Pawan Goenka on lessons from Covid and Vision 2021

Commodity price increases are a matter of concern right now for the auto industry.

ETMarkets.com
If all companies bring down the inventory level to 20-25 days and also do a very good inventory control in their plants and to the suppliers, the auto industry could take out as much as Rs 50,000 crore from the working capital, says Pawan Goenka, MD & CEO, M&M.

What is your view for the auto sector for 2021? Are we in for a good year or a great year?
One would always hope it is a great year but one thing that is for sure is that by now the demand is no longer a pent-up demand, it is a structural demand that is coming back. Anyone who had doubted that should really not be concerned about it.

Number two, what is very clear is that with the new product launches, all companies have plans for 2021. Many of the companies had held back on product launches and that is certainly going to spur demand now. On top of that, if the government comes in with some kind of stimulus to grow the auto demand, then the demand will really take off and will lead to a great year.


What is happening in the last couple of months is the fact that the HCV industry which was lagging for the last several months has started showing signs of revival. There was good growth in November and December. Once HCV is also on the growth path, the auto industry overall should look pretty good in FY22.

The auto sector had contracted and this happened in 2019 before Covid came. Auto companies had made a case for a GST cut. Demand has come back despite lack of GST cut. Is this kind of GST rate something which the customer has accepted?
I would say so. There is no doubt that industry would love to get a cut in GST rate because the GST rate is very high in auto but it has sort of become the norm now and everybody realises that if you are buying a more than 4-meter long car, you will have to pay a significant amount of indirect taxes and that has kind of become part of the overall pricing.

But what I would still request the government to consider is that while they GST rate cuts may not be possible because of the need for tax revenues in these difficult times, they should be simplified. There are just too many rates. There are eight or nine different GST rates! I would really hope that the government will just keep two rates – 28% and 43% -- and not have all of these different rates. Right now, I cannot expect a rate reduction. Perhaps when the economy is fully back on track, the government could reconsider rate reduction.
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All companies have taken massive cost cuts and because of that, margins have expanded. Suddenly Q2, Q3 and even Q4 numbers may look strong. What is your view on the top line? That is a function of demand and affordability.
Let me first go to what you said about massive cost cuts. I would say that actually more than half of what we have seen are not cost cuts but removing the fat, cost we are incurring which perhaps was not required. That is where a lot of the cost reduction has happened in terms of travel. Use of digital media for meetings has resulted in a significant reduction in cost and this will never come back. Maybe travel will go up somewhat but probably 75-80% will continue. The reductions have happened in events, inventory costs and communication costs. These will not come back to earlier levels. I would say more than half of the reductions are is for good and continue to aid in our bottom line.

Now coming to the top line, it is a function of volume and function of price. In the auto industry, this year there has not been any significant price cut or increased incentives given to propel demand. In fact, they are pretty much at the level of last year or may be even slightly better than last year in terms of overall incentives that had to be given to the customers to get volumes.

Also because of BS-VI, prices have gone up and therefore per unit revenue has gone up which will lead to a top line increase. Given that volumes are also going up and we do not expect 2021 to be any worse than 2020 there will be a revenue growth for most companies. Of course, there are some companies that will do better, some will not and competition will continue. But overall for the industry, we will see a reasonable revenue growth in 2021.

One also needs to keep in mind that many companies have not passed on the full BS-VI cost increase yet and as the companies become more comfortable with the continued volume or continued demand, the gap in the BS-VI cost increase will get passed on during this year. The big thing looming ahead of us is the commodity price increase, which will also lead to price increase. That is not desirable because if we were to pass on all the cost increases, then there could be a significant increase in prices. So commodity price increases are a matter of concern right now for the auto industry.
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Do you think that now is the time for companies to revisit capital allocation strategies across the board? How much has it and will be altered due to the pandemic impact?
I would say that Covid was a very good teacher for us both in personal life and in business life. Companies including Mahindra have been introspective during the time of lockdown in March, April, May to see where our business goes, what we should focus on and what we should not do.

One thing that is becoming very clear is that most companies are veering towards their core and getting out of things that were let us say a playground for companies to try this and try that. Most companies are coming back to their core where they have a right to win, where they have strength in India and globally and that automatically is leading to capital allocation which is going more towards core.
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Doubling down on a few things, getting out of a few things is good for each company overall because spreading wings too far, in the last three, four, five years, for many companies, it has probably led to dilution of where we should be spending money and this capital allocation will definitely help. In the case of Mahindra, for example, we have made very clear announcements on what we are going to be getting out of.

It was time for us to introspect and see what is Mahindra, what is Mahindra brand, where should we put our money, what we should be strong in and over the next two to four years, that is going to lead to a much better business performance both in terms of top line as well as bottom line for Mahindra and for all the companies that have used the Covid time to introspect and get back to the core, do capital allocation where it matters and not get into -- what I would call -- flights of fancy.

How will be the approach when it comes to electric vehicles?
We had communicated on 1st of January that Mahindra is going to be focussing on core SUV and not really get into anything else when it comes to passenger vehicles. We have always been a SUV player and we have a very strong brand history. There has been a drop in market share in the last several years and the game that we have to play now is to really become the SUV player in India and hopefully in other parts of the world and that is one part of our focus.

