Annual Report - Cummins India - 2008-2009

CUMMINS INDIA LIMITED

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

DIRECTORS' REPORT

The Directors of Cummins India Limited have pleasure in presenting the
Forty-Eighth Annual Report and the Audited Accounts of the Company for the
year ended March 31, 2009.

1. FINANCIAL RESULTS :

During the year under review, net sales turnover was Rs. 32,740,500 ('000)
Rs. 23,307,792 ('000) (Rs. 23,308 million) during the previous earnings
were Rs. 13,424,852 ('000) (Rs. 13,425 million) as during the previous year
(81% higher). Profit after tax was Rs. 4,336,611 Rs. 2,806,910 ('000)
(Rs.2,807 million) for the previous year.

2008-2009* 2007-2008
(Rs. '000) (Rs.'000)

APPROPRIATION OF PROFIT:

Profit before taxation 5,990,216 3,960,032

Net Profit for the year after tax but 4,336,611 2,806,910
before tax on proposed dividend

Tax on dividend 319,846 154,790

Dividend 1,782,000 910,800

Transferred to General Reserve 433,661 701,728

Balance carried to Balance Sheet 4,955,127 3,154,023

* Financial Results of your Company include figures of the Company's
Service India Limited (CS&S) and Cummins Auto Services Limited (CASL) which
were amalgamated with your Company with effect from April 1, 2008
('Appointed Date').

2. DIVIDEND:

Your Directors have recommended a final dividend of Rs. 2.60 per equity
share of Rs. 2/- each fully paid-up for the year ended March 31, 2009, in
addition to the interim dividend of Rs. 4/- per share declared on January
27, 2009 and a special dividend of Rs. 2.40 per share declared on December
5, 2008, aggregating to Rs. 9/- per share for the year.


3. CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Financial Statements of Cummins India Limited and its
associates and joint ventures as at March 31, 2009, have been prepared in
accordance with Accounting Standard 21 (AS 21) on Consolidated Financial
Statements', Accounting Standard 23 (AS 23) on Accounting Statements' and
Accounting Standard 27 (AS 27) on Financial Institute of Chartered
Accountants of India. As required by Clause 32 of the Listing Agreement
with the Stock Exchanges, the Audited Consolidated Financial Statements are
attached and form part of the Annual Report.

4. SALE OF POWER GENERATION RENTAL POWER BUSINESS:

Pursuant to the approval of shareholders through a Postal Ballot, results
of which were announced on December 29, 2008, the Company has disposed its
Power Generation Rental Power Business as a going concern for a total
consideration of Rs. 300 million (including stamp duty but exclusive of
applicable taxes). This disposal would enable the Company to further
strengthen and develop its core business of manufacture and sale of
Internal Combustion Engines and Generators.

5. SUBSIDIARIES:

Pursuant to the order of the Hon'ble Bombay High Court dated March Limited
(CS&S) and Cummins Auto Services Limited (CASL), subsidiaries of the
Company, have amalgamated with your Company with effect from April 1, 2008
(Appointed Date). The financial statements of the Company and figures
herein, include the figures of erstwhile CS&S and CASL and hence, the same
are not comparable with the figures of the previous year.

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,
2009, was Rs. 430,203 ('000) Rs. 478,071 ('000) (Rs. 478 million) during
the previous year (10% interim dividend of Rs. 10/- per equity share of
Rs.10/- each and a final dividend of Rs. 5/- per share for the year ended
March 31, 2009, aggregating to Rs. 15 per share [150% on the paid-up share
capital of Rs. 40,000 ('000)]. CEIL is engaged in the business of
manufacture 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, 2009, was Rs. 482,717 (Rs. 483
million) as compared to Rs. 307,690 ('000) (Rs. 308 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.

c. Valvoline Cummins Limited (VCL):

Consequent to the amalgamation of Cummins Sales and Service India Limited
(CS&S) with Cummins India Limited (CIL), the shares held by CS&S in
Valvoline Cummins Limited (VCL), now stand transferred in the name of your
Company. VCL is a 50:50 joint venture with Valvoline International Inc.,
U.S.A., a global leader in lubricants and engine oils. The sales and other
income of VCL for the year ended March 31, 2009 was Rs. 4,470,658
(Rs.4,471 million) as compared to Rs. 3,270,210 ('000) (Rs. 3,270 VCL has
declared a dividend of Rs. 4/- per equity share of Rs. 10/- each [40% on
equity paid-up share capital of Rs. 190,000 ('000)] for the year ended
March 31, 2009.

