Mahindra & Mahindra Ltd.: Pawan Goenka on lessons from Covid and vision 2021

If all firms deliver down the stock degree to 20-25 days and additionally do an excellent stock management of their crops and to the suppliers, the auto trade may take out as a lot as Rs 50,000 crore from the working capital, says Pawan Goenka, MD & CEO, M&M.

What’s your view for the auto sector for 2021? Are we in for a superb yr or an incredible yr?
One would all the time hope it’s a nice yr however one factor that’s for certain is that by now the demand is not a pent-up demand, it’s a structural demand that’s coming again. Anybody who had doubted that ought to actually not be involved about it.

Quantity two, what may be very clear is that with the brand new product launches, all firms have plans for 2021. Most of the firms had held again on product launches and that’s definitely going to spur demand now. On high of that, if the federal government is available in with some type of stimulus to develop the auto demand, then the demand will actually take off and will result in an incredible yr.

What is occurring within the final couple of months is the truth that the HCV trade which was lagging for the final a number of months has began exhibiting indicators of revival. There was good development in November and December. As soon as HCV can be on the expansion path, the auto trade total ought to look fairly good in FY22.

The auto sector had contracted and this occurred in 2019 earlier than Covid got here. Auto firms had made a case for a GST reduce. Demand has come again regardless of lack of GST reduce. Is this type of GST charge one thing which the client has accepted?
I’d say so. There is no such thing as a doubt that trade would like to get a reduce in GST charge as a result of the GST charge may be very excessive in auto but it surely has type of develop into the norm now and everyone realises that in case you are shopping for a greater than 4-meter lengthy automobile, you’ll have to pay a big quantity of oblique taxes and that has type of develop into a part of the general pricing.

However what I’d nonetheless request the federal government to contemplate is that whereas they GST charge cuts will not be attainable due to the necessity for tax revenues in these tough occasions, they need to be simplified. There are simply too many charges. There are eight or 9 completely different GST charges! I’d actually hope that the federal government will simply maintain two charges – 28% and 43% — and not have all of those completely different charges. Proper now, I can’t count on a charge discount. Maybe when the financial system is absolutely again on observe, the federal government may rethink charge discount.

All firms have taken large price cuts and due to that, margins have expanded. Abruptly Q2, Q3 and even This fall numbers might look sturdy. What’s your view on the highest line? That could be a operate of demand and affordability.
Let me first go to what you mentioned about large price cuts. I’d say that really greater than half of what we’ve seen are usually not price cuts however eradicating the fats, price we’re incurring which maybe was not required. That’s the place a variety of the price discount has occurred by way of journey. Use of digital media for conferences has resulted in a big discount in price and it will by no means come again. Perhaps journey will go up considerably however in all probability 75-80% will proceed. The reductions have occurred in occasions, stock prices and communication prices. These is not going to come again to earlier ranges. I’d say greater than half of the reductions are is for good and proceed to assist in our backside line.

Now coming to the highest line, it’s a operate of quantity and operate of value. Within the auto trade, this yr there has not been any vital value reduce or elevated incentives given to propel demand. Actually, they’re just about on the degree of final yr or could also be even barely higher than final yr by way of total incentives that needed to be given to the purchasers to get volumes.

Additionally due to BS-VI, costs have gone up and subsequently per unit income has gone up which is able to result in a high line enhance. Provided that volumes are additionally going up and we don’t count on 2021 to be any worse than 2020 there will likely be a income development for many firms. After all, there are some firms that can do higher, some is not going to and competitors will proceed. However total for the trade, we’ll see an affordable income development in 2021.

One additionally must take into account that many firms haven’t handed on the total BS-VI price enhance but and as the businesses develop into extra snug with the continued quantity or continued demand, the hole within the BS-VI price enhance will get handed on throughout this yr. The massive factor looming forward of us is the commodity value enhance, which can even result in value enhance. That isn’t fascinating as a result of if we had been to go on all the price will increase, then there could possibly be a big enhance in costs. So commodity value will increase are a matter of concern proper now for the auto trade.

