Indian shipyards is expected to double to four million tonnes by 2012. Major shipyards are heavily booked with export orders. Intensive oil exploration activities are creating a demand for offshore supply vessels. However, lack of adequate infrastructure is holding back the growth of this industry.

Reduction in import duties and Rupee appreciation will facilitate imports of equipments/ engines which is likely to increase competition. The market environment will continue to be highly competitive with increased competition, entry of new players and range extension by all players. However, this will also provide an opportunity for the Company to aggressively promote Cummins global products.

3. Segment-wise and Product-wise Performance:

3.1 Power Generation:

During the year the Power Generation business grew by 24% across its various lines of business.

Power Generation exports grew by 37% during the year.

3.2 Industrial:

The Industrial Business grew by 27% during the year.

Demand for 130-150 H P engine ratings grew due to an increase in the market for 20T/21T class excavators by the construction sector.

The Company experienced steady demand in the 450 CFM portable compressor market, due to sustained investment in infrastructure projects across the length and breadth of the country. However, the 300 CFM compressor segment continued to remain sluggish.

The Company successfully bagged an order for 600HP main propulsion power pack engines (with gear box) for Landing Craft Units (LCU) for the Indian Navy.

The high pressure water well market showed positive trends in the 2nd half of 2007 and is likely to remain stable over 2008.

The Company has made an entry into the Gas Compression market and has bagged orders for new packages from a leading gas distribution company and gas compression package manufacturers.

The Company's performance in the rail segment was boosted by the demand for 500 WA generator sets for the Garib Rath Trains.

3.3 Automotive:

The Automotive Business grew by 152% with sales comprised of BS III compliant CNG engines and BS II compliant B-series engines.

The Automotive group partnered with the key Automotive Original Equipment Manufacturers (OEMs) in India to facilitate OEM vehicle launches.

3.4 Exports:

Export Sales Performance 2007-08:

The demand for export of the Company's product portfolio continued to remain strong throughout the year. The Company capitalized on this, with significant growth opportunities for existing as well as new products both for High Horse Power and Heavy Duty engines. Challenging expectations from overseas customers were met successfully as a result of timely augmentation of capacity at the Company's plants and introduction of new products.

Sales revenues for exports reached an all time high at Rs. 7,239 million during 2007-08.

New Business Initiatives 2007- 2008:

X Series Generator Sets:

In January 2008 we launched a new line of generator sets (X Series), which provide a highly competitive and raliable power solution to a variety of applications for small business and telecommunication markets.

Marine KTA-38M engines:

The KTA-38M engines (which have critical engine configurations) were

successfully developed and launched to target the Northern American and European markets. Upon establishing stability as a global supplier for the KTA-38M non certified engines, development of Tier I I emissionized engines with the PT fuel system was also undertaken. The prototype units were successfully launched in the Second Quarter of 2007-08. This was followed by a successful production ramp.

VPI Initiative (QSK-50G Tier II engines):

In order to gear itself for manufacturing of Advance Emissions Technology Tier II Certified product, the Company has launched a programme for developing a QSK-50 Tier II MCRS (Modular Common Rail System) product.

The launch of this product would enable the Company to position itself well in the Tier II compliant U.S. and related markets.

N14 ER Rail Initiative:

The Company bagged an order for the supply of N14 Electronic Engines (N14ER) to Japan Rail.

This unit, a first of its kind, with electronic controls, was successfully built during the Second Quarter of 2007-08. Several further such units were supplied in the third quarter.

An order for several units of N14 Electronic Rail engines was successfully implemented with the Indonesian Rail. All the units were shipped in Q3, 2007-08.

New Market for N1 4G & NT 855 (Heavy Duty Products):

As part of its initiative to explore new markets, the Company developed and introduced NTA855G and N 14 G2/ G3 engines for customers in Japan. The identified business potential from these markets is 150 to 200 units for 2008.

