One sector that will be a big beneficiary of the government's rural push is the tractor space. In an interview with CNBC-TV18, Pawan Goenka, Managing Director of Mahindra and Mahindra (M&M) discussed about the growth prospects.
We are going in to the year (FY19) with almost no headwinds. The agriculture output has been good, the MSP prices have been good, the government focus on agricultural and rural development is absolutely very high and very first indication of monsoon also is positive, goods and services tax (GST) is all settled in. So I don’t see any reason why we should have a negative growth during this year, he said.
Below is the verbatim transcript of the interview.
Sonia: I wanted to start first with the tractor growth story because year-to-date things have looked very good. For M&M itself it has been a 19 percent growth and you have in the past spoken about 8-10 percent growth for the next year as well but given that things are looking so good, do you think you could outdo that projection?
A: It has been a very good year and as we look at the next year on back of two very good years, the normal growth in the tractor industry over a long-term always has been 8-10 percent. So starting off the year to project a growth much higher than 8-10 percent will be difficult but we will wait to see how the monsoon forecast comes up and then they will have to look whether industry will surprise or not. So right now we are going in with a view that the growth will be in a normal range, which is as low as 6 if the monsoon is not good and as high as 10 if the monsoon is good but we have had two very good years and on top of that to get a 8-10 percent growth will be very good third year.
Latha: This is also happening at a time when now metal prices have remained strong for the third year in a row, so will you make as much EBITDA on this tractor sales?
A: If you look at our performance during this year, up to Q3 financial year 2018, we have managed our margins in spite of all the commodity price increases. Obviously when volume goes up, it does help us to get good EBITDA level because our fixed cost gets distributed over a larger volume. So we have done quite okay up to now.
What happens next year will depend on many factors, will depend on what the volume growth is, will depend on what the commodity price increases are, will depend on how much of it we can pass on but overall I don’t expect a significant risk to a profitability unless we have some major negative surprise.
Anuj: Is there a risk right now because we have had two back to back good monsoons and even though right now early indications from MET are that the monsoon should be normal, given the kind of base effect that we have seen for the industry is there a risk that this year if things don’t stay as good as they were for last two years, there could be some decline in overall volumes?
A: I would be very surprised if that happens because we are going in to the year with almost no headwinds. The agriculture output has been good, the MSP prices have been good, the government’s focus on agricultural and rural development is absolutely very high and very first indication of monsoon also is positive.
Goods and services tax (GST) is all settled in. So I don’t see any reason why we should have a negative growth during this year. What I would say is that going in to the year because of two very good years, I don’t expect to get another 20 percent growth. I would right now say 8-10 percent growth is what we would expect on a normal monsoon, could be little bit higher, could be little bit lower but that is a range that we would talk in.
I should also say that this year, we are going to end up as an industry as the highest volume ever – 8-10 percent higher than the previous high which was in FY13.
Sonia: I wanted to also move towards the utility vehicles space because very exciting launches planned over there. In the compact sport utility vehicles (CSUV) space, now the larger SUV market is shrinking a bit and everyone has moved towards compact SUVs, you have an impending launch there as well. Tell us about the market and how it is growing and when can we see the new launches?
A: For the country, SUV growth has been phenomenal and the last two years, SUVs have significantly outperformed the passenger car segment and today it constitutes 28-29 percent of the total passenger vehicle volume comes from SUV which is perhaps amongst the highest in the world of any major auto market.
Therefore, SUV players or SUV launches have been very high and almost every other launch these days is SUV launch.
Going into next year, I would expect that outperformance of SUV over passenger cars should continue. Perhaps the gap will not be as high as it has been in the last two-three years but it should continue. For Mahindra, we have two major launches coming up and also G4 Rexton from Ssangyong coming in as a high-end SUV and therefore we have three launches that will happen of new products during this year. Two of these three launches are in volume segment and therefore we would expect to see a significant growth in our volume during next year.
