Davos 2020: M&M Upped Internal Volume Forecast Thrice In Q4, Says Pawan Goenka
Pawan Goenka expects M&M and its peers to see a “slow climb”, going forward.
Mahindra & Mahindra Ltd. has increased its internal volumes forecast three times in the current quarter, said Pawan Goenka, as a sign of an expected recovery in the industry.
“Not a huge number, but this is an increase of three times where a few months ago it was a decrease of three times. That’s what is giving me optimism,” the Managing Director at the automobile and tractor maker said in an interview with BloombegQuint on the sidelines of the World Economic Forum in Davos, Switzerland.
India’s automakers have been struggling to push sales since the 2018 festive season. First, increased upfront insurance costs and higher fuel prices kept buyers away. Then a broader economic slowdown hurt their purchasing power further. Discounts failed to lift demand, forcing automakers to cut production as inventory piled up at dealerships. Last year, the automotive industry saw the worst slump in sales since at least 1997.
Still, Goenka expects the company and its peers to see a “slow climb”, going forward.
More than data, I look at the sentiment in people and how our dealers and sales people feel. The optimism I have seen in the last five to six weeks is not something I have seen in the last year and a half.Pawan Goenka, Managing Director, M&M
That prompted Goenka to say that financial year 2020-21 would be better for all, including M&M, than FY20. There are, however, a few dampeners that make the degree of recovery in the coming financial year uncertain, Goenka said. One of them is the extent of impact that the switch to BS-VI norms will have on the company.
M&M’s stock declined over 20 percent in the last 12 months compared to a gain of nearly 11 percent in the NSE Nifty 50 index. Goenka said analysts were concerned that the automaker will be impacted most by the transition to new BS-VI emission norms as diesel vehicles forms 90 percent of its portfolio.
“Once analysts realise that we are building a strong gasoline portfolio, that concern will go away,” he said. The portfolio, according to Goenka, will be 40-50 percent gasoline in a year or two. “XUV 300 is an example where we have reached 50-50 percent diesel-gasoline mix.”
Goenka is set to retire in a little more than a year. As part of the company’s succession plan, he will take on the role of chief executive officer, besides his current position as MD, from April 1, 2020 till the end of his term in April 2021. Meanwhile, the 49-year-old IIM-Ahmedabad graduate Anish Shah will take on the roles of chief financial officer and deputy managing director on April 1 this year, eventually succeeding Goenka as CEO and MD.
Watch | M&M’s Pawan Goenka On His Last Year At The Helm
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Edited transcripts from the interview:
Do you think that the worst is over in the Indian economy? I know you want to talk about Davos, I want to talk about the Indian economy-but do you think the worst is over? Not just from your industry point of view but broadly consumption declines are bottoming out?
I think that the gentle belief is, that the worst is over. My colleagues in Mahindra and industry colleagues and we would start to see a climb, but a slow climb. Unless some very destructive measures are done in the budget which are going to be hard. We are going to see a slow climb, but a slow climb.
What is the data that is giving you this? I mean, I must say. I am not questioning your conviction, but the data is so confusing. I am wondering what sense to make of this.
I think more than data, what I look at is the sentiment of the people. When I say people, I am not talking about consumers. How are our dealers feeling? What is the body language when I talk to dealers? How do our own salespeople feel? The optimism that I have seen in them in the last 5-6 weeks, I have not seen that in the last month and half. That is what is giving me the feeling that, we are alright. I’ll tell you one more thing. In Q4, increased our internal volume forecast by three times. It is not a number but all the same increased three times. Whereas till 6 months ago, we should have decreased it three times. That is what is giving the main optimism.
And that is a useful specific, right?
Data can always fool you and tell you whatever you want to hear.
You said that there is more optimism in the dealer network. We were looking at data between wholesales and retails, right? So, if you look at the SIAM data and if you look at wholesales, there is a double-digit drop-in sales in category across passenger vehicles. If you look at retail data-which is registration data, there is about a 4 percent drop. So, I think the assumption or the conclusion we have raised, over the last year and half, the bulk of auto slowdown problems seems to be overstocking in the previous year and de-stocking from the inventory side. Would you agree to that, now that we have had some time to look back and figure out what the issue was?
Overstocking was because there was a sudden slowdown. When there is a sudden slowdown in the industry, all the plants based in the sudden volume growth, all go haywire. Manufacturing is not able to stop production quickly enough because you have backward linkages to not end up with a lot of inventory. But, I must say that the whole inventory, for the whole industry and not just for Mahindra going into this quarter is about at the lowest that I have seen in a long time.
The reason why I am dwelling on this is because, it is giving us a sense of what went wrong- maybe and what can be corrected in the next 6 to 8-10 months for the industry to get back on its feet.
Let me just point out that a 4 percent de-growth in retail is not good news. So, we cannot say that its all because of overstocking. But there are many factors that have gone into the slowdown only one of which is the overstocking that has happened about a year ago.
What would you think the other factors are?
The biggest factor is the increased cost of transaction for the consumer. Again, there are many factors that have contributed to it but that is the single biggest factor why people are shying away from buying a vehicle. That is one. Two, some kind of confusion about BS4 and BS6. So, should we buy now? Should we wait and buy later? Will my vehicle be allowed to be registered afterwards? I don’t know why this is created because there is absolutely zero constraint on using any BS4 or BS2 or BS3 vehicle which has been purchased before 31st March 2020.
