Volvo Eicher sees good growth in Oct; margins under pressure

Vinod Aggarwal, CEO, Volvo Eicher sees good demand for commercial vehicles in October on back of a good monsoon aiding rural demand, lower interest rates, and more money in the hands of consumers due to Seventh Pay Commission.

He said there has been strong traction in light and medium duty trucks, buses and construction trucks with headroom for growth.

However, he is skeptical of how the whole of second half (H2) would pan out because he expects BS-IV norms and goods and services tax (GST) implementation impacting pre-buying in the fourth quarter.

On margins front, he said they would continue to remain under pressure because the discounts are still prevalent impacting realisations.Below is the transcript of Vinod Aggarwal’s interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18. Anuj: First, I want to understand what is happening in this space because we had one of the largest players, Ashok Leyland telling us that market is a bit soft. If you could give us your sense of what is happening on the ground. A: Let us first look at what are the positives in the economy that is helping us to become optimistic in this festive season. First is the interest rates are moving towards the right side and we have now seen further reduction of 25 basis points and with this, now we are at the lowest level of interest rates in the last five years. We are benchmark rate of 6.25 percent which is the lowest since 2011. And secondly, there is more money in the hands of consumers with the Seventh Pay Commission implementation and then with good monsoons we are expecting good prosperity in the rural economy and infrastructure investments are continuing. So, these are the positive sectors which will contribute to good demand in the festive season and we are expecting that this month, October, we should see good demand. And incidentally, last year, October was low because a lot of pre-buying happened in September because of the implementation of new regulations. So, this year, we are expecting good growth in the month of October specially. Latha: Can you out some numbers to it? Second half, how much better than the first half? Will it be 15 percent, 20 percent? A: No, second half it is very difficult to comment because last quarter, still is uncertain because last quarter there are two important changes which are going to happen. One is the Bharat Standards IV (BS-IV) will become applicable throughout the country from April 1, 2017 and goods and services tax (GST) will be implemented most likely from April 1, 2017. Now, GST will most likely reduce the rates and on the other hand, BS-IV will increase the cost. Latha: But GST will not affect you FY17 even if it hits, it is going to be for the subsequent year. A: It will impact the pre-buying. Latha: So, double digits will be difficult you think, 10 percent? A: It is very difficult to put a number on that because this quarter, I am very optimistic, October, November and December will be good. But last year also last quarter was a good base and like this year January to March. So, it is very difficult to predict what will happen in January to March. However this quarter is very positive. Latha: How will margins pan out? Have your raw materials become expensive? Will your margins be as good as last year? A: Margins, if you look at our first quarter results, we are doing better than the last year, but overall margins are still under pressure because the price realisations are still not good because there is a lot of discounts still prevalent in the market. So, margins I am expecting that they will still remain under pressure. Latha: That was exactly going to be my next question. How will prices trend? Will the discounts ebb away? How will the third quarter look like? A: Discounts still are there because the capacity utilisation still in the industry is still low. So, till the time capacity utilisation is low, the discounts are still going to stay. So, that is what we are expecting that they should go away because they are definitely hurting all of us, but at the same time, you cannot do anything. Latha: Commercial Vehicles (CV) began with a bang. They were the first sector which showed a whole lot of traction and then, in the last 4-5 months, we have seen the CV segment going into an ebb. When does this slowdown correct itself? When do we see the early 2016 or 2015 growth come back? A: If you break up the CV segment, we still see a lot of room for growth in certain segments. Like for example, light and medium duty trucks. Light and medium duty trucks, we are still at an average of 6,000 units per month. Earlier peak was 9,000. So, it is growing this year. For six months, 5-15 tonne market has grown by 9 percent. And it is at 6,000 per month. If you take buses, there is still more room for growth because there is a lot of new ones which is coming. And then if you take a look at the construction trucks, again because of infrastructure investments, construction trucks are growing and we are still at around 4,000 units per month construction trucks, as against an earlier peak of 5,500. So, we see good room for growth in light and medium duty trucks, in construction trucks and in buses. As far as the heavy duty trucks are concerned, whole segment has slightly dropped because the market have also moved to higher tonnage trucks. Now a lot of movement has happened from 25 tonne gross vehicle weight or 31 tonne gross vehicle weight to 37 tonne gross vehicle weight. So, because of that, even though overall capacity of the truck has gone up, overall the load carrying capability has gone up, it may not show up in numbers. That is another reason.