Do you suppose that now’s the time for firms to revisit capital allocation methods throughout the board? How a lot has it and will likely be altered because of the pandemic affect?
I’d say that Covid was an excellent trainer for us each in private life and in enterprise life. Firms together with Mahindra have been introspective in the course of the time of lockdown in March, April, Might to see the place our enterprise goes, what we must always focus on and what we must always not do.

One factor that’s turning into very clear is that the majority firms are veering in direction of their core and getting out of issues that had been allow us to say a playground for firms to do this and strive that. Most firms are coming again to their core the place they’ve a proper to win, the place they’ve energy in India and globally and that robotically is resulting in capital allocation which goes extra in direction of core.

Doubling down on a couple of issues, getting out of some issues is sweet for every firm total as a result of spreading wings too far, within the final three, 4, 5 years, for a lot of firms, it has in all probability led to dilution of the place we ought to be spending cash and this capital allocation will certainly assist. Within the case of Mahindra, for instance, we’ve made very clear bulletins on what we’re going to be getting out of.

It was time for us to introspect and see what’s Mahindra, what’s Mahindra model, the place ought to we put our cash, what we ought to be sturdy in and over the subsequent two to 4 years, that’s going to result in a significantly better enterprise efficiency each by way of high line in addition to backside line for Mahindra and for all the businesses which have used the Covid time to introspect and get again to the core, do capital allocation the place it issues and not get into — what I’d name — flights of fancy.

How would be the method with regards to electrical automobiles?
We had communicated on 1st of January that Mahindra goes to be focussing on core SUV and probably not get into the rest with regards to passenger automobiles. We’ve all the time been a SUV participant and we’ve a really sturdy model historical past. There was a drop in market share within the final a number of years and the sport that we’ve to play now’s to essentially develop into the SUV participant in India and hopefully in different components of the world and that’s one a part of our focus.

The second a part of our focus is electrical automobiles which we once more talked about on 1st of January the place we’re going to be doubling down. We already are an organization that has invested the utmost in electrical automobiles in India with nearly Rs 1,000 crore plus of funding made already. Our focus to date had been on the shared mobility, on final mile connectivity, on final mile supply and the merchandise that we’ve like Treo Zor which is doing extraordinarily effectively proper now and has nearly 4 to 6 months of demand that we aren’t in a position to meet. One other product Atom is developing, the e-KUV is developing very quickly. The e-Verito will get phased out. All of those merchandise had been aimed toward shared mobility and final mile connectivity.

Now what we’re saying is that as we transfer ahead, this half is ok, it will proceed, that is the place the quantity development will likely be in India, that is what India wants proper now however we’re additionally going to get into private mobility area in an enormous means. The one product that we had talked about earlier was the S210 which we had proven within the Auto Expo. It’s to be launched in direction of the tip of subsequent yr however we are actually saying that we’re going to be working on a number of platforms for private mobility, not simply S210.

S210 has come out of XUV300 which is an IC engine transformed into electrical automobile. We’re additionally going to be beginning work on a few platforms that are what we name born electrical platforms or platforms designed for electrical automobiles and that enables us to get a significantly better efficiency. That’s the place we’re placing in more cash and that’s what we meant after we mentioned doubling down on electrical automobiles.

Do you suppose revival of demand within the rural sector is going through challenges on the again of the farm invoice agitation?
The farm invoice agitation may be very unlucky and I hope there’s a resolution quickly. However I’d say that that doesn’t essentially change what is occurring within the agri sector or the agricultural sector of India. The rabi crop sowing has been extraordinarily good and the crop will likely be superb, maybe among the finest rabi crop that India has ever seen. The farmer revenue is excellent and subsequently there isn’t any purpose why there ought to be any let up within the agri development in India, not less than for the remainder of this yr.

