It is not just pent-up demand because the industry is up 12% compared to last year over six months in spite of being 80% down in April, says Pawan Goenka, MD & CEO, M&M.
Do you think we have turned a corner?
Coming to the economy, have we turned the corner? Do we have good news ahead of us? Of course, a lot of it is going to be conjecture right now. But I would rather look at the glass half full right now and not half empty. And the reason I am saying that is because at least in the industries that I am more familiar with, a constant improvement month on month is happening compared to where we were last year. August and especially September were very good for the auto industry. The tractor industry had a very good July, August and September.
Frankly, almost all the players are struggling to meet demand and the concern is not on where the demand will come from but the concern is how we will make enough tractors, enough cars to meet the demand and that has to be a good sign. The question that keeps coming up is whether it is pent-up demand or a real structural demand that is coming in. It is difficult to answer. I would have to say that in tractors, it is not just pent-up demand because the industry is up 12% compared to last year over six months in spite of being 80% down in April.
Even in auto, given that a month-on-month increase is happening, I would have to believe that it is not a pent-up demand but we will have to wait two months before we can be sure that this is not pent-up demand but a structural demand. All in all, I would say that at least for these two industries, which are very important in terms of the tax collection and overall employment generation as well as backward and forward linkages. At least for these two industries, things are looking up better than any of us would have thought say three months ago.
There is a fair bit of gap between the wholesale and the retail numbers. Dealers say they have inventory piled up four-wheelers for up to 45 days. So what is the real picture?
It is very difficult to get accurate data on retail numbers because the dealer federation picks it up from vahan data and vahan data does not have everything put in by the end of the month and some states have not yet reported.
The sort of data that we collect is not formally collected. It shows that in September we had above 19% growth in retail month on month, that is last September to this September and even August was about even. So yes the retail growth in the last two months is somewhat slower than the billing growth but that is expected because everybody stocks up in September for the festive season.
One also has to keep in mind that the supplies have been very low in May, June, July and therefore dealer inventory also will be at all-time low. I do not know about everyone else, but for us, it is at all-time low and therefore we will have to fill back some of the inventory to come to a reasonable level of inventory which typically would be about 25-30 days and right now most of us are below that 25-30-day figure. You would see a little bit more billing than retail but I do not think that retail is not happening. Retail is also happening and retail also has grown from last year this month to this year month of September.
The real sort of indicator in a way is how the collections are and how eager the dealers are to buy vehicles and how willing they are to pay for these vehicles and that actually has surprised all of us that collections for all the industry, all the players have been very good. Another very good sign is that the customers are easily getting financing and this was one of the concerns that we had earlier on.
Finally, the third indicator is that the sort of incentives that are being given or discounts that are done to get sales are at a very good level and there is no extra discounting that is being done to sell vehicles. All of these are indicators that there is a robustness in demand. It is not a demand that is being bought by throwing in money.
There is robustness in demand both from the dealers, for the wholesale as well as the customers for retail which is a very good sign and that is what gives me confidence that we should have a very good festive season. After the festive season, there is always a lull period for about a month, month-and-a-half and then the real test will come from January on how demand will continue.
What are your expectations from the festive season and will there be a flurry of discounts to draw passengers in?
All the indications that I see tells me that there will not be a flurry of discounts this festive season. It will be about what you see every festive season because the demand is structurally there and also because supplies are limited.
In fact, growth will not be determined so much by demand, it will be determined more by supply which has been a constraint for the industry for the last several months. We have been talking about that as our main constraint but even that is improving significantly.
From August to September, there was a very big improvement in supply consistency and in September to October, I expect similar improvement. By the end of October, we should be more or less normal in terms of supply. All the concerns that we had about migrant labour not coming back, about working capital not being available for tier II, tier III suppliers, has been taken care of — partly by government actions, partly by action of the industry players themselves.
And it is a good sign that migrant labour is also back. By the end of this month, we will be back to pretty much good level of resourcing at all the factories with proper skill training and skill development being done. I would suspect that from November beginning, whatever little problems are remaining on the supply side will also be taken care of.
What is going on with the rural story and tractor sales? Even the retail numbers show 80% growth year on year. Where is this huge demand coming from? Is it sustainable?
