Mahindra & Mahindra Limited Conference Call On Implications of Union Budget Proposals - PDF

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Mahindra & Mahindra Limited Conference Call On Implications of Union Budget Proposals MANAGEMENT: DR. PAWAN GOENKA, EXECUTIVE DIRECTOR & GROUP PRESIDENT (AUTO AND FARM SECTORS) MR. V S PARTHASARATHY GROUP CFO & GROUP CIO & PRESIDENT (GROUP FINANCE, M&A) MR. S. DURGASHANKAR PRESIDENT (GROUP M&A, CORPORATE ACCOUNTS & GROUP SECRETARIAL) MR. K. CHANDRASEKAR EVP (CORPORATE FINANCE & INVESTOR RELATIONS) Page 1 of 12 Ladies and gentlemen good evening and welcome to the Mahindra & Mahindra Ltd s Conference Call to discuss the implications of Union Budget Proposals. We have with us M&M Management Team today. We have Dr. Pawan Goenka Executive Director & Group President for the Automotive & Farm Equipment Sectors; we have Mr. V S Parthasarathy Group Chief Financial Officer, Group CIO and President Group Finance and M&A; Mr. S. Durgashankar President (Group M&A, Corporate Accounts and Group Secretarial); we have Mr. K. Chandrasekar EVP (Corporate Finance and Investor Relations) and then we have other Senior Management and the Investor Relations team as well. As a reminder all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. K. Chandrasekhar to commence the proceedings. Thank you and over to you. K. Chandrasekar: Good evening. Arising out of the budget announcements yesterday there were lot of interested calls from analysts and investors about the implications for M&M, the industry, tractor other things so we thought we will quickly have a word with you and this call is going to be brief therefore for 30 minutes focused on some of the proposals contained in the budget on UV and on the impact on tractor and therefore we are going to have opening remarks by Dr. Pawan Goenka who is Group President and Executive Director Mahindra & Mahindra Ltd followed by Mr. Parthasarathy who is the Group CFO and CIO. So after their statements we can take questions and we hope to close within 30 minutes. Thank you very much for attending this and we invite Dr. Pawan Goenka to make his remarks. Thank you Chandra, good afternoon. This call was set up yesterday because many of you had contacted Chandra and team to get some clarifications probably between yesterday and today lot of clarifications already happened, so what I have to probably is very well known to everybody now, of course there was some confusion in the afternoon yesterday not everybody knowing what really was intended in the budget. So just let me for completeness sake repeat what the situation is with respect to the CESS that has been applied to automotive products and also this whole business of TDS that is there, I will also talk little about other things in the budget that might have an impact on the auto industry, we are focusing right now today only on auto side we are not talking about tractor, if you have any specific questions on tractors I will be happy to answer those. So, basically as far as the CESS is concerned first of all most of it is applicable to everybody in equal measures, so above 4 metres vehicles the CESS is 4% and there is no difference between the petrol or diesel or SUV or luxury car or sedan or anything, everybody is 4% so therefore there is no competitive disadvantage to one company versus other and therefore the effect that will be felt by all will be based on what might happen to the industry volume because of that and that I will come to that in a minute. When it comes to sub 4 metres there is a distinction between petrol and diesel, petrol being 1% and diesel being 2.5% and therefore there will be a relative disadvantage that diesel driven vehicles will have for sub 4 metres, again I will come to that in seconds. As far as this TDS is concerned in a sense it has no implication because it is only tax Page 2 of 12 being collected at source which will clearly be substituting tax paid somewhere else but it's certainly does increase the hassle for the dealer and dealers will not like this extra paperwork but I do not think that this will have any meaningful impact except for requiring extra cash flow when a vehicle is being purchased and most people stretch when they purchase a vehicle for down payment that they had to make and therefore needing 1% more is a stretch on the cash flow. I personally do not think it is going to make much of a difference but we will have to wait and see what happens because basically what it means is somebody buying a 10 lakh vehicle normally let us say would like to pay 2 lakhs down payment now he will also need 10,000 more for the TDS that he has to pay along with the 10 lakh vehicle. So let me start from this first and go backwards, for Mahindra the vehicles that are affected which sell for more than 10 lakhs and this is the 10 lakh ex-showroom price which means before the road tax, so all of the XUV models will come under that and some of the