The Hindu Business Line : `People's desire to own an affordable four-wheeler has gone up'

Through its persistent push into passenger cars, the huge loss it suffered some years back and subsequent return to profitability, one quality that characterised the public face of Tata Motors' top management was its readiness to call a spade a spade. Press briefings — particularly those concerning financial results — always took into consideration potential downsides, the spoilers that turn the party sour. It was an attitude much in tune with the company's engineering-based DNA, where solutions sell, but nothing is solved unless the problem is defined. For the business media, few personify this approach better than Mr Praveen Kadle, Executive Director (Finance & Corporate Affairs), Tata Motors. He spoke to Business Line in the third week of June.

Excerpts from the interview:

What significant changes do you see in the operating environment between the time Tata Motors launched the Indica and the current countdown to the Rs 1 lakh-car?

The changes are both in the external environment and internally at Tata Motors. On the former, the economy is on a better footing; we have seen almost eight per cent GDP growth in the last two years and, thanks to government support for infrastructure development, the economy should return similar growth in the foreseeable future.

My personal view is that we have the potential to exceed eight per cent. The economy is also aligned with the global economy, which was not the case in 1998-99. Overall, the external environment is conducive to growth.

Internally, we have made many changes in the organisation. In 1998-99, our business profile was predominantly dependent on the commercial vehicles industry, which, in turn, was dependent on economic cycles.

Now the business profile is evenly distributed between commercial and passenger vehicles. Even in trucks, it is more broad-based from what it used to be earlier, when it was dependent on medium/heavy vehicles and, to some extent, on light commercial vehicles.

We have gone to the lower end of the commercial vehicle segment, into pick-ups and the Ace category. That insulates us, to a large extent, from economic cycles. In passenger vehicles, for the last three-four years, we have been No 2 in the segment, with a market share of 17-18 per cent. We have cut costs; cost-consciousness has improved significantly, we have brought down break-even points across the product range. The company has become more quality conscious, though we need to do more work there.

Now, our international revenue accounts for 16 per cent of the total; it was 4-5 per cent in 1998-99. That reduces the risk profile. There has been a mindset change in the people.

The financial position, in terms of balance-sheet quality and working capital management, has improved. We have raised productivity and doubled production. I think Tata Motors is now better placed to take up new challenges.

Between the Indica launch and now, fuel prices have gone up significantly. How has that affected the environment and the backdrop to the small car's debut?

The theory is that as the income level of India's population rises, they get exposed to what is happening elsewhere in the world and, therefore, their aspirations increase. So the desire to own an affordable four-wheeler has definitely gone up.

If one can bring in a vehicle that is affordable in terms of original cost of purchase and cost of overall ownership, including the fuel price issue — that should be the kind of product at the lowest level for the new consumer.

As fuel prices rise, fuel efficiency is going to be demanded by consumers across products, not just in the small car segment. We are working on more fuel-efficient vehicles — be it trucks, utility vehicles or passenger cars.

Tata Motors is a leading Asian automobile company on a robust growth track. From a CFO's perspective what checks would you take while operating in the current global environment? Is there anything unique to the auto industry that shapes that approach?

In India we talk of growth but the competitive forces are huge compared to what they were eight-nine years ago.

In the automotive field, growth is happening only in India and China; not so much in the rest of the world. Therefore, when you try to grow, the margin of error — even if it is small — can be quite costly.

One needs to be very particular in terms of capital spending, cost assumptions, revenue growth assumptions, capital efficiency. Further, the automobile industry demands heavy capital infusion on a continuous basis due to new product introduction. Here, too, the margin of error, though small, can cause big problems if not handled properly.

Traditionally, the perception of the auto industry has not been that of a shareholder-value-creating business; it has been seen as an EVA destroyer. If one needs to be an EVA creator, one has to be more careful than in other industries.

What time-frame do you work on for projects and how do you navigate your way through the prevailing economic environment, with its many suspected bubbles?

We look at a five year-scenario but, in our business, sometimes five years is too long. One needs to re-look on an annual basis; for the last four years we have been even reviewing on a six-monthly basis. So, for us, there is a five-year plan, then the annual operating plan and the mid-term reviews.

The review has to include basic business assumptions and assumptions related to customers' buying pattern, competitive scenario, demand, revenue growth, cost assumptions and interest. Fifteen months ago it appeared that we were moving one way alone in interest rates. Things have changed since. Now we are saying there could be another 50-100 basis point increase in interest rates over the next 12 months. In such a situation, when interest rates have moved almost 200 basis points in the last 12-15 months, you need to continuously reassess all your assumptions.

There have been conventional answers for the trend of rising input costs. But it is a relentless march and every time volume increases are resorted to as a solution, there is the issue of low retail price for the finished product to cope with. How do you deal with this?

Cost increases are going to be a part of life. A couple of years ago it was steel, now it is aluminium and copper, besides rubber. People say steel prices may come down after a year or two, but aluminium prices are expected to grow on a continuous basis, at least for the next 3-4 years. And when commodity prices don't go up, there is general inflation, which pushes up the price of other raw materials. Or your wage cost goes up.

What one needs to look at continuously is how the vehicle manufacturer and vendors can work together because we are ultimately business partners. How can we bring down costs? How can we look at alternative materials/designs, the prospects for value engineering, saving logistics cost, outsourcing, etc.?

It is not the problem of any one party alone because the end customer has a number of choices today and he is looking for the best product at the lowest price. We have seen it in the computer industry, where we get a far superior product for a lower price, compared to five years ago. What happened for computers is going to happen for automobiles.

Do you see merit in de-risking the company's exposure to road-based transport? Even as a financial investment, given the maturity of the automobile industry and the stiff competition you have in its still growing markets... .

We are already de-risking our revenue profile in a few forms. First, in our domestic business model for commercial and passenger vehicles, we are trying to get into the low end of commercial vehicles — the sub-one-tonne segment. Then, we are in the bus segment, which is expected to see significant growth in coming years. It should give us steady revenue growth for a fairly long period.

We are also getting into smaller-size passenger cars, like the small car project, which according to us is a de-risking step besides adding to revenue. We are expanding portfolio in both utility vehicles and passenger vehicles.

The other way to de-risk is growing our international business. From 4 per cent of total revenue it has gone up to 16 per cent; we are trying to take it to beyond 20 per cent.

We are looking at non-vehicle business too, which include our financing business, design services, PLM services, consultancy services, auto component business, construction equipment. Through all that, we are de-risking. Do we need to go into non-road-based businesses? Well, we are in it — the technology and financing business, those that are adjuncts to our current products.

(To be continued)

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