7. INDUSTRIAL LAND AT PHALTAN:

Your Company has acquired about 64 acres of land from Maharashtra
Industrial Development Corporation (MIDC), near Phaltan in Satara District,
Maharashtra and is in the process of taking possession of additional 61
acres of land at the same site to cater to your Company's future expansion
needs. some of the projects of your Company and other Group Companies have
been deferred and are expected to commence in a phased manner from 2009-
2010.

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'

9. CODE OF CONDUCT COMPLIANCE:

A declaration signed by the Chairman and Managing Director affirming
compliance with the by Directors and Senior Management, for the Financial
Year 2008-2009, as required under Clause 49 of the Listing Agreement with
the Stock Exchanges 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 the annual accounts, all 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, 2009 and of the profit for the period April 1, 2008
to March 31, 2009;

(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 continued to undertake various energy conservation initiatives
during the year, some of which are highlighted below:

Engine Business Unit Plants (Kothrud and Pune - Nagar Road):

* Continued use of 'VAM' Waste Heat Recovery System in place of compressor
based air conditioners.

* 'Energy Conservation Awareness' communication given to all employees
through information posters displayed at usage locations across offices and
shop floor. This has helped in judicious use and saving of energy.

* Use of natural lighting during the day at the machine shop floor and
stores.

* Optimization of heat treatment operations to run furnaces for 4.5 days
instead of 6 days per week to get maximum utilization and reduce energy
consumption.

* Installation of energy efficient Metal Hallide 28 W tube lights in place
of 72 W tube lights at about 750 locations.

* Energy efficient air conditioning cooling system (Package Units) in the
new KV Engine Plant.

* Unity Power Factor achieved through installation of ten Auto Power
Factor Correction (APFC) capacitor panels.

Power Generation Business Unit Plants (Kasar Amboli and Daman):

* Installation of servo control 750 kVA voltage stabilizer at LT sub-
station.

* Push pull switches installed in the office and administration buildings.

* Optimisation of air conditioners.

* Factory buildings designed to maximise natural lighting.

Distribution Business Unit (CS&S Division), Erandawana, Pune:

* Load reduction in administration building by localized lighting at work
stations and redesigned general lighting as well as natural lighting.

* Installation of energy efficient air conditioning units in the
administration area.

* Replacement of orbit cleaning system by ultrasonic cleaning system in
component cleaning section.

IMPACT OF THE ABOVE MEASURES:

The above initiatives have resulted in savings of about Rs. 36,150 ('000)

12. RESEARCH & DEVELOPMENT AND TECHNOLOGY ABSORPTION:

Your Company remains 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 development of electronic
controls and systems to improve fuel efficiency, performance and durability
of the products.

A. New Product Development:

The following new Products were developed during the year:

1. C8.3 engine for a marine application.

2. B5.9 engine meeting BS II (CEV) emission norms for the industrial
market.

3. K50 CNG dual fuel engine for a locomotive application for the Indian
Railways.

4. QST30 engine for a dozer application meeting Tier I emissions.

5. B5.9 mechanical engine meeting BS III emission norms for the automotive
market.

6. B5.9 full authority electronic Natural Gas engine for the automotive
market.

7. N14 - 380 kVA mechanical engine meeting EU Stage II emissions.

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

* A complete range of fuel efficient and emission compliant products were
made available to customers in the shortest possible time, at significantly
lower 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 diesel as well as natural gas
engines for the automotive market, compliant with BS IV emissions
requirements.