Scorpio models will come under that. All the other models of Mahindra are not affected by this 10 lakh TDS tax collection. Now coming to the rest of the vehicles Bolero, Scorpio, XUV 500 and Xylo they all fall in the 4% bracket, the KUV 100 which is both gasoline and diesel will have 1% and 2.5% and TUV300 which is only diesel will have the 2.5%. So in terms of which product get affected relatively speaking for Mahindra, Bolero, Scorpio, XUV, Xylo is in the same boat as anybody else so there is no relative impact. KUV since we have both gasoline and diesel it has no relative effect, the only thing that might change is the ratio of petrol and diesel which is right now 45% roughly petrol 55% diesel may swing little more towards petrol those were sitting on the edge will probably prefer to now buy petrol to the petrol will be 1.5% cheaper relatively speaking compared to what it is today. The only vehicle where we do not have petrol option where there is diesel impact is that 2.5% on TUV300 again I do not expect to see a relative volume impact on TUV300 because it's a vehicle which is very different than hatchback or that will be under sub 4 meter so those who buy TUV300 I do not think will switch to a different vehicle because TUV300 has become little more expensive because of this extra CESS. So my conclusion from this is that on relative basis the impact on Mahindra products will be marginal. Now we come to industry itself, undoubtedly if I would look at in isolation any time there is a price increase there is a negative impact on volumes that goes without saying and 4% increase is not a small increase so I think 1% on petrol sub 4 meter probably will not mean anything and that customers will not even kind of notice it because it is an increase of let us say Rs on a 5 lakh vehicle so it will probably not get noticed too much but the 4% and will get noticed, 4% on a 10 lakh vehicle is Rs. 40,000 will get noticed and 4% is more increase than we do in a given year on price normally the price will go up by maybe 2-2.5% in the whole year, so 4% is quite steep and looking in isolation there will be a volume impact because of that again for the industry not specific to Mahindra but to the industry, but at the same time the budget has many other things that will help to increase volume. So if I have to look at in totality my guess is that the negative impact of 4% increase in CESS will probably get more than offset by other things. Other things primarily are what might happen to rural economy because of the emphasis that has been put on agriculture, on farm and the rural economy on infrastructure and we do expect that they will create a good demand pull provided as I've said in the past interaction and I have said yesterday in all my interactions provided monsoons remain good, because monsoon good is the Page 3 of 12 precursor for rural economy to devise without that nothing in the budget that has been said would be sufficient to revive the rural economy. So my conclusion is that with good monsoon with the announcements made in the budget about rural economy minus the increase of CESS which is negative overall we probably will come out slightly ahead and not slightly behind, that is my conclusion but it remains to be seen it depends also on what else happens if there is for example interest rate reduction by RBI then that will certainly offset to some extent the 4% increase that to happen on the price. The question asked was also very well pass it on, yes we will pass it on, that always happens that goes without saying almost everybody would, I think some people have already announced they are passing on and some are still waiting. We are still waiting today we have ASAI meetings all CEOs are in that ASAI meetings tomorrow CEO will be back and in the next day or two we will decide when we will pass it on but eventually it will get passed on to the customers therefore it will not have the effect on margin because it will be passed in totality. But it could happen slight impact on volume if it all but not on margin otherwise. So that is pretty much the summary will go into any specific questions that you may have, Partha you wanted to add few more things. Thanks Pawan. Overall the thrust of this budget has been on rural and infrastructure of rural that which Pawan alluded to, over and above the infrastructure and the focus on infrastructure, the focus on housing and real estate which has been one of the big languishing and the impact on including the banking sector while you can argue something is low or something is high but the fact is they are trying to address that with a reasonable amount of money, you should only be positive from where we are currently and liquidity should also ease and keeping deficits means the interest rates which Pawan alluded to also augurs positive. So if I were to take mentioned somewhere that this budget is pregnant with possibilities now both the government and