Achievements:

'Most Preferred Brand' - Excellence Award:

'Cummins' was conferred Frost and Sullivan's 'Corporate Image / Reputation Leadership Award' and 'Customer Service Leadership Award' at the India Genset Industry Excellence Awards function. Frost and Sullivan is a leading Global Consulting Services firm. The awards recognize best practices and capabilities in various industry segments. Cummins won awards in five out of the ten categories, including:

Industry Segments:

* Most Preferred Brand in Manufacturing Industry (>250 kVA)

* Most Preferred Brand in IT, Realty and Hospitality Segment

* Most Preferred Brand in Construction & Infrastructure segment

Star performer Award for Exports during 2005-06:

The Company is the recipient of the Engineering Export Promotion Council's (EEPC) Star Performer Award for 2005-06 and the recipient of a Silver Shield for its outstanding export performance for the year 2005-06.

The Company has received the EEPC award for the 18th consecutive year for its excellence in export performance.

4. Outlook and Initiatives for the Current Year and Thereafter:

Power Generation:

The Company has commenced production at its new facility at Kasar Amboli, Dist. Pune. This will augment capacity to meet the substantial increase in demand which was witnessed in the local as well as the export markets in the sub 160 kVA range.

This plant will also upfit and distribute imported G drives.

Implementation of Tier I I norms in the near future provides significant opportunity to introduce emission compliant products.

Industrial:

Investments will continue especially in the infrastructure sector because of sustained economic growth.

The Company's New KV engine manufacturing facility which was commissioned during the year has substantially enhanced capacity to meet increase in the

demand for these products.

Currently for the Company's Industrial markets, there is no indication from Construction OEM's on any negative impact in demand/forecast for the remainder of 2008.

Automotive:

In the Automotive segment, the Company is planning to expand its capacity to meet the expected growth in demand for the 300HP and higher power nodes for the Commercial Vehicle market. The Company is investing in developing capability for manufacturing High Pressure Common Rail engines in these segments as the country migrates to BS III and BS IV emission levels.

With the successful introduction of the lean burn natural gas engine (B Gas International) in partnership with Cummins Westport Inc., the Company has secured a 100% market share in the premium rear-engine city transit bus category.

5. Risks and Concerns the Management Perceives:

India continues to see very rapid growth in energy demand. However, domestic growth drivers may be hindered by oil prices, which have hit record highs and are expected to remain at current high levels for a sustained period of time. This may impact the ability of the Indian economy to grow at peak rates.

Continued fuel price increases will also have a negative impact on operating hours and replacement demand for the Company's power generation products, spare parts and service.

Inflation continues to be a concern with commodity prices rising dramatically. Also, the Rupee touched a nine-year high against the dollar. The combined effect of these factors may lead to a slackening of the growth rate.

In the near term, the major risk lies in managing growth and at the same time retaining the profitability. While monitoring the domestic and global economy closely, the Company intends to continue investing in opportunities, building strong relationships with its partners by offering value packages that will fuel further growth in the future and aggressively reducing cost in all areas.

The passenger bus market may be adversely affected in future if the CNG infrastructure does not develop quickly.

Measures to mitigate Risks:

The Company's focus on continuous technology development coupled with stringent cost reduction measures will address the risks and concerns of 2007-2008 to a large extent.

The Company's focus on Six Sigma continues to be higher than ever before. This data based analytical approach to strengthen business processes will be applied for problem solving across all functional and management levels.

6. Internal Control Systems and its Adequacy:

The Company has established adequate internal control procedures, commensurate with the nature of its business and size of its operations.

To provide reasonable assurance that assets are safeguarded against loss or damage and that accounting records are reliable for preparing financial statements, management maintains a system of accounting and controls, including an internal audit process. Internal controls are evaluated by the Internal Audit department and supported by Management reviews.

