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Jan 13, 2017, 09.10 PM | Source: CNBC-TV18

M&M's Pawan Goenka expects normalcy in auto sector by March-end

While demonetisation has hit the auto industry, Mahindra & Mahindra’s captain Pawan Goenka made no bones about the segment returning to normalcy by the end of FY17. Alluding to a positive impact of monsoon and a faster-than-expected pickup in business, Goenka said demonetisation “is really just a short-term effect”.

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M&Ms Pawan Goenka expects normalcy in auto sector by March-end

While demonetisation has hit the auto industry, Mahindra & Mahindra’s captain Pawan Goenka made no bones about the segment returning to normalcy by the end of FY17. Alluding to a positive impact of monsoon and a faster-than-expected pickup in business, Goenka said demonetisation “is really just a short-term effect”.

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Pawan Goenka (more)

President Automotive Sector, M&M |

While demonetisation has hit the auto industry, Mahindra & Mahindra’s  Managing Director Pawan Goenka made no bones about the segment returning to normalcy by the end of FY17. Alluding to a positive impact of monsoon and a faster-than-expected pickup in business, Goenka said demonetisation “is not something that is going to haunt us in the mid to long-term. It is really just a short-term effect”.

“Perhaps, we will see 7-8 percent impact still, overall for the industry. In auto, not compared to last year, but compared to what it had been,” he said, stressing that auto industry will get back to normal by March 31, 2016.

Below is the transcript of Pawan Goenka's interview to Latha Venkatesh on CNBC-TV18.

Q: We have to assess the state of the economy so far - the 8 weeks since November 8 2016. How bad has it got because we got some fairly negative tales from the two wheeler makers and yet the couple of small banking results that we got were not all that disheartening?

A: When we started on November 8, what my expectation was in terms of short-term impact, what actually happened was more than that. I did not expect a huge impact. Perhaps, I had underestimated the cash dependence on economy. It is not about black money, it is about dependence on cash transactions. What has hurt us more is not so much the black money part of it, but the part that people are so used to dealing in cash and just not having the cash, not being able to deal in cash is something that they will take time to get used to.

And therefore, the industry that I am working familiar with, the automotive, the tractor, the impact has been a little bigger than what we had expected. It is wrong to just compare to last year and say it is only 2 percent, 5 percent, 10 percent. We were in a growth momentum. Both automotive and tractors, especially tractors had a huge turnaround this year after two years of slowdown and that momentum got lost. So, instead of growing at another 15-20 percent, we became flat to somewhat negative. So, there was a loss of momentum. Having said that, I would also like to say that if demonetisation does what it set out to do, it is a small price to pay.

Q: Let me tie you down to some numbers. I remember at that presentation you said that you would do 20 percent, not just 15 percent. 15-20 percent growth is what you said, but the actual sales in December, the last numbers we have, tractors is up 9 percent and autos only for that month are down 4 percent. What can be a year-end performance?

A: We think that tractor would be back to more or less what it would have been if demonetisation had not happened. It will not make up for the loss of November-December, but what we had expected in Q4 it will be more or less 2-4 percent lower but tractors would be same because still the positivity about the positive impact of monsoon continues to be there. Once the farmers get used to dealing in cash and starting therefore to buying tractors, it will be alright. The problem is not so much in new tractor sales, problem is in old tractor sales and that is part of the ecosystem. If old tractors do not sell, new tractors cannot sell and that is 100 percent cash, the old tractors. We look at new tractor, but old tractor is 100 percent cash and that is what is slowing us down.

In auto, it will be a little bit longer. Perhaps, we will see 7-8 percent impact still, overall for the industry in auto, not compared to last year, but compared to what it had been. So, I do not just compare to last year, I compare to what should it have been with the growth built into the new year, we will still see some effect. However towards the end of the financial year, we should be more or less back to normal.

Q: There was also another interpretation  that the physiological impact on the consumer has been serious and that real estate could be affected and that has its own impact on consumer demand. So, there was a feeling that even though you improve in March, you may remain steady, you will not grow at the growing pace that you perhaps thought you would do in October. Did you get that sense? I am asking you this question because you all have a finger in lifespaces, in realty, are you getting a sense that there could be negative consumer impact from some quarters?

