M&M improved market share despite a 21% volume fall: VS Parthasarathy
It is the resilience and toughness that has come to the aid of the company.
The Street was pleasantly surprised by M&M’s operational performance. What aided that despite the heightened discounts, weak demand? What cost reduction measures did you undertake in the second quarter?
One of the great things to have is an organisation where the margin of safety and ROCE is a focus even in good times. Auto fell 20% in terms of volumes this quarter and that is in spite of an increase in market share for Mahindra. Overall, the industry fall was even sharper than that. We improved market share but it was still a 21% volume fall. In that fall, the auto sector maintained the EBITDA margin year on year at 12.7%. The tractor segment saw a lesser fall. They did more than 21-22% EBITDA margin and closer to 10% EBIT margin.
Again all this great balance sheet strength, less inventories in the pipeline and a zero debt situation is great news. There is a lot to take away in a sense that the organisation is lean and waiting for the turnaround. We can go up but that was not your question. You question was what aided this performance. It is the resilience and toughness of the organisation.
I had talked about an auto sector cost re-engineering programme where they took every part of the cost and said we have take a breakthrough kind of reduction in cost because of new challenges and as we may have to invest in new things. So they are undertaking a deep look into their business model. That is the kind of thing which is standing us in very good stead. No cost is assumed to be given and over a three-year period, the auto sector should look at 300 to 500 bps change and that has helped us in this quarter. It is the tractor sector which helps us reposition our market and our returns respectively.
Did you say that you did not have to let go of employees to bring down your costs?
Yes. Our headcount has been flat in terms of both white collar or permanent blue collar employees, except for a few which has happened via retirements.
You have touched upon the tractor growth and you have said that you are now looking forward to the recovery. Do you see any near-term pressures continuing? Given the kind of direction that we have had with the monsoon, is it working for you as a boon or as a headwind?
Rain Gods have given a lot of rain this time. We have had 110% of normal. So clearly in the long run it is in excess. But it does come with short-term pains and I do not want to lessen what is happening because some crop would have got destroyed and so livelihoods would have been lost. But if you look at the rabi season, good rainfall and high reservoir levels augur very well for the new harvest and sowing.
Second, there are also projects coming in the rural areas and the spend is starting to happen. Clearly, all the good green shoots are on the positive side for the rural market. I would be surprised if there is not a recovery and I would not be surprised if there is a sharp recovery in Q4.
Then why is it that you have cut your tractor guidance because that obviously means that somewhere you do envisage that tractor contribution is going to go down?
When you talk in terms of growth, it is from the perspective of demand picking up. But you cannot take away what has already happened. The guidance comes more from what happened then what would happen in Q4, etc. We can be positively surprised both at the industry as well as the economy level.
As M&is M highly exposed to the BS-VI transition and related cost challenges, we see increasing competition. In light of these disruptions, how are you expecting the segment to perform?
There is no question that there are lots of challenges for the auto sector including the BS-VI transition, completion, the business model change, the electric vehicles coming in. But some of them are boons as well. This quarter we are extremely pleased with our EV performance. We sold more than 2,000 vehicles. All this augurs well for us in some sense. The intense competition, the change in business model also bring about new products and new kind of technology and we are prepared for it. So if it is EV, then we are there. BS-VI transition is a given now.
It is a challenge but all of us have to go ahead and try to meet that. So we had prepared for it. We will bring in new products in the right kind of time. We have to make sure that the dealers have least amount or no stock at the end of the period. It is a challenge but I am sure the industry will come up on the right side on this one.
Are you facing a lot of heat especially in the UV-2 segment because of MG and Kia?
There are new products which have come and all of them are helping the industry grow. In a broader sense, overall PV market share has gone up. The total auto industry market share has gone up. In a sense, maybe the PV is the right way to look at the market share and there you can clearly see that we have held our own. The new products which are coming hopefully will lift the sentiments and help broaden the base. We are very happy to see competitions and there are no problem about that. We are happy to see our market share going up under these circumstances also.
There is still a perception in the market that Mahindra’s ability to ensure a smooth transition to BS-VI is facing a little challenge. How ready are you? What is your preparedness for implementation of BS-VI?
The one challenge we will have is that the fuel has to be available in time. The Government of India is making all efforts to make that available and there is a bit of discussion which is going on there. It needs to be available a little ahead of 1st April and that is one effort which is going on. Except for that, we are ready and able to do so very quick answer and we have showcased that.
When will the Ford-Mahindra partnership synergies flow through?
The Competition Commission approval is the first step. Once we get it, we will share more plans with you.