VS Parthasarathy is the chief financial officer of Mahindra & Mahindra Limited since November 14, 2013 and also serves as its group chief information officer and member of group Executive Board. Parthasarathy said commodity cost and expenses towards launching the Marazzo MPV in September led to lower auto margins in the second quarter. However, last week, the company posted a 23.9 percent rise in quarterly profit, beating street estimates, helped by higher revenue from its automotive segment. Parthasarathy said the company saw 17 percent growth in the tractor industry in October and added that growth and the volume is going to be similar in the second half as it was in the first half.
In a wide-ranging interview to CNBC-TV18, he said the company intends to save 200 basis points (bps) over the next two years under cost reduction programme.
One basis point is a hundredth of a percentage point.
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Edited Excerpts:
At the conference call post Q2 earnings, you said M&M will manage to meet only the lower end of your 12-14 percent tractor growth guidance in FY19, can you elaborate on that? Will you see single-digit growth in the second half and also are we seeing a structural slowdown?
I think the second half of the year is going to be very strong. The kind of growth – around 17 percent growth in tractor industry – and the volume that we saw in October is going to be similar in the second half as it was in the first half. So that is not the difference. The reason why the growth percentage is a little bit more tempered is that last year’s second half was strong and therefore, from that perspective, you may see the growth percentage tapering but the demand and the consumption story of India continues.
The positive aspect in tractors was that margins were held at 20 percent for the last five quarters, this is despite lower volumes. Will you be able to hold on to this by the end of FY19 as well?
One of the problems that I have is that I never give guidance so I am not going to talk about what we can do in the second half but let me just give you two-three inputs which will make the viewer (reader) and you take an educated guess of what could come.
Number one is that we have had growth in the last four-five quarters. You have seen that. It has been a robust growth but you are also right in saying that some times – one year back or two years back when our growth was subdued and still, we were able to maintain a very good margin.
This is coming from two things. One is that we are able to constantly do value engineering and value addition, which is giving us that added margin and second is that our cost re-engineering programme or what we call as cost management programme is giving us a lot more addition.
Added to us is the thing that we are doing over and above only tractors by implements and other things are also giving us the margin. All this put together, our margin is 20 percent, which clearly does not have any extraordinary element in it. This is coming out of operational efficiency and excellence.
Could you tell us what are the cost reduction plans currently underway and what could be the potential benefits over a 12-18 months period of these efforts?
What happens in cost reduction is you know there are new kind of expenses, which are coming. More digital way of doing things, new business model emerging. So what we are saying is that our system cost is everything below material up to profit.
Team is formed for each of the cost area and they are giving suggestions, which gets implemented. This, we are calling as Project Kuber and what is intended is that can we save 200 basis points (bps) over the next two years. So in good times, this 200 bps will go towards investing for future and in all times, it will be able to feel safe against any margin erosion. That is what is intended by this programme over the next two years.
That does provide some clarity. On the auto business, we did see some fallen margins to about under 8 percent. This was due to the Marazzo launch, higher raw material prices etc, could you tell us once these launch costs are behind, what is the overall auto business margin going to look like over the next 12-18 months again?
There are three reasons why these margins are lower this year in auto. First one is there is a commodity cost increase and it has happened across the industry, all auto players will be impacted by this and we are not able to pass all of them to our consumers because then it would dampen the demand. So we have deemed it okay to pass on half of it roughly and the other half is dampening the margin.
The second major reason is because of the launch, Marazzo launch, the prices at the lowest are introductory area and the cost is not matured. So the margins are depressed, our model mix is negative to that extent.
The third is the launch cost of Marazzo. So once the launch is over and these costs are behind us as you said then as cost starts to go down on Marazzo and the price seems to get to its normal pricing, the margin should improve there in terms of Marazzo.
Even in the material cost, if we cannot pass it today, over a period when the material cost cycle normalises then we should find ways and means of this being absorbed in the system and therefore our margin should normalise.
So over a period of time, all these elements should come to even keel but I cannot say if it happens next quarter or next to next quarter. Clearly, we have two more product launches, which are coming in the next quarter and that will have its own impact but over a period of time. Certainly, all these costs are possible and will vanish over time.
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