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Steep inflation big concern, losing competitive advantage in global market to China: Wheels India MD Srivats Ram

Srivats Ram says electrification is an opportunity for the automobile sector and that “the worst is behind us”. Wheels India boss weighs in on the effect of the pandemic, opportunities and challenges for the company, exports and more.

July 12, 2021 / 01:50 PM IST

Srivats Ram has been with Wheels India for more than 25 years. During the last decade-and-a-half as its managing director, he has transformed the company from a predominantly steel wheel automotive player to a global industrial products firm. He was the one who started the aluminium wheels business that has now gained global traction. He has also led strong growth in the air-suspension business over the last 15 years. The company has become a global player in the construction and mining wheels segment under his leadership.

Over the last decade, the company has become a major supplier of components for the wind energy segment in India and globally, with the industrial products category now contributing to around 20% of the overall business. During this period, he has also expanded the exports market for the company with the export business topping 25% of sales.

In an interview with Moneycontrol, he said inflation remains one of the biggest concerns but the worst is behind the company.

Edited excerpts:

What is your assessment of the current scenario?

The second wave of coronavirus has been quite difficult for most of us in the country because the number of cases and the deaths were substantially higher than during the first wave. The economy was crippled in May and a little bit in June due to the lockdown and the manpower challenges the companies faced. July is turning out to be a bit like April in terms of positive business but we are looking for signs of actual spending on the ground for the revival in our economy. We are hoping that there will be a stronger pickup by August. Specifically for the auto sector, the level of production is looking up but not yet at the levels we would have expected. There is likely to be a month-on-month improvement in July as compared to June but really August could be the month when we see a significant turnaround if things go to plan, especially in sectors such as commercial vehicles.

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What are the challenges the industry is facing now?

One of the big concerns is steep inflation. If you look at steel prices, it has gone up 40% year-on-year and that is a significant increase. It is unprecedented in my close to three decades of experience of buying steel and manufacturing in our country. Even if you compare it with the previous supercycle, there is nothing quite like this. The previous supercycle, which took place about a decade ago, was caused by demand surpassing supply. While the initial part of this super cycle was affected by a shortage of supply, the subsequent increases in prices have been significantly more than the apparent shortages.

It is a matter of serious concern for Indian manufacturers because our competitiveness in international markets is related to that of Chinese products. For both the US and European companies, there is an opportunity of sourcing from India as opposed to China. In both these geographies, we are competing against the costs of China. With China’s market price for steel being lower than international price, they seem to have an advantage. If you look at India’s exports, the biggest opportunity for the Indian manufacturers is the movement away from Chinese products, notably in the U.S. European companies are open to looking at both India and China but there is no real commercial advantage of buying from India. When you have a situation where the Chinese have control over the steel prices, and in India, the prices are running away, we could potentially lose our competitive advantage in the global market.

If we don’t have a level playing field in raw material prices vis-a-vis China and if steel prices don’t stabilise, it will affect the competitiveness of Indian manufacturers in terms of our exports. Any further increase in steel prices would hamper the position of Indian exporters in the international markets.

What do you see as the solution to this?

We should not allow price to reach a point that affects demand. Price is the equilibrium between demand and supply. If the price goes beyond the equilibrium level, demand could come down. One has to find a way of reigning in industrial inflation.  For that, it will stimulate demand. Inflation beyond a point changes the commercial equation for manufacturers. In addition to the steep increase in steel prices, commodity prices, notably petroleum, too, have gone up. I will be curious to see if we can keep it under wraps. The Reserve Bank of India Governor has been quite industry-friendly, and held back on increasing interest rates because these are extraordinary times. I hope the demand-supply mismatch, which is causing inflationary pressure, cools down in the near future. A lot of this in the past was capacity-related.  This time, however, it is because of supply lagging demand. So, it is a question of catching up. You cannot have a longer-term inflationary spike due to that. Geopolitics, too, has also played a role with Chinese exports of steel to the US has reduced significantly. Hence, there has been an opportunity for others to fill the gap. This has resulted in increased demand for Indian steel. But the point is that the proportion of the increase in steel prices is disproportionate to the mismatch. The suggestion that is being made is that in previous periods when there has been steep inflation in steel prices, the government, also being a major user of steel, has levied some kind of nominal export duty. Hence, there is a precedent. The government could look at a nominal export duty levy of 5%. India has a natural resource in iron ore, which is a basic raw material for steel. There should be some advantage for steel manufacturers to sell in India vis-a-vis exporting as it is a commodity of national importance. By this, there could be a relative advantage to Indian manufacturers.

You have spoken in the past about the de-risking strategy of global companies presenting an opportunity for Indian manufacturers. Has this really taken off and have Indian companies been able to leverage this new-found opportunity?

The potential is definitely there for automobile and engineering exports because global companies in the U.S. and Europe are looking at geographic de-risking of their purchase. There is an opportunity for India to take part in this de-risking play of the global companies as they move away from China. Specifically, in automobile and engineering, there is scope for growth and for us to take a part of the pie. For companies that are already exporting, the opportunities have clearly increased in the recent past, and there have been a lot more requests for quotations than in the past. Some of these are getting translated into business. There is a genuine interest to buy more from India. The order book has seen a good improvement for existing suppliers in the auto component space. While currently, they are doing it with existing suppliers, once India stabilises after the pandemic, there will be opportunities for many more Indian companies to become exporters. I am saying these not just due to the geopolitical shift that is taking place. It is also because there is a lot of pickup in global economies post the pandemic and solid positive growth is expected to take place in the U.S. and Europe. The other thing that is happening, albeit at a lesser pace than it should, is the move for India to become a manufacturing export hub for global companies. This has been spoken about in the past but the deals have been few and far between so far. Once the perception about pandemic-related safety in India improves, I am sure we will see more action on this front. After travel is normalised, you will see more international companies visiting India and trade will take place. India becoming an export manufacturing hub given its competitiveness is an opportunity for the future. We have to see how this whole landscape pans out.

