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Jul 11, 2013, 02.20 PM IST | Source: CNBC-TV18

What production cuts by M&M, Maruti mean for auto industry

M&M and Maruti are correcting their stock as per market conditions. For more than three-four months, these companies have been facing a fall in sales, but they never cut down on production.

The automobile industry in India, especially the passenger cars and medium and heavy trucks, has seen a slowdown over the past one year as customers postponed new purchases amid expensive loans, high petrol prices and the overall economic slump. Demand also shifted to utility vehicles (UVs) from sports utility vehicles (SUVs) as petrol-diesel price gap widened and several companies launched new compact UVs.

Against this backdrop, Mahindra and Mahindra  announced that they will observe ‘no production days’ at their automotive plants this month. Maruti Suzuki too has reduced production of diesel engines and diesel cars following the slowdown in demand. It is now operating only two shifts instead of three at its Manesar plant.

But, Jagdish Khattar, CMD, Carnation Auto told CNBC-TV18 that it was unusual for Maruti to run three shifts in the first place. He feels M&M and Maruti are correcting their stock as per market conditions. For more than three-four months, these companies have been facing a fall in sales, but they never cut down on production.

As a result, inventory at the dealer level and the manufacturer level went up. Plus, anyways during the monsoon season, sales go down, he explains. He expects these companies to start fresh production during the festival time. According to Khattar the skewed policy of fuel pricing should be corrected to gauge the true potential of each fuel.

Sudarshan Shreenivas of India Ratings & Research is not too positive on the sector . He sees capacity utilisation levels falling well below 57-58 percent levels in FY14 from 65 percent last year.

The discounts car manufacturers have to offer, along with increased competition will have an impact on margins of these companies, he adds. He expects slowdown to last till November atleast. "If there is a greater than expected output in agriculture then that could probably kick-start some demand in rural areas."

Below is the verbatim transcript of Sudarshan Shreenivas & Jagdish Khattar’s interview on CNBC-TV18

Q: There is news that Maruti is suspending one line of production in Manesar at its diesel output plant and now Mahindra & Mahindra (M&M) a company which was very late in reporting slower and slower production tells us that as part of aligning its production it will be observing no production days at its automotive plants for a period of 1 to 8 days in the month of July. How are you interpreting this kind of news? Are you getting a sense that there is more of such bad news to come or do you think this is pretty much it?

Khattar: No, I think let us keep in mind that suspending production, for example like Maruti has decided, but Maruti was working for three shifts on the diesel plant, very unusual. Usually you have two shifts in a day. So anyway the diesel market has been affected, so that is what happened in Maruti and Mahindra. What is really happening is that over the last 3-4 months and earlier than that the sales had gone down, but the manufacturers continued to produce. As a result, inventory at the dealer level and at the manufacturer level is huge, then you have the monsoons. In any case the market goes down during monsoons. So the production would have been gone down.

What they are really doing is they are correcting their stock according to market conditions. So the situation has not become worse, has not become better. It is merely a correction which was postponed so far. Try and see that stocks are at reasonable levels and then comes the festival period. Usually the festival period does better, though we have experienced that sometimes even the festival period does not show what is expected, but they are all hoping that it would be better, but at that time they will have fresh production and they will wait for the market.

Q: The takeaway is that perhaps these production cuts are just seasonal in nature and then things should normalize in one or two months?

Khattar: At the end of the day, automobile goes along with the economy. There is a thumb rule of the gross domestic product (GDP) - automobile grows at 1.5 times the GDP. We are seeing a huge problem as far as depreciating rupee is concerned, and  chances of interest rates going down are also less, so I do not know. Couple of months back people were hoping that all these negatives would not be there.

Q: The cash discounts have widened both on petrol as well as on diesel?

Khattar: Earlier people used to buy diesel or natural CNG because of the price differential. That has gone now. People will not buy depending upon the fuel price, but on the product. Four-six months back, you had a waiting list for diesel, today it is a discount. Everyone went gaga over diesel and SUVs that they are the growth areas. In this country you cannot have SUVs of Rs 8 lakh when Alto is not selling. The skewed policy of fuel pricing has got to be corrected and only then will we see the true potential of each fuel and the customer's preference for the products.

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