One can say on a lighter note that Bharat is pulling India and the reason that is happening should not actually be surprising because what happened was that in February-March a sudden slowdown happened in the tractor industry with Covid-19 fear coming in . Those two months were bad and then in April, there was obviously not enough supply because of the lockdown and in April, the industry was down by 80%.
So by the end of this year, I would hope there serious consideration will be given for rationalising the rates if a deep cut is not possible.Pawan Goenka
I do not recall maybe in 10 years, when everything was so aligned for agri income and agri output to be as good as it is going to be. Monsoon is about 7-8% up and more importantly, the distribution of monsoon is very good and it came evenly throughout the monsoon season. The sowing is about 5% higher than last year.
The revenue from rabi crop is very good, about the highest revenue that has happened in the recent times and as a result of all of that, there is optimism in the agri sector that kharif crop will bring one of the best sort of revenues for the farmers. When you combine the fact that last year there was a sudden degrowth of about 10% in tractor sales and add to it the fact that the agricultural economy and the expectation for kharif crop is very high, that will write the story of why we are doing so well.
Overall, in the agri economy and it is not just the tractor sales, it is almost everything that is purchased for agriculture — whether you talk about seeds, nutrients, fertilisers or farm mechanisation equipment, all that is doing very well and each manufacturer is making highest ever production in September, August and yet they are not able to meet demand. It is just unbelievable.
In April or even before Covid-19, nobody would have ever imagined that we would have such a good demand pull and again it is not here just for these few months, I can say with confidence that the festive season demand for tractors would probably be among the highest that we would have seen in recent times.
Is the long-standing demand of the automotive industry for GST cuts is unnecessary now?
Well let us put it in two parts — short term and the long term. The auto industry is very heavily taxed. The industry’s demand is fair. We have fully realised that right now the government cannot do anything that would have a net revenue loss and therefore to expect that anything will happen in the next few months is unrealistic.
But I would hope that once the situation becomes a little bit more stable and when the government revenue starts coming back to normal, the Government of India would look at rationalising the GST for automobiles. So by the end of this year, I would hope there serious consideration will be given for rationalising the rates if a deep cut is not possible.
But what is more important for the auto industry are some of the other things like scrappage policy which would create a win-win situation for everyone. I know the Government of India is very close to announcing it. We hear that the scrappage policy will be a very wonderful way of increasing demand and at the same time reducing pollution emission.
Has anything moved in the direction of import replacement and reducing dependence on imports, especially from China?
The only spoiler that could happen for the industry in the next six weeks is if from now to Diwali time, there are any kind of local lockdowns that will disrupt the supply chain. My earnest request to every decision maker is to be a little careful about this. Any local lockdown would easily disrupt the optimism and positivity that is building up.
Now coming back to your question, about a month back, both auto components and the OEMs had their annual meeting where this was discussed at great length. The component makers have made almost a commitment that over the next three to four years, they will reduce imports by almost 50% from the level that it is today which is about $15-16 billion. That means a $8 billion or about Rs 60,000 crore reduction which is significant and that will happen only with the partnership between the OEMs and the suppliers. Suppliers cannot do it alone, OEMs cannot do it alone.
We are not just looking at the components, we are also looking at the toolings. Today there is a significant import of tooling, especially from China. How do we reduce that? It is not going to be something that will happen overnight because developing a component for a car or tractor takes two or three years of engineering, development, tooling, testing, validating and getting the quality right. You cannot overnight change from supplier A to supplier B. So the effort has started and everybody is very serious about it.
There is a realisation that there is no reason to import so much. There are certain business disabilities that we have in India and we have to face up to it. We have to face up to it that there are certain things that increase our costs and we need to address those things and therefore the only way this thing can happen is where we can bring down the import from $15-16 billion to $7-8 billion. A partnership between OEMs and suppliers is a must but not only that, it has to be also between suppliers, OEMs and the government because we will have to look up to the government to help us bring the cost down of Make in India.
Perhaps the bigger opportunity for us is exports. Today our component export is only about 1-1.5% of total global trade of components. And this is where we really need to focus because the export opportunity is worth $25-30 billion and where we are focusing right now is what do we need to do to increase exports from India especially of components? These were not just something that got talked about and forgotten. It is something where both OEMs and suppliers are looking at very seriously.