Is long-term growth reviving? Too early to say: Maruti

Sonia: In the earnings that we saw from Maruti Suzuki this time, we got a positive signal in the sense that the first time buyer has return to the market and we are seeing signs of pick up at least initial signs of pick up in urban consumption. Do you think this is a trend that can be sustainable?

Bhargava: I think the evidence is still very limited to make a judgement as a long-term trend of growth in the automobile sector, certainly April has been a good month for the industry but one month cannot be use to generalise for what is going to happen in the future. Therefore, I would take the view that we should just wait and watch and see what happens over the next few months.

Latha: Tata Motors now has a fairly big suite of passenger vehicles for Indians. Jaguar-Land Rover is not the question of the day. The question of the day that we are discussing, the theme is recovery in urban demand in India. Are you noticing any improvement?

Pareek: We are seeing some spurt in demand in last couple of months, for example last four months our growth has been around 20 percent, in the month of April we grew by 40 percent but I would agree with Mr. Bhargava that these are early trends and I do not think we can continue with that. We have come out of trouble but still there are market pockets which are not doing as well as we would expect them to do but last couples of months have been good. Larger issue is the demand shift between urban and rural. I do not think there is any shift in demand from rural to urban or vise versa, both coexists. There has been a little slowdown, if I may say resistance on the rural counter but still things are under control.

Ridham: What are the factors you are seeing? Do you see the customer returning to the showroom, is this largely inventory filling or is there end consumer demand and what do you think is bringing the consumer back? What are the factors that are driving the return of the consumer?

Bhargava: I think there are number of factors. One is the fact that we have had two or three years of no growth in this industry and the demand for replacement of cars, for new cars, new entrants has been kept pent-up because in that time people were reluctant to buy cars and put money into an expensive consumer durable but I believe that you can only keep that going for so long and along with that we have had a situation this year when inflation has come down substantially, the petrol prices have – if anything being reduced somewhat and all of that has persuaded people that this is a time now to go back and meet what should have been requirements of customers in earlier years.

Ridham: The government is proposing change in regulations with respect to average efficiency of engines, they are proposing to hike that to 18.5 kilometers per litre and that could be punitive for things like sports utility vehicles (SUVs) which consumer a lot more fuel and beneficial to your product line especially small cars. Do you see this evolution to get more environment friendly as a factor in the way the consumer behaves and the way you react to the market?

Bhargava: No I do not think the consumer would react to that. What it means is that the auto manufacturers have to balance their production between more fuel efficient cars and the less fuel efficient cars, so that they average fuel consumption of all that is produced meets the norms but that norm is yet to come. Its some distance away. I do not think it at all determines the consumer behaviour.

Latha: To make it more broad based beyond a heavy consumer durable like cars and take the argument to other items as well. What is you sense? We have seen a decline in inflation. But it is come along with some severe rural distress. How is demand panning out; rural and urban? Is the lower inflation now generating a confidence to buy?

Bijapurkar: In fact I even want to make a comment on cars because I am making a distinction between company top and bottom lines and between consumer desire and money. So the top 20 percent of India is actually a middle class. We call it the middle class, but it really is our upper class. That is the place from where we will revive consumption. That is a place from which things will get better. Now, they also have over 80 percent of India’s surplus income which is income that is left over after you meet all your expenses. They have been abstinent for a long time and they have money.

If you look at the last 10 years, they have got, even if we have grown at four percent income on an average per year, we are a large economy. And, so they have got over 40 percent of the share of that money. So, they have money, the minute you have some signs of greater confidence, they will bounce back. Even the penetration of cars for example in the top-10 percent of India’s rich households is reasonably pathetic. So, we have everything there. The minute you see a little bit of interest rates coming down, the minute you see people feeling better, I agree with Mr Bhargava that you can only be pent up and abstinent for that long and not very much longer.

As far as across the board is concerned, we should, it is time to for a moment abandon the rural-urban in the classical sense we see it. Rural India has about half of India’s rich, it also has most of India’s poor. So, when we say rural is doing well, it is basically just saying that the rich guys in rural are actually buying and there about 15 percent of all of rural India. So, if you think about the country as the top half and the bottom half, the bottom half is almost entirely in rural, they are under distress, I agree with what was said on your show a little earlier, but the top half is actually doing quite well, thank you very much. And the top half and even the top 15 percent of rural India, what we call developed rural, basically in everything mimics your niche towns, your boom towns, it actually does better than the small town of urban India. So, I always say that the plural of anecdote is not data. And when you look at data, you can also see that, as we also say, those that watch CNBC have a bad Diwali, those that shop on Crawford Market from Chinese goods have a pretty good one.

Latha: Did I get your numbers right? You are saying that 20 percent is really the Indian middle class. The top-20 percent.

Bijapurkar: The top-20 percent, yes.

Latha: That is about what? 300 million people and you are saying it is 150-150 between rural and urban?

