There is no doubt about a rural recovery: Mahindra’s Pawan Goenka5 min read . Updated: 06 Jun 2018, 10:44 AM IST
Pawan Goenka said last two years had been very good in terms of farm incomes, helped by two rabi and two kharif harvests, and an increase in minimum support price
Mumbai: Banking on a rural recovery and higher farm income, Mahindra & Mahindra Ltd will introduce three new passenger vehicle products; enter the 10-16 tonne truck segment to complete its commercial vehicle (CV) portfolio ranging from 0.5 tonne to 49 tonne; turn Ebitda-positive for its trucks business; set up assembly facilities overseas—all of this in the current financial year. Ebitda or earnings before interest, tax, depreciation and amortization is a summation of a company’s profitability.
“Frankly, the kind of growth that we saw in the fourth quarter surprised all of us," M&M managing director Pawan Goenka said in an interview, He added that the last two years had been very good in terms of farm incomes, helped by two rabi and two kharif harvests, and an increase in minimum support price. “That results in reasonably good affordability for the farmer," he said.
Goenka is concerned about growing protectionism the world over and calls for a need to devise strategies to counter it. Edited excerpts:
You have had about 70% growth in your net profit. What has changed in the past one year?
All the uncertainty regarding GST (goods and services tax) and (the shift from) BSIII (to) BSIV is behind us, so we can now plan very well for the coming years. The safety and emission norms are well-defined. It looks like the ministry has made it clear that 31 March is the last date for production and not sale, so we don’t expect the kind of thing that happened from BSIII to BSIV.
We have been looking to see how we can make BSVI an advantage as we switch over, rather than something we are concerned about. When we go to BSVI, it will not only be about emission but we will also be looking to add to the product so they have better value for the customer.
Immediately, we are launching three products this year; the U321, S201 and G4 Rexton. All three are very important for us. Two of these are volume products, while the third is not. We believe we are well poised going into FY19 with the line-up we already have and the upcoming one.
What about the trucks business and global expansion?
We are predicting a first Ebitda-positive year for the truck business this year. We will also be entering the 10 tonne to 16 tonne segment. Therefore, our CV portfolio becomes complete from 0.5 tonne to 49 tonne.
On the international side, we had taken a call two-three years ago to have more market presence than just exporting vehicles. Therefore, now we have a physical presence in four zones in Africa—Cairo, Nairobi, Nigeria and Johannesburg. We also have offices in Sri Lanka, Bangladesh and Nepal. We are setting up CKD (completely knocked down) plants, which will allow us to have a more aggressive export growth.
Growth in the tractor segment is a happy story...
When it comes to tractors, the story is even more exciting in some sense. We are doing three things; the first is to fortify the core, which is the domestic tractor market where we have been the leaders for over 30 years. We have been fortifying it by launching new products. The portfolio is almost entirely new with three launches in the past three years. Therefore, we believe our domestic tractors business is reasonably well-insulated from any kind of attack.
We have established CKD operations in the US and Australia, with Brazil and Mexico coming in recently. Acquisitions over the past three years (such as Hisarlar and Erkunt in Turkey) are giving us good global growth. This year we had over $1.4 billion in revenue coming from outside India in the tractor business; this was almost 38% of revenue. That’ll keep growing.
Are you actually seeing a turnaround in rural sentiment?
It is definitely positive; there’s no doubt about it. Some of it is actually what has happened and the rest is anticipation of what is happening.
What is driving the 40% growth in tractors you saw in the March quarter? Are rural incomes really rising?
It’s a combination of things. One factor was subdued demand because of a slowdown in the tractor industry, another is the increased availability of funds for farmers.
If you were to look at where we were in FY14, we had sales of 630,000 units. In FY18, we had 700,000 units. That means 11% growth in four years. Don’t look at 40% growth in one quarter. Look at 11% growth in four years... that’s not very large. The industry was not doing well for two years and then it recovered during the next two. Therefore, if you were to look at the 8-10% average growth, we still have room for good growth.
The last two years have been very good in terms of farm incomes. We had four very good harvests—two rabi and two kharif. The support price went up also. That results in reasonably good affordability for the farmer. Everything else is positive in terms of availability of retail financing, interest rates. Everything is adding up to create this demand. Frankly, the kind of growth that we saw in the fourth quarter surprised all of us.
Are you taking a bet on the Indian economy?
When I look at the next two years, we are certainly more confident in the first year but there’s some uncertainty in the second year. GDP growth is well-poised to grow above 7%, that’s a good growth. The monsoon also looks very good. The interest rates also look good at the moment; if they go up by 25 to 50 basis points, it will not spell any kind of disaster. The only concern is the rise in commodity prices. There was high growth last year and there will probably be equal growth this year. Combining both years, we will see a 5-8% increase in commodity prices, which is quite significant. That will lead to an increase in price in our cars and tractors. Oil prices are a concern as well. There are no other macroeconomic or external concerns at the moment.
There is a concern in terms of the increase in global protectionism, which is coming in now. Almost all countries, big and small, are looking at more protection at their borders either through tariffs or non-tariff barriers. Therefore, we have to redefine our strategy for global expansion. We started a bit earlier in terms of having a physical presence in the markets rather than counting on exporting our vehicles and tractors from India. That should work very well for us.