A: I don't necessarily think so. The reason I say that is the investment in real estate slowed down because real estate had a very high element of unaccounted for money unfortunately. That perhaps is a sector that is biggest impacted by this. Therefore people are waiting for prices to come down and builders don't want to bring the prices down. So, builders are not willing to bring prices down and consumers are not willing to pay the old prices. Once that is fixed I think it should be alright. I put a positive twist, people are not spending money to buy houses, they will probably spend money to buy cars and tractors.

Q: There are also some positive impulses as you say and mainly that is interest rates. We have seen almost a 100 basis points fall in a month or maybe in two weeks, is that going to be a very big trigger?

A: Interest rates are expected to fall for two reasons. One is, the policy rate may come down from maybe next announcement. More importantly banks are now beginning to pass on the gains from the previous announcement to the consumer now. Perhaps the RBI is forcing that in some shape or form. Maybe one of the reasons for not reducing rate last time was also to first say, you give to the consumer what I have given you then ask for more. So, clearly housing rates have come down and that certainly will have a positive impact.    

Q: How do you see the impact of demonetisation on auto industry

A: When we started on November 8, what my expectation was in terms of short-term impact, what actually happened was more than that. I did not expect a huge impact. Perhaps, I had underestimated the cash dependence on economy. It is not about black money, it is about dependence on cash transactions. And what has hurt us more is not so much the black money part of it, but the part that people are so used to dealing in cash and just not having the cash, not being able to deal in cash is something that they will take time to get used to.

And therefore, the industry that I am working familiar with, the automotive, the tractor, the impact has been a little bigger than what we had expected. And it is wrong to just compare to last year. It is only 2 percent, 5 percent, 10 percent. We were in a growth momentum. Both automotive and tractors, especially tractors had a huge turnaround this year after two years of slowdown. And that momentum got lost. So, instead of growing at another 15-20 percent, we became flat to somewhat negative. So, there was a loss of momentum. But having said that, I would also like to say that if demonetisation does what it set out to do, it is a small price to pay.

Q: Let me get back to this momentum question because your last analyst meet was on November 14 after your numbers. And I went through your presentation that the festive season or the harvest festive season, after a long time was better, much better than you anticipated. So, given that growth momentum you referred to, did the last week of December look like that the negatives of the previous seven weeks are receding?

A: Receding, yes. Disappeared, no because October, this year was a phenomenal month, something that we have not seen in at least my lifetime of being involved with this industry. And that was really phenomenal. And from there, we dropped significantly, coming back up. So, it is not something that is going to haunt us in the mid to long-term. It is really just a short-term effect.

Q: Let me tie you down to some numbers. I remember at that presentation you said that you would do 20 percent, not just 15 percent. 15-20 percent growth is what you said, but the actual sales in December, the last numbers we have, tractors is up 9 percent and autos only for that month are down 4 percent. What can be a year-end performance?

A: We think that tractor would be back to more or less what it would have been if demonetisation had not happened. It will not make up for the loss of November-December, but what we expect in Q4 will be more or less 2-4 percent lower. But, tractors would be same because still the positivity about the positive impact of monsoon continues to be there. And once the farmers get used to dealing in cash and starting therefore to buying tractors, it will be alright. The problem is not so much in new tractor sales, problem is in old tractor sales. And that is part of the ecosystem. Old tractors do not sell, new tractors cannot sell. And that is 100 percent cash, the old tractors. We look at new tractor, but old tractor is 100 percent cash and that is what is slowing this down.

In auto, it will be a little bit longer. Perhaps, we will see 7-8 percent impact still, overall for the industry. In auto, not compared to last year, but compared to what it had been. So, I do not just compare to last year, I compare to what should it have been. With the growth built into the new year we will still see some effect, but towards the end of the financial year, we should be more or less back to normal.

Q: You promised to launch in a big way into the petrol variants and you kept part of your promise. What should we expect in the next year or two?

A: Everything that we had planned on doing in terms of automotive and tractor launches, recent events has had no impact on that. Everything is on schedule, will happen. In automotive industry, even tractor industry, the cycles are so long that the product plans do not change based on an event of the day. In fact, our biggest launches that happened were invested in when we had the biggest slowdown 4-5 years ago.

Q: Which is, I guess, the wisest thing to do.