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

* Installation and commissioning of Euro-IV level state-of-the-art
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, domestic and global emissions regulations. Your
Company is also committed to introduce environment friendly engines,
running on both conventional and 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:

2008-2009 2007-2008
(Rs. '000) (Rs. '000)

a) Capital 100,132 37,247
b) Recurring 307,990 269,692
c) Total 408,122 306,939
d) Total R&D expenditure as a 1.25% 1.32%
percentage of total sales turnover

13. FOREIGN EXCHANGE EARNINGS AND OUTGO:

During the year under review, your Company exported 7,106 engines and 8,632
generator sets thereby achieving export earnings of Rs. 13,129,018 ('000)
(Rs. 13,129 million).

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

2008-2009 2007-2008
(Rs. '000) (Rs. '000)

(a) Earnings 13,424,852 7,420,494
(b) Outgo:
- Raw Materials/components 5,798,772 3,726,212
- Capital equipment 261,073 80,736
- Others 1,663,153 998,921
7,722,998 4,805,869

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 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:

In accordance with the provisions of the Companies Act, 1956 and the
Articles of Association of the Company, M/s. Rajeev Bakshi, P.S. Dasgupta
and S.M. Chapman, Directors of the Company, retire by rotation and are
eligible for re-appointment.

16. AUDITORS:

The Auditors, Price Waterhouse, Chartered Accountants, hold office until
the conclusion of the ensuing Annual General Meeting and are eligible for
re-appointment.

On behalf of the Board of Directors,

Place: Pune Anant J. Talaulicar
Dated: May 26, 2009 Chairman & Managing Director

Management Discussion and Analysis Report

(Annexure to Directors' Report)

1. Industry Structure and Developments:

Economic Trends and Implications:

After 5 consecutive years of solid growth in the 7-10% range, the rate of
economic growth in India witnessed a slow down. Revised estimates from the
Government of India indicate that the full-year GDP growth (2008-09) will
be approximately 6.5%, while the outlook for fiscal (2009-10) is projected
to be in the range of 5.0 to 5.5%.

For the first time in 15 years, the Index of Industrial Production (IIP)
contracted and witnessed negative growth during the period Dec'08 - Mar'09.
For the fiscal year 2008 - 09, Industrial output grew only by 2.4% as
compared to 8.8% a year before.

However, demand revival is expected in the Fiscal Year 2009-10, given the
fall in inflation, correction in interest rates and a commitment from the
Central Government to stimulate growth with infrastructural investments.

Exports contracted for six consecutive months (Oct'08 to Mar'09), bringing
the year's cumulative growth down to a meager 3.4% over the same period of
the last year. The trade deficit for 2008-09 was $119 billion, up 35% from
$88 billion in 2007-08.

India is projected to achieve FDI of $27.5 billion against a target of $30
billion for the fiscal year 2008-09.

The Indian Government's timely release of three stimulus packages to boost
the economy has started yielding positive results in key sectors like
Automotive, Power Generation and Industrial.

Growth fundamentals of the Indian economy remain strong due to a high
savings rate, strong banking system, favorable demographics and a rising
disposable income.

2. Opportunities and Threats:

Key Opportunities include:

Power Generation:

India's power market is growing faster than most other countries. With an
installed generation capacity of 147 GW, generation of more than 600
billion kWh, and a transmission and distribution network of more than 6.3
million circuit kms, India is now the fifth largest power market in the
world. Per capita electricity consumption in the country is around 665
units which is envisaged to increase to 1,000 units by 2011-12.

A huge opportunity continues to exist in the Power Sector in India due to
the growing gap between demand and supply. Demand is typically driven by
sectors such as Telecom, Commercial construction, IT, ITES, Retail etc.

Implementation of Tier II emission norms for Power Generation provides a
significant opportunity for Cummins to introduce its global emission
compliant products.

Industrial:

A large outlay of funds that have been allocated as part of the stimulus
packages and the interim budget, present a significant opportunity in
infrastructure projects.

Additional plan expenditures announced in the current year for critical
rural, infrastructure and social security schemes, are expected to generate
demand in the Construction segment for Cummins. These are projects such as
Pradhan Mantri Gram Sadak Yojana (PMGSY), Jawaharlal Nehru National Urban
Renewal Mission (JNNURM), National Rural Employment Guarantee Scheme
(NREGS), Indira Awas Yojana, Accelerated Irrigation Benefit Program, and
National Social Assistance Program (NSAP).