One would’ve thought that some of the sales would get advanced because BS6 will bring in higher costs, right?
We are beginning to see signs of that now. So, I had mentioned this in a TV interview about a month ago that in the month of March, the discount on BS4 will be on premium on BS4. I think we are heading to that because most manufacturers were very conservative about how much BS4 vehicles to make and therefore, the BS4 stock is quickly running out.
So, the second half of this financial year- which is FY20, you were expecting recovery in tractor sales and you were expecting better performance from the UV category. Does that hold, is that something you would like to up because the moods changed?
So, tractor sales are still down. They are down by about 11 to 12 percent for the industry in the first nine months. This 4th quarter, we do see some uptake happening, but not enough to make up for the loss of the first nine months. So, they will end up with roughly a 10 percent decline in the tractor industry and I would expect that once the Rabi crop revenue starts coming in, which should be good, we will see a pickup happening in about a June-July timeframe. So, something in February-March but bigger in June-July.
So, FY21 will be much better than FY20, right? I mean, you would be over the BS6 hump- hopefully. The sentiment would have recovered a little bit, growth will look better because of the base effect if nothing else, and I must assume that you might have got new product launches in the past, in the second half of the next fiscal year.
There are two or three unknowns that could put a dampener in it but generally, what you said is true. We do expect FY21 be better than FY20. But we still don’t know what the overall impact of BS6 price increase will be. The consumers will definitely delay their buying somewhat, whether it is 2 months or 3 months or 6 months or 9 months or they might say that we wont buy. I hope there is not a bulk impact but there might be some impact on that. There would be on the truck segment right now and the slowdown does continue and that will not quickly change because that depends on the whole economic activity to recover, right? So, specifically we have new product launches. That should give us volume. If I were to look in the crystal ball, I will definitely say that FY21 will be better than FY20 and I don’t think that anybody will disagree with that statement. How much better? We don’t know. It certainly won’t be uniform. Some companies will do much better than the others, but everybody should do better in FY21.
Two questions. One is, the M&M stock has done worse than its peers. How do you view that? I know someone in your leadership position doesn’t look at weekly or monthly or quarterly performance of stock prices but nonetheless, I am sure it is somewhere playing on your mind whether what can you do strategically and that connects to my last question. This is your last year of leadership. What is the unfinished agenda for Dr. Pawan Goenka?
If you look at twelve months- just to say that because the share price has not done well. If you look at a little bit of a longer time, then we have done very well. So, the last twelve months have been somewhat bad for us. But having said that, there are 2 or 3 factors that are playing on the minds of consumers or the analysts. Because of which, I say that the share price has done worse in the auto index. One is, we have a predominately diesel portfolio and our concern is that, the BS6 and the high price of diesel vehicles will be impacted more than the others. That is a fair question to ask. What is not understood very well is that, we have- over the last three to four years, have worked very hard to create a gasoline portfolio. We already have two engines launched. We have a third one to be launched at 6 to 7 months from now and therefore, we have a very strong gasoline portfolio.
Can you give me a percentage breakup or a proportion breakup?
Right now, we are predominately diesel. So, 90 percent diesel. I would say, 40-50 percent gasoline. For example, XUV300 where we have both petrol and diesel offering, we have reached to about 50-50. So, we could get to that point. Once they understand that we have a strong gasoline portfolio work in progress, then I think, that worry will go away. Second concern is coming from the agri-side. Because agri slowdown also has an impact on our share price and for some reason, there is a belief that we have no upside potential because we have a very high market share- about 43 to 44 percent. We have the highest profit margin in the industry. So, we are paying a price for very good performance in a sense. I do believe that some of the bets that we have taken in agriculture- which is the international expansion and that’s also the cause of worry right now because the international investments yet, are not paying off. But these are always long-term bets and one cannot expect to invest internationally and get a pay of one or two years. So, that’s a long-term bet which will compensate for not too much more headroom for us to grow beyond the 43-44 percent market share that we have. The third big worry which is causing our share price to be subdued, is Ssangyong now where the performance in the last six to nine months have been poor. Though strangely, the total weightage of Ssangyong price on Mahindra price is very low. But psychologically, it seems to have a bigger impact.
This is your diagnosis of why it is so?
There are the three factors that I would say.
So, let me then come to your last year of leadership. It’s been a long successful stretch M&M and I think you’ve watched this company and let this company grow into a variety of different segments. What is the unfinished agenda of Dr. Goenka? How much will you cram into one year?
There’s always a lot to do. There’s always if you take that clock back and say, take me back 20 years, I would do many things differently and that will be true for anyone.
Give me an instance.
I would not be able to. Not on TV but there will be many things that one would wish you did differently and that will be true for almost anyone not just for me. In the last one year obviously like you said that there is no need to cram things because there is leadership continuity. So, people who are going to be running the business in the leadership position are people with whom I have worked with all through and it’s not like, they’re going to have a very different agenda and then what I did. Because my agenda was formed by the same team. Therefore, there is no reason for me to kind of going to a sprint. We have to continue the pace that we have been continuing. There are a few things we do more aggressively not because it is my last year but because it has become more important in the current situation. So, we do that more aggressively but that’s about it. So, I am going to have an ordinary last year.