A: That is right. We have some very exciting launches that are happening. We had one year of slowdown after huge launches the year before and next year we will start our launches. The major launch, the big launch that we have next year is product that is codenames U321. We have not talked too much more about it though there is a lot of speculation on it. That is a very important launch for us because we are coming into a segment where right now we have a very small presence and we think the segment has a good potential for us and it is a natural fit for us.

The next launch will be the year after and again there are many small launches that happen which are refreshes and all that I am not talking about. Then the major next launch which happens is what we call S201 which is a product that is based on most successful product of Ssangyong, Tivoli which we have licenced the platform and we are developing our own product based on the Ssangyong platform. That again is a very important launch because it is coming in a sub-segment where we do not have a very strong product right now. And that segment is a segment that is growing very rapidly and every auto manufacturer is launching products in that. And after that, we have products coming in third and fourth year. So, every year, we have one major launch happening.

But right now, the major focus that is coming into product development is in meeting the regulations that are coming in for safety which comes in October 17 and October 19 for old vehicles which is a very important development for us and I am very happy that this is happening in a sense because this makes our product comparable to products sold in western world in terms of safety. India frankly, was lacking, at present in that regard. Then the BS-VI emission norms that come in, in April, 2020 which is a very big deal for us and all of us are busy working on that.

Q: What kind of growth, therefore, are you estimating? How much may you end FY17 in automotives because obviously, this year has had dislocations? So, what is the growth this year and on that, what might be the FY18 number you are targeting?

A: We always refrain from giving a forward looking statement on volume growth potential. Of course, every automaker would work towards growing better than industry. So, do we. I do believe that this year, somewhat slowed down for the industry and for us because of the last two months. And in passenger vehicles segment, the growth was at about 8-10 percent till October and then, now it is flat to slightly negative in the two months. It will probably ramp up back to single digit growth in the next three months. And we will end the year, not much more than 3-5 percent is my guess. So, if I take that into account, next year should be better.

The reason I am saying better is that the momentum that we had lost, there is no reason why it should not come back. There are many exciting launches happening in the industry. Some have been announced, some not yet announced. Every auto maker is working extremely hard to gain market share in this market. It is a hyper competitive market now. The Indian market is perhaps, the most difficult one and one can say that if you can make it in India, you can make it anywhere in the auto industry. So, it is going to be very interesting year for the consumers, for the industry. The prices will be controlled because right now, everybody is in the mode of getting volumes back.

Q: Your Scorpio had a magic, it just captured the imagination. So, what is it that we can expect from the U321? It is a petrol vehicle.

A: Let me tell you officially that U321 is an MPV. MPV we have the products right now but it is not something that has given us good numbers. We do expect U321 will be very competitive against the existing products in that segment and should give us a very good volume.

One cannot plan for a hit. Hit happens when lots of factors come together. I wish every product that we launched was a hit but that is wishful thinking and can never happen. Scorpio was a huge hit for us, Bolero always remained a very good product for us and XUV500 was the next big hit for us. After that we have had successes but not blockbusters. So, we are hoping that soon we will see some blockbusters happening. It could be U321, it could be S201, I don't know, it could be both. One plans for a blockbuster but the product, the design, the pricing, the marketing, the consumer sentiment, the competitive scenario at that point of time, all have to come together. Often Anand Mahindra talks about that launching a product is like launching a movie. If the first weekend is not a hit then it is over.  

Q: One of the lame ducks for Mahindra has been the two wheeler segment. Do you really want to chase it because you have other areas where things are looking hot?

A: We have announced a strategy for two wheeler where we have slowed down in terms of investing in what we call commuter bikes and scooters. We are continuing to sell what we have but not putting any more money in that. So, we have realised that perhaps it is a game that we should not be playing and slowed down on that. At the same time we still believe that two wheeler has a potential if we are in the right segment of two wheelers. A decision now is that the segment that we need to be in is a niche segment of premium bikes and premium scooters perhaps. We have purchased two brands BSA and we are developing right now bikes that will be under that brand.

Q: So, we should hear something shortly?

A: We have already announced that we are going to be doing that. This was a company that we have launched called Classic Legends Private Limited (CLPL) in joint venture with some outside players and we are right now working on those products. So, we think that is the right positioning for Mahindra, right niche for Mahindra and that is where we will be spending our effort on.

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