More stringent emission norms and fuel efficient/technologically advanced
products will be the major drivers in the Industrial market in coming
years. This is a good opportunity for Cummins to gain market share, given
its global technology/emission leadership and vast domestic as well as
global distribution network.

Automotive:

Cummins has engineered products compliant with stringent emission norms
such as the BS III and BS IV that are to be implemented from April 2010
(country-wide implementation of BS III norms and 11 major cities with BS IV
norms). This positions Cummins as a preferred supplier to Indian OEMs for
their Domestic and Export applications.

The Government has announced funds under the JNNURM for cities to purchase
15,000 buses. Cummins with its superior B series gas technology engines is
very well positioned to gain business for CNG engines under this scheme.

Cummins has already secured business in the Delhi Transport Corporation
requirements for CNG low floor buses.

Distribution:

Despite the economic slowdown, India's coal mining sector shows a strong
demand, which will drive Parts & ReCon engine demand for your Company.
Better availability of quality remanufactured components from Cummins
Technologies India Ltd., another Cummins company in India, will help expand
sales for our distribution business.

The Defense segment reflects new opportunities for your Company in
containerized custom built powerpacks in remote locations.

There is a significant opportunity in Railways for upgradation of existing
380 kVA powercars to 500 kVA. The CNG application for Diesel Electrical
Multiple Unit (DEMU) presents another significant opportunity in Railways
for your Company.

Key Threats include:

Exports (Power Generation):

The global economic conditions have impacted demand for engines (Power
Generation application) in the Low Horse Power, Heavy Duty and High
Horsepower segments. Prolonged slowdown of this magnitude will adversely
impact Export revenues.

Industrial:

Due to widespread economic uncertainty and credit availability issues,
customers are reluctant to purchase new equipments.

Global mining majors are focusing on the Indian (domestic) market because
of weakening demand in overseas markets. Aggressive price competition in
dump truck tenders is putting pressure on margins.

Major shipyards which till last year were heavily booked with export orders
are now facing order cancellations or indefinite postponements.

Automotive:

After registering strong growth for seven successive years, the medium and
heavy commercial vehicle industry in 2008-09 declined 35% over 2007-08. The
decline was mainly associated with high interest rates, excess cargo
capacity and decline in freight realization for transporters. This has put
pressure on sale of new commercial vehicles which in turn had an adverse
effect on the demand for engines.

OEMs collaborating with foreign companies for development of CNG
technologies in India, may pose a threat to your Company's market share in
CNG engine business.

3. Segment-wise and Product-wise Performance:

3.1 Power Generation:

During the year, the domestic Power Generation business remained almost
flat as compared to the previous year.

Power Generation exports more than tripled during the year owing to
increased capacity from the newly set up plant at village Kasar Amboli.

3.2 Industrial:

Industrial Engine Business grew 13% during the year.

Demand for 130-150 HP engine ratings remained robust in the first two
quarters due to increase in the market for 20T/ 21T class excavators in the
construction sector and 450 CFM Compressors. The momentum slowed down
significantly in the last two quarters.

The Mining segment performed well as compared to the previous year and grew
by more than 30%. Apart from the strong growth, Cummins successfully
introduced electronic engines on varied applications such as dump trucks,
dozers and excavators.

The high pressure water well market showed declining trends in the second
half of 2008 but is expected to stabilize over 2009.

Portable compressors continued to show consistent demand in the 450 CFM
market due to sustained investment in infrastructure projects. However, the
300 CFM compressor segment declined and is expected to remain sluggish.

With the introduction of new products, the Pump segment will now be
consolidating its position in low horsepower engines. Cummins factory
approved engines have been received well in the domestic market.

The Marine segment successfully bagged repeat orders for 600 HP main
propulsion power pack engines (with gear box) for Landing Craft Units (LCU)
for the Indian Navy.

