Hero Honda sees growth tapering off next year

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He is among the CFO's who won the top honours at the CNBC-TV18 CFO awards last night. In an interview with CNBC-TV18, Ravi Sud, CFO, Hero Honda gave his assessment of the economic recovery, his outlook for the two-wheeler industry and the country's transition to GST next year.

Here is a verbatim transcript of his interview on CNBC-TV18. Also watch the accompanying video.

Q: What is your own assessment of the economic recovery? Are you feeling more comfortable with the revival in the macroeconomic environment?

A: I must say that as far as India is concerned the macroeconomic environment is much better than most of the western economies or what the Japanese economy is doing. Whatever happened in the last 18 months, I think India is one of the few countries, which have shown this type of global recovery in the last 6-9 months and there are various indicators.

One of the indicators are how the stock markets are performing, that is one but I will say it with a caveat because stock markets generally go by liquidity which is in abundance. But I think the way the government has handled the situation in the last 6-9 months, particularly since at least I was concerned when the Union Budget came with a fiscal deficit of 6.8% and a target of 6% of GDP growth.

One of the great concerns at that point in time which I had expressed and I am happy that I was wrong is divestment. The way the government is moving towards achieving a large amount of divestment in the next 5-6 months, I think the fiscal deficit of retaining 6.8% seems to be possible and a target of which I had said about 6% maybe now anything between 6.3-6.5% target looks very much achievable.

This improvement in the sentiment and the environment apart from certain setbacks like the poor monsoon fortunately the later part of the monsoon really helped; otherwise the impact would have been much more serious.

The only concern today I have is about the inflation, which the RBI in the recent quarterly view has given very clear signal for things to come. I think inflation would be one of the important things which RBI will continue to monitor and take necessary steps. I will not rule out some spike in interest rates going forward.

Q: What about your sector in specific- phenomenal numbers not just for the industry as a whole but specifically for Hero Honda? Off late you have been toning down expectations. Are you worried that this kind of growth is not sustainable?

A: As I said monsoon was a big concern. If we compare the impact of monsoon in the current year versus 2002-03 or versus 2005, there are many positive things which are in the environment partly supported by government.

Number one is the loan waiver which came last year which was close to USD 14-15 billion that left too much of money with people to spend.

Secondly, the spot prices are definitely much higher than what they were say five years back and government has been supporting higher spot prices.

Thirdly, the government scheme of rural employment, the NREGA scheme which is an ongoing scheme, I think people do have that type of money. Particularly the financial impact which came globally, I think it left scars in the large metropolitan cities.

But people who had the money to spend kept on spending that money and hence if we look at the two-wheeler industry, though it did not grow that much in '09 but in the current year in the first 6-7 months it has already grown more than 15%.

But going forward H2 for the industry, the base would be much higher. So we expect growth to taper off but we are definitely expecting a decent double-digit growth in the current year.

But going forward with GDP of 6-6.5% current year and going forward 7-7.5% and again moving towards growth of around 9% and hopefully, I am pretty sure RBI will take necessary steps to control the inflation.

Disposable incomes are likely to go up and the benefits of economic growth percolating down to the rural or semi urban areas, we believe that fundamentally the industry should continue to grow anything between 7-9% for the next three to five years.

Q: The next year will also see some important legislation come into play i.e. GST or the Direct Tax Code. Are we prepared for these new laws and how confident are you about this transition taking place smoothly?

A: As far as the Direct Tax Code and Goods and Services Tax are concerned, I think these are revolutionary steps in this country. It will take time to understand them.

We must understand that we are a vast country with different culture, different people. To build consensus, issues between centre and the states, some states not falling in line are some important issues.

But once they get implemented I think life is going to be simpler. According to our assessment, prima-facie, I think if GST gets implemented the prices goes to the ultimate customers, and some industries are likely to come down.