The Board of Directors has a Finance and Audit Committee whose Chairman is an Independent Director. The Committee meets periodically with the Management, Internal Auditors and representatives of the Company's Statutory Auditors to review the Company's program of internal controls, audit plans and results and recommendations of the Auditors and Management's responses to those recommendations. All audit observations and follow up actions thereon are tracked for resolution by the Business Controls and Compliance Function and reported to the Finance and Audit Committee. The Finance and Audit Committee met six times during the financial year under review.

7. Discussion on Financial Performance with respect to Operational Performance:

Financial Review:

The financial statements have been prepared in accordance with the requirements of the Companies Act, 1956 and Generally Accepted Accounting Principles (GAAP). There are no material departures in adoption of the prescribed accounting standards.

The estimates and judgments relating to the financial statements have been made on a reasonable basis, in order that the financial statements reflect in a true and fair manner, the form and substance of transactions and reasonably represent the Company's state of affairs and profit for the year.

7.A Results of Operations:

7. A.1 Income:

During the year under review, the Company achieved domestic sales of Rs.16,069 million (previous year Rs. 12,358 million), showing an increase of 30% over the previous year. Exports grew by 20% to Rs. 7,239 million as against Rs. 6,050 million during the previous year. Total sales grew by 27% to Rs. 23,308 million as against Rs. 18,408 million for the previous year.0The Company's market share and demand for its products in the domestic market remained strong. This demand has been across the power generation, industrial and automotive segments. An increase in Exports by Rs. 1,189 million indicates success of the Company's strategy to promote India as a sourcing hub for global demand.

7. A.2 Expenses and Margins:

The Company's cost cutting measures through a major three year initiative of Accelerated Cost Efficiency (ACE) and Six Sigma projects have yielded planned savings. These have helped to largely offset the recent significant increase in metal prices affecting component procurement costs which is a matter of concern. Savings from six sigma projects generated Rs. 624 million and ACE initiatives generated Rs. 146 million.

Total employee cost increased from Rs. 1,200 million during the previous year to Rs.1,384 million during the year under review mainly due to increase in compensation to employees over the last year. Depreciation charge marginally increased from Rs. 326 million during the previous year to Rs. 330 million during the year under review. Interest and the interest expenses decreased to Rs. 7 million as against Rs. 14 million in the previous year.

7.B Financial Condition:

7. B.1 Share Capital:

Issued and subscribed capital remained unchanged at Rs. 396 million consisting of 1,98,000,000 equity shares of Rs. 2 each.

7. B.2 Reserves and Surplus:

Reserves and Surplus increased by Rs. 1,741 million to Rs. 10,641 million as a result of profit appropriation.

7. B.3 Loan funds:

Secured loans increased from Rs. 24 million to Rs. 287 million for the year ended March 31, 2008 which mainly represent book overdraft position. The debt equity ratio as at March 31, 2008 was 0.026.

7.B.4 Fixed Assets:

Additions to the Fixed Assets block during the year ended March 31, 2008 were Rs. 1,100 million (Rs. 288 million in the previous year). The addition of Rs. 1,100 million consist mainly of plant & machinery of Rs. 432 million for augmenting various manufacturing facilities, furniture and fittings of Rs. 17 million and vehicles of Rs. 0.26 million. The depreciation block as of March 31, 2008 was Rs. 3,929 million as compared to Rs. 3,620 million as of March 31, 2007. The deductions/disposals during the year amounted to Rs.29 million against previous year's Rs. 118 million. Consequently, the net fixed assets block increased to Rs. 2,548 million as at March 31, 2008 as compared to Rs. 1,817 million as at March 31, 2007.

The estimated amount of contracts remaining to be executed on capital account and not provided for as of March 31, 2008 was Rs. 425 million and the Company believes that it will be able to fund them from its investments in liquid assets.

7. B.5 Investments:

Investments increased to Rs. 4,321 million as of March 31, 2008 as compared to Rs. 2,826 million as of March 31, 2007. The net increase was due to investment in liquid funds such as Government bonds/ securities, units of mutual funds etc.