What happens to the market will depend on overall growth of SUV industry. So I cannot predict that but what I would like to say with reasonable confidence that we should see a good volume growth for M&M and SUV segment on the back of these two launches.
Latha: Would you put some number on that significant growth?
A: I would not want to project numbers but all I can say is these two products are in high volume segment and can easily give us additional volume of 8,000-10,000 vehicles once both of them are launched. 8,000-10,000 based on current volume, which is about 20,000 – you can sort of do a math.
Sonia: what about the Ford partnership, what kind of SUV launches are we looking at over there? If not SUVs then Sedans, how is it going to play out over the next six-twelve months between M&M and Ford?
A: We have had this alliance teams working for the last six months to pin down what are the things that we could be doing together and we have announced on Thursday last week that there are five MoUs that we have signed to work on some specific things. The CSUVs as we call it, which will be a Mahindra platform on which there will be a Ford vehicle that will probably get launched – the Ford vehicle – somewhere in 2021 or thereabouts. There is another SUV that we are right now working on to decide whether we should have a common platform. There is engine sourcing that is happening from Mahindra to Ford for some of the India products and potentially for their global products also. So lots going on in that space and we are very happy with the way things are progressing right now.
Of course, new product launches will not happen in the immediate future, it always takes three-four years but lot of things going on, all positives.
Latha: Let me come to the big sunrise product for you, the investment in electric vehicles. It is Rs 600 crore in terms of investment and 12,000 vehicles capacity by September 2018, what does this to the profit and loss (P&L), will this be a competitive product or will you have to bleed for a year before you start making money?
A: It depends a lot on what others do in terms of pricing. As far as we are concerned, we believe that there is now – the prices are coming down and the costs are coming down and we believe that unless the market becomes irrational and unless there is an abnormal price competition to grab volume, we should see a reasonable – I cannot imagine right now getting the same kind of margin as we get in other vehicles but we should start making small profit fairly soon. Lot of the selling of electric vehicles will happen on tender basis. There is a severe competition on tender basis, so I think we are over the situation of having to have a variable cost loss and as we move forward, I would expect to start seeing little bit – various margin coming into variable cost level and as volumes go up then we would see overall profitability but I would say that at an overall profitability level, it will take a couple of three years before we can start seeing sort of positive based on the volume growth that we are going to see and volume growth becomes very important and competitive pricing becomes very important.
Latha: If I read the last statement from Maruti, they were going to launch only in 2020, wasn’t it? So do you expect irrational competition?
A: There are many players who have announced their desire to come into electric vehicles, some are already now here and some have said 2019, some have said 2020 and there are some Chinese players also who are right now not in the passenger vehicle space but in commercial vehicle space, so the space is going to get crowded.
Sonia: In terms of margins, in the quarters gone by, the margins have improved both for tractors as well as the auto segment, tractors I take your point about maintaining it at these levels but in autos, is there scope of higher margins because not only in LCVs but in HCVs, MCVs etc, now we are getting feedback that a lot of higher tonnage trucks etc are getting bought even commercial vehicles, the higher sort of tonnage series is seeing more demand, do you think you could leverage on that and see perhaps higher margins as well in the quarters to come?
A: If you look at our historical margin levels, we have more or less managed to maintain our margin sometimes little bit on improvement that we are able to get. Again it depends on too many factors, commodity prices is a wild card going into next year and we don’t know what will happen with the commodity prices and how much of it we can pass on. Our effort obviously will be to try and maintain the margin for sure and if we can to increase it a little bit but right now for me to predict or to be able to extrapolate that will get an increase in margin will be difficult to do but that is always an attempt, always an effort for every automaker to increase margins.
I would say that we are doing a reasonably good in terms of margins in spite of several things that happened during last year. For example, BS III to BS IV problem in the GST transition also we had lot of loss of previous excise duty that was paid. In spite of all of that, we did pretty good in terms of maintaining margins.