The Hindu Business Line : `Rising interest rates will bottle up growth'

"Rate hike is coming at a wrong time when the capex cycle is at its peak. Companies are on investment mode and there will be a higher burden on them now. Higher finance cost will hit bottomlines."

MR RAVI KANT, MANAGING DIRECTOR, TATA MOTORS

Tata Motors is in the midst of an exciting growth phase with a laundry list of models lined up for launch in both commercial vehicle and passenger car segments. Mr Ravi Kant, Managing Director, who is piloting the company in this crucial period, is no stranger to the industry having joined Tata Motors in 1999 and see it pass through one of its most testing phases in 2001 when it posted a Rs 500-crore loss, the first and biggest ever in its history.

In this interview with Business Line in Mumbai last week, Mr Ravi Kant spoke about his worries over the possible impact of rising interest rates on corporate bottomlines. Though Tata Motors is well placed to tackle a slowdown in its main business of commercial vehicles, there can be no denying the collateral damage it could suffer from a slowdown in the economy, he said. He was also candid in his response to a question on component imports pointing out how it was cheaper to import and how local vendors were not investing in increasing capacity.

Excerpts from the interview:

What's your take on the impact of rising interest rates on the corporate sector?

I don't want to comment on the Government's moves but the rising trend in interest rates is causing a serious disturbance in the minds of people. It will bottle up growth and is coming at a wrong time when the capex cycle is at its peak. Companies are on investment mode and there will be a higher burden on them now. Higher finance cost will hit bottomlines; there is a time lag usually between rising rates and their impact on the balance-sheet. We will begin to see the impact three-four quarters from now and it will be felt for three-four quarters after that.

The third quarter results due this year will show the impact first. EBITDA (earnings before interest, taxes, depreciation and amortisation) margins are already under pressure due to the rise in commodity prices but higher sales volumes are compensating and absorbing the extra cost. But what happens when sales volumes drop and interest costs rise? These things have a way of coming together.

What about the commercial vehicles industry specifically?

The commercial vehicle growth rate has to come down, though by how much is difficult to estimate. Your guess is as good as mine. Let's assume a hypothetical situation where a truck operator who was planning to buy 12 vehicles scales it down to 10 because of higher finance cost and our (Tata Motors) momentum is to produce 12 trucks. What will happen? We will have to necessarily modulate the speed at which we are running. It happens in our daily lives.

What do you do when vegetable prices shoot up? You try to scale down your expense by buying lower quantities and looking for alternatives to compensate.

So have you begun to modulate your speed already? Was the relatively lower growth in March sales due to higher finance costs?

I don't want to comment on the speed part. The lower sales growth in March was due to the base effect (higher sales in March last year) and also dissonance caused by the rising interest rates.

We at Tata Motors are well hedged in terms of our international business, which accounts for 15 per cent of revenues and through products such as the Ace, which is extremely well-received in the market.

Tata Motors has started importing components such as tyres and wheel rims from China and other countries. Is this a conscious strategy or just a stop-gap measure?

The strategy is only one — how can you be cost competitive? When the landed cost of a particular component is 15 per cent cheaper than a local supplier's and also of comparable quality what do you as a vehicle manufacturer do? The point is that you (vendors) don't want to increase capacity and are holding me to ransom. You cannot restrict my growth because of your problems. I will have no option but to look elsewhere for supplies.

Competition in the domestic market will be up several notches with multinationals such as Mahindra-International Trucks and MAN launching products soon. How do you plan to take them on?

With a combination of better products and by extending our network. We have the products and we have to do certain things to be in the market; that we will do.

We want to be very strong in the market and our capex programme of Rs 12,000-13,000 crore in the next few years says it all.

We will also be launching our `world truck' in June 2008 in Korea and six months after that in India. It will be state-of-the-art with an engine of 450-500 horsepower, going up to 49 tonnes in size and with different applications and greater comfort and safety.

For buses, we will source technology from Hispano Carrocera and this year you should see some launches. We will be setting up the largest bus body-building plant in the world along with Marco Polo.

Your China entry strategy has somehow not worked out as per expectations. Why?

Yes, it has not worked out as per our expectations. The auto policy of 2004 was restrictive and made it difficult to set up manufacturing in China. It brought in minimum investment norms and also made it difficult to produce some things there.

We started going slow after that. But we still look at China as a sourcing base for components. While China became difficult, South Africa has worked out very well for us.

What are your plans for HV Axles and HV Transmissions? Are you still looking out for joint venture partners?

Whatever we do in these two companies must be in tune with Tata Motors' vision and competitiveness. Though now they supply only to us these companies will eventually cater to others.

We will be happy to join hands with a player with strategic technology with or without equity contribution. We are talking to some now but I would not like to talk more on this.

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