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Coronavirus impact | Auto companies review spending amid belt-tightening plans

The shutdown of practically every auto plant in the country for four straight weeks has put immense strain on cash reserves of these companies

April 27, 2020 / 10:41 AM IST
 
 
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The coronavirus pandemic has upset investment plans of all automakers including spends on marketing, output expansion and new product development as the industry prepares for one of its worst-ever slowdowns.

Auto companies that typically have capital expenditures ranging from Rs 300 crore to Rs 4,500 crore per year have put almost all their plans on review. For the first time ever, all automotive plants in India stayed shut for four straight weeks, putting immense strain on cash reserves.

Mahindra & Mahindra, Bajaj Auto, Hero MotoCorp, Honda Motorcycle and Scooter India, Mahindra CIE have either put a freeze on the capex or started trimming them, approving only priority spends.

Pulsar-maker Bajaj Auto, for instance, will save Rs 200 crore from cutback on marketing spend for the April-June quarter bringing it down to zero. The Pune-base company has frozen all renovation and expansion activities at its plants while allowing only minimal funds for continuation of research and development (R&D).

At least one retail launch of SUV-specialist Mahindra & Mahindra (M&M) has been impacted by the disruption caused by COVID-19. The electric KUV, which was planned to reach customers at the beginning of April will now be supplied after lifting of the shutdown and supply chain resumption.

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After declining a direct fresh investment of Rs 3,500 crore in its Korean subsidiary SsangYong Motor Company due to the COVID-19 triggered disruption, M&M is now learnt to have tightened investments within the company too.

“M&M continues to stay strong through the crisis due to its high cash levels and low debt. Our board has also initiated several measures to tighten capital allocation norms. All of this will ensure we emerge in a strong position after the crisis passes,” added an M&M spokesperson.

India’s largest two-wheeler maker Hero MotoCorp is also banking on measures such as restricting the capex and cutting back on non-essential operating expenditure. Since spends on continuity of new product development (R&D) is unavoidable Hero will fund only those projects, a top company official said.

Speaking to analysts Niranjan Gupta, Chief Financial Officer, Hero Motocorp, said, “As far as recurring capex is concerned, of course, at this point in time, there is a capex pause. As the business opens up, then we will again prioritise the capex in terms of what is really required immediately and also based on the demand scenario, so that prioritisation will happen as we move forward.”

There is growing uncertainty, especially among two-wheeler makers, about the possibility of downtrading where consumer switch from expensive option to the cheaper alternatives.

Pawan Munjal, Chairman and Managing Director, Hero MotoCorp said, "There is a possibility that downtrading happens, but it would happen in all the segments. Some of the premium buyers might come into the executive segment while some of the executive segment buyers might come down into the entry segment. Some entry segment buyers might just fade away. There are possibilities that some four-wheeler buyers might come into the premium segment".

However, some companies who have only recently begun operations in India have no choice but to go ahead with their schedules.

Kia Motor India, for instance, is going ahead with its planned launch of the Sonet compact SUV which will debut during Diwali. All associated costs in areas of production, marketing and distribution will thus have to be incurred.

Similarly, MG Motor India will go ahead with the launch of the six-seater Hector followed by the introduction of the Gloster premium SUV before the end of the year.
Swaraj Baggonkar
first published: Apr 27, 2020 10:41 am

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