private sector have to kind of push and deliver on the ground level. So that is my assessment of the budget, the Finance Minister also made a point that they are now not looking at extending many exemptions and in the sense made positive pitch for removal of exemptions so there I must share one aspect which I was hoping for some benefit to arise out of the budget. Many of you may know it Haridwar which was tax exempt from excise point of view for the first three quarters of the year, so from first January that is no more available and any extension which could have been possible now we know for the fact that it is not. I am mentioning this so that anyone who has not caught that can take that into account. Also next part is that mentally what do I think will be the impact so I think the impact will be somewhat net-net looking at can be 100 bps impact we will see how this pans out over a period of time, what happens to commodity prices etc. but other things being equal the impact could be about 100 bps, without taking more time I would just say what Pawan said that please go ahead and ask your questions, as Chandra said this is a T-20 rather than a one-day. Thank you very much Sir. Ladies and gentleman, we will now begin with the question and answer session. The first question is from the line of Kapil Singh of Nomura Securities. Please go ahead. Kapil Singh: One clarification before I ask the question, this 100 bps is the impact on overall M&M plus MVML margins? Page 4 of 12 Yes. Kapil Singh: Any tax rate implications are also there? Why don't you ask the question fully because I'm not able to understand because of 100 basis points there is no tax implications, if the question is what is it earlier we used to get excise duty benefit, customer price being what it is our margins are beneficial to that extent and what I said is that if I estimate net-net the impact to be about 100 bps. I just want to add to it. Just for total clarity on this there used to be income tax benefit also but that has already expired, there is no difference on the tax rate. Whatever tax rate you have currently, that is a good point Pawan, it is already taking into account that there is no tax benefits available from Haridwar this year. Kapil Singh: That is what I was checking. My question regarding this budget was on this TDS this 1% you said is not incremental, this will not lead to a price increase but it adds to compliance cost so this will be funded by the customer and then the customer will need to take refund of this at the end of the assessment year when he files the returns, should we look at it that way and will in that case will there be customers who may choose to not buy cars more than 10 lakhs because of this? Let me answer the first part the tougher one I will ask Pawan. The simple answer is your understanding is correct, it is an administrative one of deducting 1% TDS unless a form is given by the customer saying he is a farmer in which case nothing will be deducted so the dealer will have to do an additional administrative effort and in a sense that the deal because of complex. I do not think anybody is going to downgrade the vehicle that they want to buy because they have to deposit this 10,000 which comes back in income tax so it is not even comes back like if you're going to pay advance tax you will pay that much less advance tax so therefore I doubt, if somebody is about to buy 10,20,000 cars and they decide to buy 9,80,000 that might happen so what might happen just to be little more precise. Let us assume that there is a Scorpio variant that sells for 10,10,000 and a Scorpio that sells at 9,80,000 I do not know if there is such a number I am just saying that, it might happen that somebody might say that let me not go to 10,10,000 let me buy lower variant and avoid paying this but I do not think is going to anything major. Few people may do it but it is very-very marginal. Kapil Singh: Company may also look at some opportunity to structure the selling price in the manner? Look if it is 10,01,000 I might make it 9,99,999 but it is not that we're going to reduce price because the revenue loss of profit loss by reducing the price is too high, if you do anything like this it clearly comes out in the bottom line. So it is very unlikely that anything will happen but if I just Rs. 5 above may make it Rs. 5 below. Page 5 of 12 Thank you. Our next question is from the line of Amyn Pirani of Deutsche Bank. Please go ahead. Amyn Pirani: My first question is on the fact that in this budget after a very long time there has been a distinction made on the petrol and diesel while it is only 1% and 2.5%, on a small car it could still become slightly relevant also given the debate which is going on and the fact that the Supreme Court had ruled and you were going to make further representations do you think that the signals government intent that going forward this is a preferred view that petrol is better than