Also Read: Explained | What’s behind China’s attempt to rein in commodity prices?

Specifically for Wheels India, have you seen business coming to you out of this global de-risking strategy and supply chain realignment?
Yes, there have been opportunities that have come up for Wheels India. We have set up new plants which essentially are an alternative to Chinese supply, especially to the U.S. At the moment, it is easier for existing suppliers to patch into that than new ones. We have recently set up a cast aluminium plant at Thirvoy Kandigai, near Chennai, at an investment of Rs 140 crore. The motivation for the plant itself was built on the de-risking strategy of a US customer who committed off-take. A windmill project is currently taking off on another plot of land in the same industrial park. It is built off a strategic partnership with a windmill supplier who has decided to build a global base for his product in Chennai. A good portion of this year’s Rs 100-crore capital expenditure will go into this new windmill plant that we are setting up. We are also investing in and expanding the cast aluminium wheel plant to move it up to 7.50 lakh per annum capacity.

 

You have also been bullish on the export segment in the recent past. What are the reasons for this bullishness, and do you see the segment holding up for the rest of the year?

There is definitely some amount of pick up in global economies post the Pandemic, especially in the U.S. and Europe. The mindset there seems to be that the Pandemic is over and behind them although we in India are still slightly tentative given our recent experience from the second wave. Auto demand is strong in the U.S. and Europe. Infrastructure-related expenses are seeing an uptick in those geographies coming out of the Pandemic. You are already seeing large crowds in football games such as in the Euro 2020. This spending is getting reflected in terms of demand. Things had been muted for a year but they are coming out of that negative phase. The increase in demand brings with it new opportunities for Indian companies. There is a potential to increase your share in the new business. For us, exports topped 25% of our overall sales last year. I expect that upward trend to continue. Barring the air-suspension segment, all the segments that we are in, we are also exporting. Across the board, demand for the export of products remains quite strong for Wheels India. Tractors are likely to hold and will be pretty much the same as last year. There may be some amount of growth in commercial and passenger vehicles. We are also seeing fairly robust demand in the construction equipment segment in the international markets. Aluminium wheels and windmill business, too, have been growing well in the overseas markets. One of the big things that happened last year at Wheels India was the exit of Titan Europe (Promoter of Wheels India along with the TVS Group). With their exit, we can now sell all our products anywhere we want. We have actually got new businesses as a result of their exit. Previously, there were restrictions on where we could do business but now there is newfound freedom to do business anywhere and with anyone.

How do you see things panning out specifically for the auto sector?

It is sometimes forgotten that the auto sector had been contracting year-on-year even before the pandemic. Towards the latter part of last year, there was a certain amount of pent-up demand that drove growth in the sector. And then with the emergence of the second wave, the segment went back one step. We have to see how much of the pent-up demand exists after the second wave. I am optimistic about the prospects for the year compared to last year but it depends on the control of the third wave and the Government spending. Electrification is an opportunity in itself. It will involve the existing players but there could also be a separate ecosystem and potential business from that. It may take slightly longer in India but it is a business opportunity no doubt.

In a year of the pandemic, you have made significant investments in two new plants. What is the thought process behind such investments during tough times?

You have to back your instincts in terms of where you see demand potential and invest in those spaces. There may have been a little bit of pause caused by the Pandemic but in segments where we believe there is demand, we have invested for the future. As a businessman, if you see demand and the potential to grow in select segments, albeit in international markets, we would continue to invest in those segments in a prudent manner.

Given that you have just gone through the second wave and there is the threat of a third, what is your overall outlook for the industry this year?Things have been topsy-turvy here on the domestic front and we have to wait and watch as to how things play out. We need to see all major districts out of lockdown for the revival of the industry to be present in full. Given the period of three months that were practically locked down in the last year, we should see strong double-digit growth for the industry in this financial year, provided that the third wave is muted. The CV sector growth is also dependent on government spend on the ground in terms of infrastructure. Provided this takes place and if we are relatively uninterrupted by wave 3, we should see double-digit growth in the M&HCV sector as well. Capital formation by the government in infrastructure will lead to trickle-down growth going forward. They need to continue with infra CapEx. For, that will have a positive multiplier effect on the economy. While there could be a debate on the percentage of growth, there will definitely be growth in the country especially more so because of the base effect of last year. The second wave has muted companies’ expectation of the growth plans for the year, and most are now guarded because of the recent experience. However, in the long-term, given our demographic dividend with the middle class segment set to grow, India is the target economy for global companies looking to sell their products. The question is if we are ready to make our country a global destination for manufacturing. We see a lot of potential in the international markets and are optimistic about the prospects there. We are seeing the U.S. and Europe having strong demand. Even in Japan, there has been a talk about positive growth prospects for this year. You are seeing economic expansion and export opportunities seem quite attractive. If there are no new shocks in the system and stability returns, we can expect the second half of the year to be better than the first half. I am optimistic about the global economy and cautiously optimistic about the Indian economy. I do believe that the worst is behind us.
KT Jagannathan is a senior journalist based in Chennai
first published: Jul 12, 2021 01:33 pm

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