Diesel, two-wheeler market still strong, say experts

Singapore:  

The dismal trend in car sales continued in June on the back of negative market sentiment. Demand has been subdued given the combination of high interest rates, petrol prices and policy uncertainty over diesel cars. However, experts still hope of a recovery in the next four-five months. In a chat with NDTV Profit’s Ira Dugal, Arvind Kapur, MD of Rico Auto Industries and Amit Kalyani, ED, Bharat Forge Ltd, discuss how the Indian auto sector will perform going forward.

 

Below is a complete interview. 

 

Mr. Kapur, we have been talking a lot about the auto slowdown. It is no more a one-two month story. So, what is happening at the ancillary end? How are things shaping up?

Kapur: See, if you look at the auto component industry in totality, the two wheelers are doing very well, and infact, there is a good growth in the two-wheeler industry. If you look at some of the selected cars, specially the diesel vehicles, they are doing very well also. Commercial vehicles are down and that is one concern that people have. In fact, some of the ancillaries have started shutting down their shops for maybe one-two days a week. Those who are completely dependent on commercial vehicles, some of their cars are not doing pretty well. But, yes, the exports are pretty good for many of the ancillaries.

 

So, just to clarify that point sir, you are seeing a lot of ancillaries shutting down production for a day or two a week?

Kapur: Yes, that is very obvious. In case my customer shuts down the line, I would shut down the line too. There is no point in over producing and just stocking on the material. But, by and large, those companies who are defendent on the two-wheelers, they are not shutting shop. Those who are mainly dependent on cars, mainly the diesel cars, they are also doing very well. So some of them, who are dependent a lot on commercial vehicles, they are the ones who are impacted mainly.

 

Mr. Kalyani, what is your perspective? Do you agree with that analysis?

Kalyani: See, I generally agree with what Mr. Kapur is saying. I would only like to add two more points to that; one is that – everyone has been talking about automotive boom in India, which led to a lot of people setting up capacities. So, when there is a downturn at a time when capacities have increased, it creates an added burden on a lot of companies. So those companies are definitely more affected.

 

Secondly, as Mr Kapur mentioned, the CV [Commercial Vehicles] market is very badly hit, and this is a market, which is very dependent on economic growth. It is not based on discretionary spending, but on industrial activity and movements of goods and services. So, this is a sector which has been very badly beaten. The market is down between 15-35 per cent down right now depending on which end of the sector the company is in. But, hopefully this is a short-term scenario and in the next 4-5 months, the situation should turn around.

 

Mr. Kalyani, you are saying that capacity utilization is coming down, and we are not even talking about future investments. I am just wondering, is the longer or medium term outlook on the sector starting to change and starting to impact some additional investments that the company would be making, Sir?

Kalyani: You have to look at it from sector to sector. If you look at the passenger car sector, eight to ten months of negative sentiment have finally started to impact the consumer sentiment coupled with high interest rates; and therefore, buying is low. But, as you heard earlier, the diesel market still continues to be strong. Now, if there is some activity or signal from the government that they are cognizant of this and are willing to take some action, whether it is interest rate cut or some fiscal measure, it will have a positive impact on the industry.

 

So, as an industry, I don’t think we should lose hope or get overly worried. Yes, as Mr. Kapur mentioned, we have to calibrate our current operations, inventory and production to keep in line with the demand so that we don’t blow up our balance sheets and have cash flow issues. But at the same time, don’t lose focus of the overall long term opportunity and do whatever possible to reduce internal expenditure.

 

Mr Kapur, there was a comment that I had picked up earlier that even on the export side, the volatility aspect is much higher, whether it is Europe crisis; but say, from China?

Kapur: The people who are dependent on Europe and Americas, and the class of people that you are supplying to, if it is after market or if it offload vehicles, the high end cars are doing very well; the Audis and BMWs are doing exceedingly well and in fat, the demand has gone much higher. Our exports are going to be higher than what it was last year. We have been talking across the industry to man people; and by and large, they are all happy where exports are concerned. They expected a big downturn which has not happened as far as exports are concerned.

 

Now, to explain as to why this is happening, that is a big question mark. But the market is sustaining at the moment, and let’s hope that it is going to sustain further. Also, Mr Kalyani said it very correctly that the hope in the industry is very good. Yes, there are issues because of the policy and cost of ownership as far as passenger vehicles are concerned, but that is because a major chunk if it is financed by the banks. Also, because petrol prices are very high, people are shifting to the diesel variants.

 

But, in the medium-long term, the growth is going to be there. There will sales of 8-10 million vehicles by 2020; and that is the growth we are targeting and we will be producing almost 10 per cent of the car production around the world. So, in long term, we are ok, in short term, we will have dips over the years and we will have to sustain during that.

 

Mr. Kalyani, to what extent is the rupee providing a buffer to the export story; because at the end of the day, the weaker rupee should benefit you as manufacturers from the export side?

Kalyani: Yes, but you have to understand that a lot of our commodities are based in dollar. So, as the rupee weakens, that price also goes up. The part that is unaffected is your conversion cost, which is where you do gain. But most exporters hedge their dollars. So the impact of this is seen typically with a time lag. But it definitely makes India a more competitive location.