Cummins has developed a strong partnership with leading Gas Compression
package manufacturers, and has commissioned engines at strategic gas
distribution locations in the country. In the coming years, your company is
poised to strengthen its position in this market.

The Rail segment's performance was boosted by the demand for 500 kVA
generator sets for the Garib Rath Trains.

3.3 Automotive:

The Automotive Business revenues declined by 34% in 2008-09 compared to
2007-08.

Cummins secured 100% requirements for Delhi Transport Corporation (DTC)
tender for 2,500 low floor buses. Your Company maintained 100% market share
in premium CNG engines through its B series Lean Burn products.

Heavy commercial segment of 300 HP and above remained nascent during the
Financial Year 2008-09 due to decrease in infrastructural activities.

3.4 Distribution:

The Distribution Business Unit (DBU) recorded a 20% growth in revenues over
previous year and reported a robust performance in almost all lines of
business.

Through a comprehensive Activity Based Cost Management initiative, DBU was
able to drive process improvements and significant cost reduction across
its operations.

3.5 Exports:

Exports earnings for the year 2008-09 grew by almost 81% over the previous
year and reached an all time high of Rs. 13,129,018 ('000) [including
exports of Rs. 63,964 ('000) of the merged entity namely Cummins Sales and
Service India Limited (CS&S)].

The strong demand from overseas markets for the entire range of products,
along with your Company's focused initiatives in enhancing its
manufacturing capacities and new product launches, contributed
significantly to the growth.

New Business Initiatives 2008-09:

Power Generation:

The new X series 3.3 litre generator sets which were launched in January
2008 for exports have found wide acceptance from customers and distributors
globally. The upcoming introduction of the X1.3 litre generator set will
widen Cummins product portfolio in 7.5/10/12 kVA range.

The new Power Generation plant that was inaugurated in January 2008 is
being recognized as one of the best Cummins' Power Generation facilities
globally.

During the year, QSK23 powered 750 kVA generator sets were introduced in
the domestic market.

A range of Automatic Transfer Switches (ATS) was launched during the year
for critical applications such as hospitals, hotels, data centers,
commercial complexes, malls, telecom and process industries, where power
failure results in loss of major processes and machinery.

Industrial:

Your Company gained market share in the 100 Ton dump truck market with 30
litre electronic engines and successfully seeded electronic engines in
dozer and excavator mining applications.

Cummins implemented customized power pack solutions/value packages to
leading end users in the gas compression segment. This cost competitive
indigenous option to the customers is suitable for uninterrupted operations
under stringent site conditions.

Distribution:

Your Company's distribution arm launched a new initiative to target new
OEMs with relatively smaller account size or applications or segments in
order to increase 6BT/6BTA/6BTAA 5.9L engine sales. With the initiative, it
was able to expand its penetration in the Marine and Automotive sectors.

As part of its Customer Support Excellence strategy, your Company commenced
discussions with On Highway OEMs to provide parts & service support and has
been successful in establishing an overall support policy. Your Company has
been working closely with its customers on pricing and other details and
expects a business potential of Rs. 100 million by 2011.

In order to gear itself to meet the demand for high horsepower
Reconditioned diesel generators, an initiative was launched to improve the
availability of core needed to recondition the product. Your Company has
made significant progress in identifying new channels for this.

Exports:

Your Company successfully geared-up capability to offer Tier II emission
compliant high horsepower 50L engines with full authority electronic
Modular Common Rail Fuel System (MCRS) to the U.S.

Cummins is working towards offering the 6CTA8.3 G engines for Power
Generation applications in South East Asia. The annual potential volumes
for this product are expected to be 250 plus units and regular supplies are
expected to start in late Q3 - early Q4, 2009.

Achievements:

Power Generation:

During the year, Cummins won the Confederation of Indian Industry (CII)
National Award for Excellence in Energy Management in the category of
Innovative Product / Service' for the third successive year. The award has
been conferred upon Cummins for its unique Power Quality & Adequacy
Analysis' service designed to ascertain source and load compatibility.

Industrial:

Telcon, a market leader in construction equipment in India has conferred a
Certificate of Honour on your Company for making a significant contribution
to Delivery Efficiency of Proprietary Components' during the year 2008-
2009.

