Not overly worried about infra cess impacting demand: M&M

The infrastructure cess is sure to have a negative impact on the  overall demand said VS Parthasarathy, CFO, Mahindra and Mahindra but on other hand the various measures to boost rural economy, infrastructure and farmer income could help mitigate the negatives.

The Finance Minister in Union Budget 2016 proposed a cess of 1 percent on small petrol, LPG and CNG cars, 2.5 percent on diesel cars of certain capacity and 4 percent on other high-powered vehicles and SUVs.

M&M has a strong presence in rural India through tractors. Moreover with the monsoons likely to be good in the current year, most indicators are positive for the rural market and thus in turn bode well for the company too.

According to him the 1 percent TDS on passenger vehicles will not impact the costs of the vehicle because 1 percent TDS can be reclaimed by the customers.Below is the verbatim transcript of VS Parthasarathy’s interview with Reema Tendulkar and Anuj Singhal on CNBC-TV18.Reema: Let me first start with the 4 percent infrastructure cess on sport utility vehicle (SUVs). How will it impact you and do you think you will be able to pass it on to the customers? A: The industrial infrastructure cess on automobiles which is between 1 and 4 percent will certainly have a cost impact. The industry in the past have passed on any regulatory and cess and things around this to the consumer and this time what happens we will have to wait and watch and that is for the sector to comment but overall yes it will be an impact and it will have the cost of the final product will go higher to the consumer. On the other hand, like you rightly pointed out, the rural sector focus and the infrastructure focus are big demand drivers and we hope that that clearly adds a big positive to the growth trajectory. So one hand the growth trajectory is higher, it will be a little bit dampener as far as the tax is concerned, overall very positive.Anuj: The other point is that this cess that we have is most negative for Mahindra and Mahindra (M&M) because 4 percent is on SUV and your portfolio is mostly SUVs in terms of cars. Do you think the company will have to take some hit on margins or do you think this entire 4 percent can be passed on without any ramifications on the demand? A: We will have a set of portfolio, if you see that first as far as the rules are concerned, there is 2.5 percent for diesel, less than 1500cc and up to 4 meters and then there are products higher than that which are on 4 percent. So, we will have set of portfolio under petrol as well. So, there will be portfolio which will fall in petrol category, there will be a portfolio which will fall under the 2.5 percent and there will be a portfolio which will fall under 4 percent. As I said, this is an industry phenomenon so everybody who has that gets impacted by this. Anuj: For M&M it is the Scorpio and the XUV 500 which I believe would attract the 4 percent cess so for you it impacts more because your portfolio is more skewed towards these vehicles? A: You are right, the Scorpio and the Bolero will attract the higher one but I also wanted to point out, our new launches, which is TUV300 and the KUV100, the petrol version will have a different impact, the diesel version and these are the growing products. So, we will have a mix around the whole thing. I believe our impact will be similar to the industry impact and the assumption, in the past we have been able to pass this on. Rest we will have to wait and watch and it is too early for me to comment on that. Reema: On a blended basis, given your portfolio and the expected sales, what will be the infrastructure cess?A: On a blended basis I think overall the impact could be in the 2.5 percentage range but more will come out when we do the calculation and I think I will wait and watch as it comes in.On the other hand, I wanted to clearly point out that the rural which is where our brace of the auto is and of course the tractor is, that is positively impacted. So, we will have to take this in along with the positive impact which comes both because we are even in auto fairly rural based. So, the balance I believe is very positive. Reema: We will come back to the boost on account of the rural focus of the Budget but let me just continue with the taxation bit. Anyway the auto sales for M&M have been fairly lackluster on year-to-date (YTD) basis, your sales growth is only been close to about 4 percent and it is not just the infrastructure cess, even passenger vehicles where the value exceeds Rs 10 lakh will attract a 1 percent TDS. So what would be the FY17 auto sales growth that you forecast given the increased taxation? A: First and foremost is let me talk a minute about that 1 percent TDS that you talked about. That is not going to impact per se the cost. What it is going to impact is an administrative or ease of doing business as dealer end will go up a little bit. So, that is an administrative angle but it is not cost which is going up because the TDS which we deduct will be reclaimable by the customer. So, it is more an administrative bit. However, you are right on the other hand the cess cost will go up so overall this will impact the growth trajectory. However, like I said, you have to overlay on that two things actually. First is rural sector what are the impetus and what that does to pull up the rural economy up because as you know auto sector is also very much focused on the rural side. Over and above that, the infrastructure focus also will be positive. So, both put together, the net impact can be positive. You asked a very specific question which is what do you think the FY17 growth will be. I will let the industry come and share the data at a particular point of time. We have never talked about giving guidance for future. Anuj: While we have discussed your car portfolio, it is the tractor angle clearly where you have the large presence and in fact is your bread and butter business. We had a lot of focus on rural India, on farmers, agriculture in this Budget. Do you see that being a bit a game changer for your tractor portfolio over the next three or four years? A: I think clearly the fact that they have focused on protection of farmers, cost, convenience and value which is all the insurance, interest subsidy, ecommerce platform, etc, all of this is a fundamental shift to giving a lot of empowerment to the farmer. That along with the infrastructure where the income goes up because there are so many projects on irrigation or rural roads, so the household income will go up and the stated intent which is in terms of doubling the farmers income, is clearly seen in action.So, I can only say the future is pregnant with possibility and now it is for the private sector along with government to push and deliver. Reema: Are you confident that FY17 tractor growth sales will be better than FY16. I know you are not giving us guidance and actual growth numbers but qualitatively given the boost do you think growth will be better? A: I certainly see all the right incidents are in place. If you take a long with it that La Nina which is also positive from a monsoon point of view and is expected to be normal monsoon this year, so all indicators and all things which are done so far in the Budget are very positive for the rural market. How fast and how much it picks up we will see in FY17 but the trend is clearly positive. (Interview transcribed by Priyanka Deshpande)