7. B.6 Current Assets, Loans and Advances:

i. Inventories:

Inventories increased to Rs. 3,215 million as of March 31, 2008 against Rs.2,814 million as of March 31, 2007. The increase was mainly in raw materials and finished goods.

ii. Sundry Debtors:

Sundry debtors, net of provision for doubtful debts, increased to Rs. 5,505 million as of March 31, 2008 as compared to Rs. 4,185 million as of March 31, 2007. These are considered good and realisable. The Sundry Debtors in terms of days of sales based on certain assumptions marginally increased to 86 days as of March 31, 2008 as compared to 83 days as of March 31, 2007.

The need for cumulative provision for doubtful debts as of March 31, 2008 of Rs. 52 million (previous year Rs. 49 million) is assessed, based on various factors including collectibility of specific dues, risk perception etc.

iii. Cash and Bank Balances:

Cash and Bank balances decreased to Rs. 123 million as at March 31, 2008 as compared to Rs. 389 million as at March 31, 2007. They represent the year end cash and bank balances with scheduled banks in current and deposit accounts.

iv. Other Current Assets:

Other current assets decreased to Rs. 24 million as of March 31, 2008 against Rs. 33 million as of March 31, 2007. Other current assets include interest accrued on investments and lease rentals receivable.

v. Loans and Advances:

Loans and Advances increased to Rs. 1,935 million as of March 31, 2008 as compared to Rs.1,499 million as of March 31, 2007. The Loans and Advances were primarily towards amounts paid in advance for value, material and services to be received in future and various deposits kept towards rent, telephone, electricity, insurance etc.

7. B.7 Current Liabilities and Provisions:

i. Current Liabilities:

Acceptances represent bills of exchange drawn for a period by the suppliers and accepted by the Company. Acceptances increased to Rs. 674 million as of March 31, 2008 as compared to Rs. 550 million as of March 31, 2007. The sundry creditors represent the amount payable to suppliers for supplies of goods and services and also include accrued cost of various operational expenses. The sundry creditors increased to Rs. 4,031 million as of March 31, 2008 from Rs. 2,316 million as of March 31, 2007, as a result of increase in volume of operations. The total current liabilities increased to Rs. 4,984 million as of March 31, 2008 as compared to Rs. 3,062 million as of March 31, 2007.

ii. Provisions:

The total provisions increased to Rs. 1,458 million as of March 31, 2008 as compared to Rs. 1,219 million as of March 31, 2007. This includes provisions on account of pension and leave entitlement, warranty, engine overhauls for service contracts etc.

8. Human Resources Development and Industrial Relations:

The total strength of employees was 2,290 as on March 31, 2008.

The Company strongly believes that its people are its greatest strength. A critical part of our Business Strategy is to make the Company 'A G BEAT PLACE TO WORK' where a diverse set of employees respect and trust each other, take pride in their work, deliver superior results and contribute in increasingly greater ways while growing and developing as individuals.

Leadership Development and Capability Building:

In order to groom and enhance the performance of upcoming employees, a Mentoring Program was initiated during the year.

Last year, the Company inducted fresh graduate engineers under its Young Managers Development Program. The objective of this program is to build a pipeline for future Leadership, as well as to serve as a bench-strength against separation of employees.

The Company's major thrust area is Six Sigma and it continues on its journey of training employees in Six Sigma principles and methodology. During the year, 90 Green Belts were trained/ certified.

Compensation, Benefits and Recognition:

In line with the Company's global compensation philosophy, the Company continued to align its compensation structure to bring it at par with the market while recognizing performance, potential and critical skills. The Company undertook a study to harmonize the compensation of its Management Staff across all Cummins entities in India. This will enable seamless transition of employees within India and will thus help in career development and retention.

The Company recognizes the importance of training & development. The in-house Learning Centre regularly conducts programs on Leadership Development and Capability Building. Strategic and Tactical leaders undergo the Cummins Leadership Development System (CLDS) Training, a global initiative that enhances leadership skills.