Bijapurkar: In fact, interestingly it has a much larger number of households. It has about 60 odd million households because all of us have children who choose to live alone as well as singles who choose to live alone. So, that is really where it is and they have the lion’s share of both the income and the surplus income.

Ridham: Has the internet made the difference in the past few months? Is that what is triggering some behaviour on part of consumers to shop?

Bijapurkar: Everybody is working for the e-commerce company. The government of India is working for it because you step out on the road, you break your ankle, it is better to stay home. The telecom companies (Telcos) are working because they are actually advertising the user data through all those lovely gender friendly advertising that we see. If you also look at the prices smart-phones and Telecom Regulatory Authority of India (TRAI) holding prices down, everybody is working for e-commerce.

Latha: Banks, wallets.

Bijapurkar: So, if you have Crawford Market on the net at really unbelievable prices feuled out of capital, then that it is a good place to be in. We will see much more of it. That does not mean that any other form of buying is dead. I mean, if the pavement improves and the parking improves we might venture out a bit in the evenings.

Ridham: In fact even foreign investors are working for this because all the foreign direct investment (FDI) that is come in the internet is basically being used to discount.

Bijapurkar: And look at the amount of advertising on TV from online, from e-commerce people basically telling you why you should actually go there and all that.

Sonia: What is the sense you are getting because in this year gone by, we have seen rural growth outperform urban growth. It is about a 20 percent growth versus a 10 percent growth in FY15. What about FY16? Do you think the reverse could take place?

Pareek: I do not think. Rural market will continue to outgrow the urban markets. Reasons are like this. And I heard Rama saying that everybody says that rural is poor, but actually the 50 percent of rural market which drives the market. In fact when we see, when we started rural marketing a few myths which conventionally were held were broken. One is rural marketing is all about poverty, it is not. Second is rural means farmer, it is not. It is people who support, in fact out of total cars sold, only one-third of the cars are sold to farmers and these are sold to people who are supporting rural economy, rural shop-keeper, rural teacher, rural private sector worker, etc. So, the rural market will continue to out grow the urban market. However, we will have to work harder for that. Good news is that urban markets have started turning. That is good news; the people who joined the job market two-three years back, normally what I have seen is that after three years of job, people starting, start looking for the cars. So those people have started buying. Also there has been a pent up demand, last three, four years urban markets were more or less hardly any growth was there in that. Top-20 market had almost one percent or so growth. So those customers, the pent up demand will manifest itself into demand. So, to sum-total urban will definitely grow but rural growth will be still more than the urban growth. Just because the low base.

Ridham: I had one question on discounting – do you think that is a factor that probably helping car sales or do you think that now the market is seeing reducing discounts?

Pareek: Discount depends on many factors. It depends on what is the market resilience, what is the competitive pressure on the market, what everybody else is doing and of course when there was a slowdown for the last two-three year everybody started discounting their products to win extra customer. Last couple of months I am seeing some sort of taper down of discounts but because we have been discounting for two-three years; they cannot come down overnight but going forward we will see some moderation or softening of discounts.

Lathal: What is your sense? The improvement that we saw sales, how much of that had got to do with inventory refilling as well your comment on both rural and urban markets in the current and coming quarter?

Bhargava: In the month of March the retail sales, I am talking about Maruti; the retail sales were higher than the wholesale sales and as a result the inventory levels both with dealers and with Maruti in the factory had come down to probably the lowest levels throughout the whole year and maybe earlier and high volume of wholesale sales in April partly reflects the fact that inventories everywhere were very low and therefore the wholesale sale were that high but in April the retail sales were not as good as the wholesale sales and the real criteria of determining the strength of the market is not wholesale figures but the retail figures and till we start getting retail figures fairly soon after the end of the month from all across the country is going to be very difficult to make a real prediction on what the strength of the market really is.

As far as urban rural is concerned, I agree with what Mayank said that the rural market even in ’15-16 will grow at a faster rate than the urban markets. And exactly what he said, it is largely because of much lower base which we have in the rural market and the fact that the sales system which companies have buildup in the rural market now is quite affective and results in customers buying cars and getting them serviced far more easily than they could ever do in the past.

Latha: You want to elaborate?

Bijapurkar: We have just done a study. We call it the IS 360 database and we actually calculated how much income comes out of agriculture. So there are some households that will have both sources of income. We said that lets burst that myth and the answer basically is that 43 percent of income comes from agriculture and 57 percent comes from non-agriculture.

We also profiled who are the rural rich and Mayank is right that those who are in the top 20 percent of India residing in rural areas are basically regular salaried people. Having said that people always say to me there is inter linkage and my point is that in good times non-agricultural income will boost, in bad times it may not damp as much but I completely agree from the data also that rural incomes in the last ten years have grown faster than urban incomes, for the first time we are finding the absolute quantum taking away the base effect of how many rupees in real terms rural income per household has grown to be higher than urban income. To me that is quiet spectacular and the force of change in India is large number of people moving at a little speed, it is not the other way round.