diesel? I do not want to hazard a guess on the second part because I do not know what their intent is and why it was done, whether it is a statement or whatever, the first part it is not after a long time a distinction is made first time, in fact I did mention yesterday in some of my interactions that something that I'm concerned about because that gives one more tweak, as it is have so many different excise slabs which distorts the market, just pays one more slab one more variable and every year there may be some tweak happening here and there 2.5% becomes 3% becomes 0.5% who knows so that is the concern I have it is one more variable and the second concern that I have is we are just about to get into GST, to create one more disturbance in the excise rates just for one year again counts somewhat unnecessary complexity that we're adding. So I do not know where it is going to lead to, it's a standalone, standalone is not something that we are very pleased with but it is not the first time that we have had things like this happen to us, we will come out of it and not a problem. Amyn Pirani: As a clarification the case which is going in the Supreme Court there is no final ruling yet? There is no final ruling but let me be a kind of be an optimist on this I'm also hoping with the Government of India having announced that BS-VI emission norms draft already which happened a week to 10 days ago and with this happening the Supreme Court may take a view that Government of India has done what had to be done and that there is no need for them to take any action. I don't know, they may decide that their job is done. Amyn Pirani: One clarification question on excise exemption that you mentioned, in Haridwar do you make automotive vehicles or the tractors? We make automotive vehicles and vehicles that were made there is the 3-wheeler, Bolero some models of Bolero and some models of Scorpio. Thank you. Our next question is from the line of Chirag Shah of Edelweiss. Please go ahead. Chirag Shah: Question on Haridwar what kind of capacities you have at Haridwar, the impact seems to be too big on M&M plus MVML including tractors if you have to just sum it up, what kind of numbers are coming from Haridwar? You would be surprised that Haridwar had a capacity of almost 1 lakh vehicles. Page 6 of 12 Chirag Shah: And it was fully utilized? It was fully utilized. Chirag Shah: Second question in your assessment this excise duty hike how much time do you think that customer will take to come back to market and accept the increase in excise because unlike the previous incident is that there is no pre wind there was no indication that something of this sort would happen in the budget? In case of excise there was never any pre-indication, it happens and 4% is perhaps little steep but 3% has happened many times, for example there was a 3% excise put on this vehicle above 180 mm ground clearance so 3% has happened many times, 4% is perhaps a little steep. Chirag Shah: So you do believe this impact could last for a reasonable longer period of time and it may not be 3-6 months phenomena. These are all conjectures, last year given that commodity prices were low or in fact reducing, the vehicle price increase has been very marginal, in a way what this 4% does is just like on gasoline and diesel prices the Government of India has taken advantage of lower crude price by increasing the prices or the duties in a way think of it that way. Since the commodity prices were benign the Government of India has taken its advantage of that and said let me collect more excise duty. Chirag Shah: If I can squeeze in one more question on tractor demand given the budget proposals do you believe road activity pick up will aid because in the past we have seen at times road construction on the rural side aiding tractor demand at times it has not been aiding tractor demand so in the current scenario where are we leaning in terms of your assessment? Let me again say what kind of alluded to early in the opening remarks that if the monsoon is good everything is right for a good year for tractor demand, two or three things are happening one is with the infrastructure picking up which is going to happen for sure with some opening of mining activities the demand for haulage which had probably suffered more than the demand for agriculture or tractors would come back and that will give a demand boost for the tractors, second there is a significant replacement demand that is pending right now with two years of industry de-growth there is significant demand that is pending right now and with a little bit of improvement and sentiment with monsoon that demand also will also come back, now tractor industry is known to grow sometimes very rapidly when time is right and with two years of negative growth just like what is happening right now for the truck industry with 2 to 2.5 years of negative grow
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