Elgi Equipments Limited, India's leading supplier of Air Compressors has
awarded your company with the Best Supplier Winner of the year 2008 title.

The Cummins Rail segment has bagged the prestigious order to supply 14
litre horizontal engines for 4 wheeler over head equipment (OHE) cars. It
has further secured a breakthrough order for supplying 50 litre engines for
powering Diesel Electric Multiple Units (DEMU's) to run in Sri Lanka.

The Cummins Marine segment bagged an order to supply 38 litre engines for
Catamaran Survey Vessels for the Indian Navy.

The first train in the Jammu & Kashmir valley started its run in February
2009. This specially developed train is powered by a Cummins 50 litre
engine for traction and 14 litre underfloor engines of 320 kVA DG set for
heating coaches during the winters.

Exports:

Cummins received the prestigious Engineering Export Promotion Council's
'Star Performer Award' for Export Excellence for the year 2006-07. This was
in recognition of its outstanding contribution to Engineering Exports
(Western Region) in the category of 'Large Enterprises'. Your Company has
received this award for the 19th consecutive year.

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

Power Generation:

Domestic power generation segments such as Auto, Textiles, IT/ITES, Telecom
and Infrastructure are already in the revival mode due to corrections in
channel inventory and measures taken by the government as a part of
stimulus packages. The power generation exports outlook however continues
to remain weak.

Initiatives:

The new facility at Kasar Amboli has been identified as one of the global
production facilities for generator sets below 200 kVA and is expected to
manufacture new products.

The new 1.3 litre X series generator sets will be introduced in the export
and domestic market.

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

Industrial Outlook:

The outlook for Industrial segment is likely to remain stable in 2009-10.

Initiatives:

Introduction of electronic engines in the Mining and Rail segments.

Offer BS III compliant engines for the Construction segment.

Penetrate the domestic Light Construction segment (< 100 Hp) through the
introduction of the B series Engines.

Automotive:

Outlook for Automotive segment looks positive in the CNG bus segment with
various tenders floated by the Government under JNNURM and demand for CNG
low floor buses at Delhi Transport Corporation.

Heavy Truck and Tipper segment is expected to undergo a slow recovery path
from the current dip. Demand for 300 HP and above may not pick up in the
immediate future.

Initiatives:

R & D on CNG programs for lean burn stoichiometric engines for meeting BS
IV emission norms and integration of these engines on new vehicles will
position Cummins strongly to meet the 2010 Emissions.

Explore new market segments with expansion of current product portfolio.

Distribution:

Your company plans to set up a state-of-the-art rebuild facility at Cummins
Megasite in Phaltan for its line of HHP mechanical & electronic engines to
cater to the growing demand in the region.

Despite the downturn in the economy and weak sentiments in the market, the
distribution business maintains a positive outlook for the current year and
has launched several initiatives to continue this growth.

5. Risks and Concerns the Management Perceives:

For growth to continue, sustained reforms by the newly formed government
are crucial. The commitment of the new government to introduce measures
that continue to enhance domestic demand, reduce unemployment and put the
economy back on track would be necessary. Steering India out of a slowdown
will need both quick actions and responsible economic policies.

The global liquidity crisis that erupted in the international financial
sector has engulfed the real economy as well.

Projections for world output, which would impact global demand, continue to
worsen. The record trend of growth rates witnessed till the first half of
the fiscal year 2008-09 reversed from October onwards with Exports being
substantially impacted. If the recovery takes longer than anticipated,
Exports outlook will continue to worsen.

Despite the rate cuts by the Central Bank, banks continue to be cautious in
reducing lending rates to the extent needed. The auto sector therefore,
continues to be under pressure for financing options which may impact the
commercial vehicle demand.

A significant strengthening of the Rupee could impact export margins
adversely.

Measures to mitigate Risks:

Diversifying our product and market segment portfolio will be a continuing
thrust.

Company wide initiatives such as direct material cost reduction under the
Accelerated Cost Efficiency' (ACE) program and Six Sigma continue to be
higher on priority then ever. These data based analytical approaches to
strengthen business processes and remove waste in the system continue to be
applied across all functions and business units.

