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We will have zero capex this year and a large part of next year: Baba Kalyani

ET Now|
Aug 14, 2019, 11.57 AM IST
Baba Kalyani-1200


  • The second half should be a little better than the first half.
  • Q2 will be even worse as most vehicle makers have taken plant shutdowns
  • One should be cautious & cut costs down.
This is the fourth one that we will be seeing from 2008. So downturns do come, industrials are a cyclical business, commercial vehicle also is a cyclical business. Everything that goes down, also goes up at some point in time. So, I would not be too worried about it, says Baba Kalyani, CMD, Bharat Forge. Excerpts from an interview with ETNOW.

The NA (light goods vehicles) class A production has been robust but sales have started to moderate. Are we looking at some kind of production cut as the order backlog declines? Should we read too much into this or is the slowdown just cyclical in nature?
The real slowdown is what is happening here in the domestic market and quarter one (Q1) was bad. The quarter two (Q2) probably will be even worse because most vehicle manufacturers have taken 8-10 days’ plant shutdowns. The good thing is the government is taking this issue up pretty seriously. I am sure they will come up with some interventions to resolve this problem. Hopefully, we should see the second half getting a little better than the first half.

Given that you are already struggling with the slowdown in the domestic market, do you think a moderation in the international markets could lead to double digit decline in sales?
Well, I do not know because we have a fairly diversified market in many different areas but a lot depends on the domestic market. The domestic market is seeing a double digit decline.

Given that the OEMs focus on correcting inventory levels across the value chain, what is the impact you are currently witnessing in order flows?
We are not seeing any larger impact than that because in the first quarter itself, the same thing was happening. If you looked at the inventories of commercial vehicles with dealers at the end of the first quarter, they are pretty close to 58,000-60,000 vehicles which is a huge quantity compared to the sales that is actually taking place. It was a matter of time before they started correcting it. They have started correcting the inventories.

How is it that you are managing cost efficiencies at your end? While sales are dependent on end markets, what will be your strategy to minimise the slowdown impact?
It is more than order inflow. The schedules and deliveries have become very volatile because nobody knows… I do not think even the OEMs know what they want to produce next week. It has become very volatile.

The bigger issue at play is there is an excessive inventory with the dealers and that inventory is getting liquidated. To that extent, production is going to be coming down. Second, we have had this major monsoon problem in the south. NH4 is still blocked because no trucks are moving around in that area because of water. Kerala is flooded. All kinds of issues are plaguing this industry. It is going to take at least two-three weeks before things start looking a little better.

Are you also curtailing capex to adjust the slump in the demand?
We have a very clear strategy. Whenever we have had a downturn, the first thing we do is focus sharply on cutting our costs, cutting our fixed cost, bringing our breakeven level down, cutting our operating cost and I think we are pretty good at that in doing so. At this time, we have taken an even bigger target for cost cutting and that should help us tremendously in other two quarters in terms of where our costs will be.

Second, we are also focussing on a lot of new products that we are developing. How can we speed that up and how can we put that in the market and create some new business out of this?

Third, we have been reasonably successful in the passenger car business. We have won almost every major contract even in India on the new vehicles that are coming out, plus we have fairly large business on passenger cars in Europe and the United States. So, that is a good area for us to keep growing. There are many places where we can grow the business and that’s what we are trying to do.

In the light of the various measures you have taken including capacity readjustment and focus on high operating efficiencies, how do you see the margin trajectory?
Yes, absolutely. We only produce what is required to be produced. We do not create inventory, any surplus stocks. We have decided to have zero capex for this year and a large part of next year. The only capex payments that we will have to make this year is from last year’s capex.

You have seen earlier down-cycles. Can you tell us what is your assessment and once we come out of this, what measures can the government take in order to ensure a revival for the space?
The last down cycle lasted for roughly three to four quarters. The government fundamentally revived that particular industry by making sure liquidity was available to the industry and a demand was created. If you look at the classic case in 2009, the government placed an order for 65,000 busses under the Jawaharlal Nehru Urban Renewal Programme and that kind of kick-started the whole CV industry into full gear.

There are many things that government can do and there has been a fairly reasonable dialogue between industry and government last week. Let us hope the government will come out with some solutions.

India has also come on Donald Trump’s radar for unfair trade practices. Could that have any impact on your sector?
Honestly I am not very worried about this. As you said earlier, we have seen many downturns this is the fourth one that we will be seeing from 2008. So downturns do come, industrials are a cyclical business, commercial vehicle also is a cyclical business. Everything that goes down, also goes up at some point in time. So, I would not be too worried about it. Yes, you should be cautious and you need to do the right thing, cut your cost down, prepare for the downturn, get technology levels up and make sure you are not spending money on unnecessary capex. Those are the things that everybody does and we are doing it in our company too.

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