‘Consumer demand needs a financing fix’


Two years ago, when the going seemed good, Srivats Ram, MD, Wheels India Ltd., had said his industry was cyclical and that what goes up typically comes down. In the midst of a pandemic, he takes a tempered view, suggesting that things could look up soon. Excerpts from an interview:

This slowdown seems to have hit the industry pretty hard. Did you expect the downturn to be this severe?

I can’t profess to have predicted that the downturn would have been as bad as it was in FY20. But it is the nature of the industry to be cyclical and it was anticipated at some point, although the extent of the slowdown is much more than what I expected. I do not think that companies who have been in existence for 50 years and more have ever experienced a month of zero sales. To that extent, iIt is totally unprecedented.

When we have found a new normal in the post COVID phase later this year, volumes are likely to be a lot less than what it was last year. While this year will be a wash [out] compared to last year, if you look at FY22, you are probably going to have at least a month and a half of gain as compared to this year (that saw a lockdown in April and May) and thus there will be some kind of positive base effect next year.

Is the government taking the right steps? Does spurring consumer demand without looking at the supply side risk fanning inflation?

With companies working at a fraction of their capacity, industrial inflation is not a major concern at the moment. When we came out of the lockdown, supply chain was very visible as an issue but this is likely to be more short term in nature. Longer term issues are really demand related.

One concern in the passenger cars segment is about getting customers to come to the dealerships and buy cars. The issue that could come up there is the credit rating of individual customers. The banking sector has been risk averse. Given the current situation of lower prospects for most people, banks are likely to be even more risk averse. Demand is a question of aspiration and of financing.

After the financial crisis of 2018-19, the banks have started looking into credit history even more. In the current scenario, when most people are struggling, if banks continue with tough norms, then financing of consumer demand could be an issue. Last year, a lot more loan applications were rejected as a result of the tougher norms and it will be even worse now.

This needs to be addressed. If the financing issue is not fixed, it will be harder for the passenger vehicles sector to look at reviving demand.

Some suggestions that came up in discussions with ACMA leadership include rationalisation of GST for the auto industry for a brief period; localisation benefits for importers by way of lower duties on their remaining imports; and similar incentives to importers for increased exports.

You had said global firms looking to de-risk were exploring locations outside China. Has India failed to capitalise on the trend?

Even pre-COVID, a lot of investors had been asking the global companies to look at ‘sourcing’ portfolio de-risking. This is not a knee jerk reaction but had started a couple of years back.

So, the opportunity is there for Indian companies; but in the current situation there are limitations as well.

The possibility of international travel is limited. When an Indian firm becomes a supplier to a new global customer, an audit is conducted by the overseas firm.

With travel restrictions, that could still take a while. But if you are an existing part of the [vendor] mix and if they are looking to change, then Indian companies could stand to gain as they may give more [business] to the existing suppliers.

Has Wheels India benefitted from this de-risking strategy?

Yes, for some of the newer products where we are just making investments, we are aligning with the strategy of some of these companies that are moving away from a particular geography.

The opportunities were there even earlier but the current scenario has speeded it up and kind of given it a fillip.

In the last couple of years, the global firms have been looking at redistributing their sourcing. Post COVID, because the uncertainties are more, a few more companies are now looking at distributing their sourcing. One of the industry segments that Wheels India is present in is looking at this redistribution of sourcing but for it to fructify, it will take 1-2 years.

In the windmill industry where we are becoming more and more of a global player, we are looking at customers and their de-risking strategy and seeing if we can align with that and get business from some of these companies who are looking at changing the mix.

Why do the Railways, windmill and tractor segments give confidence for growth this year?

In the Indian Railways, there is already a safety commitment to change and convert to LHB coaches. We are involved in the making and supplying of bogie suspension parts for LHB coaches. There is also a certain amount of redesigning of suburban rail where some of the products that we have developed are being deployed. It is a steady growth story and is something which will hold us in good stead.

Prior to COVID, this year (2020) was supposed to be a peak year for the windmill industry. In this segment, a lot of what we supply domestically is exported by windmill manufacturers (sometimes even sub assemblies) to meet global demand. Being a capital goods industry, there is a certain amount of book that has been already built and we are looking to execute the orders.

The bullishness on the tractor segment comes on the back of a good monsoon and the impetus of the government on the rural and agricultural sectors. Also, the previous year was a down cycle for the tractor sector. The positive growth this year in the tractor segment is completely opposite to some of the other sectors we are in.

Exports seem to have given you some lift…

A lot of what we export comes under ‘industrial’ and what are deemed essential services such as windmills, construction equipment and even trucks. These have been less hit by the lockdown than the other sectors. If the situation becomes better globally and if operations become more streamlined in those countries, then exports could improve, with monthly economic activities picking up there.

What is the thought process behind the philosophy of investing in a downturn?

While we are conservative by nature, the investment that we make is based on business opportunities. It is true that these opportunities are linked to the market at that point of time but it also depends on which market you are in and what the customer tells you. We have invested significantly in the last two years than ever before. While some of the investments have gone into the new segments that are showing growth for us, some of it has also been into traditional segments that [now] see over capacity. We are in weekly contact with our customers and there has been no negative feedback yet. There has been nothing that our customers have told us recently that seems to indicate that things are slowing down. And that is good news.

You have had overseas tie ups with firms in Japan and Turkey. Has that helped you get customers?

The technology agreement with the Turkish company firm EGE Endustri was for the supply of lift air suspension for multi axle vehicle for the Indian market. Japanese firm TOPY Industries is the leading wheel manufacturer in Japan for the car industry. They get early development advantage for all new models there. Being aligned with them, we get into new models that these Japanese manufacturers introduce there in that country. TOPY also buys a lot of products from us in segments such as construction equipments where the best global manufacturers buy from them.

What is the scenario on CVs?

There was already a cyclical downturn last year. The axle load norms suddenly increased the load carrying capacity in the country significantly.

Unfortunately, it happened just prior to lot of the financial hiccups that we had in our system which also started slowing down the economy.

Thus, there was excess capacity that built up.

At some point, we will have to return to public transport. The social distancing in public transport will mean the need for more buses.

A nationwide bus building scheme will give a shot in the arm to the CV sector as well as the components sector. The Government has an ambitious 5-year plan for the construction sector. If construction activity starts happening, this will result in demand for tippers and construction equipment and that will also be a boost to the CV sector.

What about prospects of the defence segment?

Government has launched many defence programmes but most have a long gestation period that involves testing and validation and these will come to fruition in course of time. And the auto sector will benefit from that.

Did you have to resort to salary cuts?

We try to ensure that we abide by the thinking of the government in such hard times. But beyond a point, companies will have to make that adjustment and take decisions in terms of a cut because our economic fortunes are significantly worse than they have ever been because of the lockdown and slowdown. The cuts are higher at the top of the pyramid and much lower at the bottom.

You had a tempered view when the going was good. How about now?

COVID-19 is not a cyclical event but an unprecedented one. By and large, if you look at it over a longer period, there will be troughs and peaks. And the world has been a lot more volatile over the last 10-15 years in terms of these cycles. You put in your best efforts but time normally normalizes things. If you are having a period of very robust growth, time normally will come in between and ensure that it is disrupted. And if you are having a period of downturn, time will interrupt you and suddenly and surprisingly things will improve. It also shows how little control we have over what happens to us.



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