Increasing focus on domestic business will be important to take full
advantage of the revival in the Indian economy.

Increased focus on product value engineering and localization will help
reduce the cost of our products.

Introduction of emission compliant and fuel efficient value packages to
reduce the Total Cost of Ownership of your Company products.

6. Internal Control Systems and its Adequacy:

Your 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 five 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. Pursuant to the Order of the Hon'ble Bombay High Court dated March
20, 2009, Cummins Sales and Service India Limited (CS&S) and Cummins Auto
Services Limited (CASL), subsidiaries of the Company, have amalgamated with
your Company with effect from April 1, 2008, (Appointed Date).

The financial statements of the Company therefore include the figures of
erstwhile CS&S and CASL and hence, the same are not comparable with the
figures of the previous year.

Income:

Your Company's market share and demand for its products in the domestic
market remained strong particularly in the first half of the year and was
reasonable in the second half.

Your Company's revenue grew 40% and profit before tax grew 51% despite
severe cost pressures and rising material cost during the first half of the
year and a significant slowdown in the economy in the second half of the
year.

This was possible due to your Company's cost cutting measures through a
major three year initiative of Accelerated Cost Efficiency (ACE) and Six
Sigma projects which have yielded planned savings. Savings from Six Sigma
projects generated Rs. 757,000 ('000) and ACE initiatives generated
Rs.150,890 ('000).

Total employee cost increased from Rs. 1,384,225 ('000) during the previous
year to Rs. 2,129,616 ('000) during the year under review mainly due to
increase in compensation to employees over the last year and inclusion of
CS&S and CASL employee cost [Rs. 365,641 ('000)] pursuant to the
amalgamation. The depreciation charge increased from Rs. 329,620 ('000)
during the previous year to Rs. 455,587 ('000) during the year under
review. Interest expense increased to Rs.26,080 ('000) as against Rs. 6,665
('000) in the previous year.

India is projected to achieve FDI of $27.5 billion against a target of $30
billion for the fiscal year 2008-09.

The corresponding performance numbers of the Company excluding CS&S and
CASL for the year 2008-09 as compared to the previous year were:

Revenue growth - 23%
Growth in profit before tax - 32%.
Employee cost - Rs.1,763,974 ('000)
Depreciation charge - Rs. 428,653 ('000)
Interest expense - Rs. 12,330 ('000)

Fixed Assets:

Additions to the Fixed Assets block during the year ended March 31, 2009
were Rs. 1,107,944 ('000) (Rs. 1,100,722 ('000) in the previous year). The
addition during the year includes Rs. 405,850 ('000) on account of the
amalgamation. The addition of Rs. 1,107,944 ('000) consists mainly of plant
& machinery of Rs. 851,417 ('000) for augmenting various manufacturing
facilities, furniture and fittings of Rs. 46,013 ('000) and vehicles of
Rs.39,361 ('000). The depreciation block as of March 31, 2009 was
Rs.4,323,632 ('000) as compared to Rs. 3,928,945 ('000) as of March 31,
2008. The deductions/disposals during the year amounted to Rs. 444,105
('000) against the previous year's Rs. 28,616 ('000). Consequently, the net
fixed assets block increased to Rs. 3,090,162 ('000) as of March 31, 2009
as compared to Rs. 2,548,520 ('000) as of March 31, 2008.

The estimated amount of contracts remaining to be executed on capital
account and not provided for as of March 31, 2009 was Rs. 616,602 ('000)
and the Company believes that it will be able to fund them from its
investments in liquid assets.

Investments:

Investments decreased to Rs. 3,992,691 ('000) as of March 31, 2009 as
compared to Rs. 4,321,455 ('000) as of March 31, 2008. The net decrease was
due to the incremental dividend of 220% paid during the year, which was
partly funded by the investments pertaining to Financial Year 2007-08.

8. Human Resources Development and Industrial Relations:

The total strength of employees was 2,516 as on March 31, 2009.