Once more, after we come to the kharif crop of 2021, it’ll rely to some extent on the monsoon however as we’ve superb reservoir ranges maybe the results of monsoon is not going to be very extreme. all of this, I must suppose that the agri demand or the tractor demand that has been unbelievable to date will proceed to stay good for not less than the remainder of this rabi season and for the kharif season of subsequent yr. Then we must wait to see what occurs within the rabi season of 2021.

Total, it isn’t only a query of what’s taking place with sowing in rabi or kharif. It’s every part coming collectively very effectively as we had mentioned a number of months in the past — the farm revenue, the sowing, the degrees of reservoirs. The general optimistic sentiment within the rural space, within the agriculture space after all considerably tempered due to the farm agitation proper now however that will likely be quickly resolved and subsequently I stay very bullish on the agri sector and on the general rural demand coming from the revenue of agri sector for even durables which might be bought in rural areas.

Do you suppose that customers at this level are prepared to soak up any type of value ?
The demand to date may be very sturdy. Many firms are constrained by what they will manufacture. Mahindra is a type of and we’ve very sturdy demand. So provided that situation, a marginal enhance in costs is feasible and the truth is usually in January yearly, costs have elevated. So we’ve introduced 2% value enhance. It shouldn’t be a dampener on demand.

The actual proof is a reality that there’s not that a lot of an expectation that prospects have had within the final a number of months on reductions of subvention of pricing and that type of says that the purchasers are maybe ready to pay somewhat bit extra for the product, provided that we’ve a requirement provide scarcity. A partial enhance may be very a lot doable for many firms and finish of the day, firms must do it as a result of no one can take in the type of commodity value will increase that we’re seeing and one must merely get used to it. Not solely auto, the impact of commodity value rise will likely be felt by customers of virtually all type of sturdy items.

Proper now, everyone is worked up about the truth that demand is coming again however there can be some extent at which reductions, value struggle, market share good points, the strategic calls will likely be taken. Do you see that taking place in 2021?
I want I knew whether or not that can occur or not. My take is that we are going to not develop into irrational. The auto trade total has gone by way of some very tough occasions due to the investments in BS-VI which led to extend in prices most of which couldn’t be handed on. In some sense, the price discount that occurred throughout Covid outbreak has come to the rescue and subsequently most firms have managed to take care of their revenue margin.

Actually Mahindra’s revenue margin as we introduced within the second quarter was increased than what it was within the earlier yr despite all of the challenges. Due to this fact, in some sense, the businesses are usually not in a dire scenario. The P&L is wanting fairly good, the steadiness sheet is wanting extraordinarily good as a result of the stock discount that has occurred by drive, a brand new lesson for us that hopefully will proceed, Total stock within the trade and steadiness sheets are wanting superb; the supplier funds, buyer funds are taking place higher than what it has been within the regular occasions. There is no such thing as a monetary stress that I see on the auto firms proper now and subsequently I don’t see something illogical or irrational taking place within the subsequent six to 9 months. However making predictions concerning the future is a harmful factor as a result of we have no idea what’s going to occur tomorrow.

What’s the stock degree within the trade? At what degree would stock ranges hassle sellers and might harm demand?
Usually, on a median, earlier than Covid, within the passenger automobile section a 30-35 days’ stock was thought of to be good. Now, most firms are saying 30-35 days is just too excessive and we have to be taught to work with 20-25 days of inventories. Mahindra is aiming in direction of that type of quantity proper now. We’re decrease than that due to the provision constraints however we’re aiming at 20-25 days of stock as being the traditional stock when provide constraints are usually not there and guaranteeing that we don’t get right into a scenario the place we enhance stock past this degree.

I believe that will be an excellent degree to goal for and I’ve carried out a back-of-the-envelope calculation which tells me that if all firms deliver down the stock degree to 20-25 days and additionally do an excellent stock management of their crops and to the suppliers, the auto trade may take out as a lot as Rs 50,000 crore from the working capital. This can be a studying from Covid that can assist the trade cut back working capital and enhance the steadiness sheet of virtually all the businesses.

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