The second part of our focus is electric vehicles which we again talked about on 1st of January where we are going to be doubling down. We already are a company that has invested the maximum in electric vehicles in India with almost Rs 1,000 crore plus of investment made already. Our focus so far had been on the shared mobility, on last mile connectivity, on last mile delivery and the products that we have like Treo Zor which is doing extremely well right now and has almost four to six months of demand that we are not able to meet. Another product Atom is coming up, the e-KUV is coming up very soon. The e-Verito will get phased out. All of these products were aimed at shared mobility and last mile connectivity.

Now what we are saying is that as we move forward, this part is fine, this will continue, this is where the volume growth will be in India, this is what India needs right now but we are also going to get into personal mobility space in a big way. The only product that we had talked about earlier was the S210 which we had shown in the Auto Expo. It is to be launched towards the end of next year but we are now saying that we are going to be working on multiple platforms for personal mobility, not just S210.

S210 has come out of XUV300 which is an IC engine converted into electric vehicle. We are also going to be starting work on a couple of platforms which are what we call born electric platforms or platforms designed for electric vehicles and that allows us to get a much better performance. That is where we are putting in more money and that is what we meant when we said doubling down on electric vehicles.

Do you think revival of demand in the rural sector is facing challenges on the back of the farm bill agitation?
The farm bill agitation is very unfortunate and I hope there is a solution soon. But I would say that that does not fundamentally change what is happening in the agri sector or the rural sector of India. The rabi crop sowing has been extremely good and the crop will be very good, perhaps one of the best rabi crop that India has ever seen. The farmer income is very good and therefore there is no reason why there should be any let up in the agri growth in India, at least for the rest of this year.

Again, when we come to the kharif crop of 2021, it will depend to some extent on the monsoon but as we have very good reservoir levels perhaps the effects of monsoon will not be very severe. Looking at all of this, I would have to think that the agri demand or the tractor demand that has been unbelievable up to now will continue to remain good for at least the rest of this rabi season and for the kharif season of next year. Then we will have to wait to see what happens in the rabi season of 2021.

Overall, it is not just a question of what is happening with sowing in rabi or kharif. It is everything coming together very well as we had said several months ago -- the farm income, the sowing, the levels of reservoirs. The overall positive sentiment in the rural area, in the agriculture area of course somewhat tempered because of the farm agitation right now but that will be soon resolved and therefore I remain very bullish on the agri sector and on the overall rural demand coming from the income of agri sector for even durables that are sold in rural areas.

Do you think that consumers at this point are ready to absorb any kind of price ?
The demand up to now is very robust. Many companies are constrained by what they can manufacture. Mahindra is one of those and we have very robust demand. So given that scenario, a marginal increase in prices is possible and in fact normally in January every year, prices have increased. So we have announced 2% price increase. It should not be a dampener on demand.

The real proof is a fact that there is not that much of an expectation that customers have had in the last several months on discounts of subvention of pricing and that kind of says that the customers are perhaps in a position to pay a little bit more for the product, given that we have a demand supply shortage. A partial increase is very much doable for most companies and end of the day, companies will have to do it because nobody can absorb the kind of commodity price increases that we are seeing and one will have to simply get used to it. Not only auto, the effect of commodity price rise will be felt by users of almost all sort of durable goods.

Right now, everybody is excited about the fact that demand is coming back but there would be a point at which discounts, price war, market share gains, the strategic calls will be taken. Do you see that happening in 2021?
I wish I knew whether that will happen or not. My take is that we will not become irrational. The auto industry overall has gone through some very difficult times because of the investments in BS-VI which led to increase in costs most of which could not be passed on. In some sense, the cost reduction that happened during Covid outbreak has come to the rescue and therefore most companies have managed to maintain their profit margin.

In fact Mahindra’s profit margin as we announced in the second quarter was higher than what it was in the previous year in spite of all the challenges. Therefore, in some sense, the companies are not in a dire situation. The P&L is looking reasonably good, the balance sheet is looking extremely good because the inventory reduction that has happened by force, a new lesson for us that hopefully will continue, Overall inventory in the industry and balance sheets are looking very good; the dealer payments, customer payments are happening better than what it has been in the normal times. There is no financial stress that I see on the auto companies right now and therefore I do not see anything illogical or irrational happening in the next six to nine months. But making predictions about the future is a dangerous thing because we do not know what will happen tomorrow.

What is the inventory level in the industry? At what level would inventory levels bother dealers and may hurt demand?
Typically, on an average, before Covid, in the passenger vehicle segment a 30-35 days’ inventory was considered to be good. Now, most companies are saying 30-35 days is too high and we need to learn to work with 20-25 days of inventories. Mahindra is aiming towards that kind of number right now. We are lower than that because of the supply constraints but we are aiming at 20-25 days of inventory as being the normal inventory when supply constraints are not there and ensuring that we do not get into a situation where we increase inventory beyond this level.

I think that would be a very good level to aim for and I have done a back-of-the-envelope calculation which tells me that if all companies bring down the inventory level to 20-25 days and also do a very good inventory control in their plants and to the suppliers, the auto industry could take out as much as Rs 50,000 crore from the working capital. This is a learning from Covid that will help the industry reduce working capital and improve the balance sheet of almost all the companies.
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