Your Company strongly believes that its people are its greatest strength
and a critical part of the business strategy is to make the Company 'A
Great Place to Work'.

Organization Development and Capability Building:

Acting on the fundamental belief that excellent leadership creates a 'Great
Place to Work', the Chairman of Cummins Inc. conducted a 'Leadership
Culture Session' for the senior leaders of your Company. This will be
followed by five specific skill sessions led by the Global BU Presidents,
in the next 24 months. Also, the CIL Chairman and Managing Director will be
personally conducting a three hour workshop on Leadership Excellence in the
Indian Context for all level of managers of people across the Group in
India in the second half of calendar 2009.

In addition, your Company has initiated a Leadership Development series,
where the current and potential leaders go through developmental sessions
once a-quarter, with a one-day workshop. The objective is to ensure
consistent development of high quality leadership skills throughout the
Company. Over 300 employees were trained under the program last year. The
four leadership training skills that are covered in the program are i)
Setting the Aim ii) Coaching for Development iii) Championing Change, and
iv) Valuing Diversity.

The Chairman directly interacts with a group of 25 randomly selected
employees every month and gathers valuable feedback on how to make Cummins
a Great Place to Work.

Your Company enhanced the Mentoring Program which was initiated last year
and developed a pool of 100 mentors.

Your Company continued to induct 89 fresh graduate engineers this year
under its Young Managers Development Program (YMDP) a majority of whom were
females.

All exempt employees were covered under the mandatory program - 'Through
the Lens of the Customer' wherein the employees were trained to understand
and meet customer needs better.

Performance and Competency Management:

A new global, internet-based Performance Management System Tool, OnTrack,
was successfully launched and used for the first time for quarterly
performance and development reviews of employees.

The Company also introduced a new online Competency Management Tool,
SkiIITrack, which will help identify skill gaps and show the way forward
for employee development and driving functional excellence.

Compensation and Benefits:

Seamless deployment of talent across our Group entities is a critical
element of making this a Great Place to Work and your Company successfully
completed the compensation (excluding some indirect benefits to be taken up
in future) harmonization exercise of its Management Staff across all
Cummins entities in India. Harmonization of indirect benefits would be the
next major step in this direction.

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 similarities and
differences in backgrounds help solve the most complex business problems
and generate innovative ideas.

Gender representation in your Company has significantly improved through
the Company's campus recruitment program. In the year 2008, 89 graduate
engineers (47 females), 15 Chartered Accountants (10 females) and 14 MBAs
(1female) were recruited from reputed institutes across India.

Industrial Relations (IR) and other Initiatives:

The Industrial Relations between the Management and Employees Unions
continued to be cordial. A comprehensive long term wage settlement for
Kothrud Plant was signed on February 12, 2009, in the presence of the
Additional Commissioner of Labour, Senior Management, Associates' Union
Office bearers and production Associates. The long term settlement included
production/productivity increase and a new monthly sectional incentive
scheme based on production, quality & safety. This settlement was well
received by the associates, who also appreciated the fairness of
Management.

Corporate Responsibility:

The Cummins India Foundation (CIF) continues to focus on the following
three core areas:

Higher Education (graduate level & professional diplomas) and particularly
those institutions that cater to traditionally disadvantaged groups. This
initiative included:

- Cummins Scholarship Program - 53 students benefited so far.

- 12 students sponsored by individual employees.

- 42 employees assist these students as mentors.

- Support for Cummins College of Engineering for Women.

Energy and Environment related initiatives, particularly those that sponsor
renewable, lower cost and more energy efficient technologies.

- Your Company is extending the support for Rural Electrification Project
at village Kollha, Orissa.

Local community infrastructure development e.g. healthcare, clean water,
improved roads, improved governance etc.

- About 26 awareness sessions were conducted under the Right to Information
Act.

- Supported the Jaago Re' campaign encouraging employees to register for
voting and assert their right to vote for worthy candidates.

- Construction of a Community Hall near our Kasar Amboli Power Generation
Plant.

- Disaster relief during the natural calamities such as the floods in Bihar
and Columbus, Indiana as well as the China Earthquake.

9. 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.