Expect a benign approach from FM this budget: M&M

The Indian auto industry is set to retain its robust growth trajectory in 2011, following last year's over 30% growth in sales. However, a major challenge for the industry this year remains rising cost of raw materials and shortage of components.

With less than 10 days to the budget, the industry has placed its wishlist to the government asking for a reduction in excise duty from the current 22% and an additional Rs 15,000 tax imposed on big cars with engines over 1500 cc. In an interview with CNBC-TV18, Bharat Doshi, Executive Director & Group CFO and Rajeev Dubey, President - HR, M&M spoke on their expectations from the finance minister this budget and the road ahead for the auto industry. Below is a verbatim transcript. Also watch the accompanying video. Q: Going in to the budget what do you expect this time around from the industry as a veteran and what kind of an impact would any kind of excise duty have on the demand situation? Doshi: I expect the Finance Minister to be pragmatic and thinking about long-term growth strategy which is sustained growth rather than thinking about short-term issues. Secondly at this juncture, as industry one would say the excise duty at 10% is also consistent with the long-term GST. So, one would expect a benign approach from the Finance Minster. There could be some tinkering here and there but I think budget basically should look at long-term sustained growth as part of the strategy. Q: If indeed there is some 2% hike in excise duty which a lot of people are expecting for small cars, CVs even utility vehicles, it is not unlikely that it happens a) would you pass it down and b) given that interest rates are also high now; do you expect that to have any kind of impact on demand? Doshi: Let us put it this way that on interest rate if there are gradual increases, one has seen that the market has been able to absorb it and has not had so far an impact on demand. So longer-term there would be an impact, if there is an unusual hike in interest rates. The inflation is actually coming under grips compared to last month. You can see the reversal, one feels that step will not happen. As to if excise was increased by 2%, whether it would be passed down or not, I have a feeling that at this juncture the market is buoyant and there would be a partial pass off; whether one can pass it off fully or not. But the real concern right now would be more about inflationary impact overall from the budget, if the Finance Minister is not pragmatic, and you'll find that general inflation impact. Already the industry is facing rising input costs. There will be customer resistance and you will see an impact on demand if there is any irrational increase of excise duty rates. Q: What in your sense is the growth that you are expecting for the auto industry because it is well documented that it will slowdown for sure compared to the 30% that we saw last year for 2011 what is your estimate of the growth? Doshi: If you are talking about FY12 you have already seen the kind of growth in the next one month it is not going to make that much of a difference. If you are talking about the calendar year 2011, then there would be an impact but we are still seeing good robust demand particularly with the rural income growing. And while we have seen negative aspects of food price increases, one is also seeing that the agricultural incomes are growing for them. So there is therefore that balancing factor in rural India. Q: The one issue which saw some reaction in your stock price was when you unveiled that aggressive ESOP plan, if you do it at par then you will have to pass nearly Rs 1200 crore over a period of time through your P&L. So how will this ESOP plan be structured, how will the vesting happen because your P&L would need to be adjusted by that amount over FY12, FY13- FY14 onwards? Dubey: To give you a background, we have had stock option schemes operating since 2000 and all that we have done this year is to issue the stock with a much deeper discount, which means three things. One is less dilution, better perceived value for the employees and less liquidity requirement for the employees in purchasing the grant. As far as the expensing is concerned, under IFRS over the vesting period, the expense is the same. There is absolutely no difference whether you give a deep discount or you give a small discount. Doshi: I would like to add one important thing; you talked about the figure of Rs 1200 crore. But let me explain that the total issue of stock to the employees trust has not been utilized to give immediate grant. What has been given as grant is only 0.2% to the employees at this juncture. In the previous occasion when the total shares issued were 1.28 crore, at that time, it took us 10 years to absorb that number in terms of grant. So it is not that you are seeing a Rs 1200 crore debit coming immediately and hitting your P&L account. That I thought I must underline here that the number which you said is the gross number for the total number of shares, which was issued to the trust. But the shares issued to the employee will take quite a while before they impact the P&L account. As Mr Dubey explained under IFRS, it doesn't make a difference whether they were at the full market price or whether they were at deep discounts. I must also add that whatever is the P&L impact has no impact on networth because what is debited in the P&L account is credited automatically in the share premium account. So there is no cash outgo arising out of this issue of ESOP. It is very important for the market to appreciate that because sometimes people feel that does it mean more cash outflow. It means less cash outflow. Otherwise we would be ending up paying much higher salaries. Secondly, as Mr Dubey underlined that if suppose it was issued at market price as we were doing in the past, we would have had to issue more than 2.5 times the number of options compared to what one has to issue now. So it is lower dilution for the shareholders. Q: Can we pin you down to a couple of numbers, what is the exact dilution that you are looking at and once IFRS comes in, what will the exact P&L impact be? Dubey: The dilution on account of the current grant would be one-fifth of 3%. So you can see that it is less than 1%. Q: Over what period will this entire grant be exhausted? Dubey: The vesting is over a five-year period in equal installments. So the expensing would be done over a five-year period.