Chairman's Awards, introduced for recognizing employees exemplifying the six Cummins core values, is now in its fourth year. 103 employees were awarded in the categories of Integrity, Innovation, Delivering Superior Results, Global Involvement, Diversity and Corporate Responsibility as well as Six Sigma this year.

Performance Management:

The Company's unique Performance Management System Tool was upgraded to strengthen the process for monitoring and enhancing employee performance, reinforcing the Company's Values and also ensuring Development of Employees through the Individual Development Plan.

Diversity:

In line with the Company's core value of Diversity, initiatives are being taken to recognize the strengths of every employee, value the contribution made and create an inclusive work environment where differences in background help solve the most complex business problems. Diversity complemented by intensive training and Cummins Performance Management System (CPMS) implementation has enhanced the Company's business performance.

In order to improve Gender representation, the Company focuses strongly on employing women employees through its campus recruitment program. In the year 2007, of the 84 students hired from 44 institutes across the country, 55 were women. A similar approach is being adopted in the current year, to improve Gender Diversity, both through the Campus Recruitment Process and lateral hiring.

Industrial Relations (IR) and other Initiatives:

The Industrial Relations between the Management and Employees Unions continued to be cordial. Wage negotiations for the Associates at Kothrud are in progress. A series of change initiatives undertaken by the Management towards improving productivity and elimination of wasteful practices has been received well by the Union. Motivational and attitudinal training programs are conducted for Associates, which has helped boost their morale and productivity.

Corporate Responsibility:

Corporate Responsibility is one of the Company's six core values. Employees across the board are encouraged to participate in CSR activities that help better the lives of those less fortunate, thereby living the Company's Vision Statement of Making people's lives better by unleashing the power of Cummins'.

Cummins India Foundation (CIF) continues to focus on the three core areas of Higher Education with special focus on the traditionally disadvantaged groups; Energy & Environment and Local Community Infrastructure Development.

CIF is involved in several projects in each of these areas, where senior leaders get personally involved in supporting and sponsoring these projects.

CIF has been associated with the Cummins College of Engineering for Women, since its inception in 1991. It has sponsored the establishment of the first all women Mechanical Engineering branch in the country in July 2007.

Four students from the Cummins College of Engineering for Women were selected for the two year Masters program conducted by the Purdue University, U.S.A.

CIF awarded the Cummins Scholarships to fifteen students in addition to thirteen students who were awarded similar assistance in the previous year. This Scholarship is awarded to students from economically and socially disadvantaged backgrounds pursuing their engineering degree course and covers the entire tuition and examination fees.

CIF provided financial assistance for establishment and running expenses of a training cum research facility at the Indian Institute of Technology, Mumbai campus for increasing awareness amongst the IIT students on alternative power generation systems. Phase II of the Cummins Engine Research Laboratory at IIT Bombay was completed in March 2007.

A project on Environmental Protection was undertaken at the Company's factory at Kothrud, wherein a 'Biogas Plant' was installed to utilize canteen food waste for conversion to biogas and manure.

The Company continued its close association with the Poona School and Home for the Blind, by providing financial assistance for refurbishing the school.

CIF provided financial assistance towards the Reaching Out' Program of Snehalaya to help the NGO provide nutritional and educational support to orphans, some of whom are HIV Positive.

In keeping with its commitment to improve communities by strengthening local governance, CIF continued to support the Pune Chapter of Public Concern for Governance Trust (PCGT), Pune, in its mission to promote honesty, transparency and accountability in governance. Apart from financial support, senior leaders of the Company participate actively in PCGT's advisory council.

Cautionary Statement:

The Management Discussion and Analysis Report contains forward looking statements based upon the data available with the Company, assumptions with regard to global economic conditions, the government policies etc. The Company cannot guarantee the accuracy of assumptions and perceived performance of the Company in future. Therefore, it is cautioned that the actual results may materially differ from those expressed or implied in the report.