M&M may lose speed as rural India brakes on spend

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Monsoon failure will impact ability, willingness to buy.

“There was cause for cheer in the first quarter thanks to a “nice point of convergence” where the tractor and auto businesses had done extremely well.” — Mr Anand Mahindra, Vice-Chairman and Managing Director

Murali Gopalan

Mumbai, Aug. 18 Mahindra & Mahindra has had a good run in the first quarter of this fiscal, thanks to its utility vehicles and tractors notching up good numbers, but the company not entirely sure if this can be sustained through the year.

“The second quarter will be good because of the early festival season and this will prop up sales. In our group, we are fortifying ourselves for what might be a flattening of rapid growth in the third quarter. I hope it does not happen though,” Mr Anand Mahindra, Vice-Chairman and Managing Director, M&M, told Business Line.

From the company’s point of view, any failure of the monsoon will directly impact rural India’s ability and willingness to buy. “My concern is that the rural buyer has a different psychology. It has taken three-four good monsoons and crop years to convince him to take money out of the mattress and actually spend it. However, during these times, he will be a lot more cautious about spending and we will see the effects of that from the third quarter onwards,” he said.

Though a section of experts reiterate that there is far less dependence on agriculture today (based on the fact that it is only 18 per cent of the GDP), this does not mean that the rural economy is not dependent on agriculture or the monsoons.

“This is because the non-agricultural incomes in the rural areas are actually sustained and nurtured by agricultural incomes. In short, the services business set up in rural areas are catering to farm income which means that they are not mutually exclusive,” Mr Mahindra said.

Ground realities

M&M has, interestingly, been getting an update on the ground realities of rural India from an initiative in-house. The group’s finance arm, Mahindra Finance, has 500 branch offices across the country. A system was put in place where, on a daily basis, a panel of farmers spoke about the rains and whether they were adequate to help them in their sowing efforts. The inputs were then converted into a crop efficiency index and made accessible to the top management everyday.

“This helps us get an on-the-ground feeling about what is happening in the farming areas. Every farmer tends to be pessimistic but despite that, over the last three to four weeks, it is clear that every passing day looks dismal. In the process, we were getting worried because of this real time feedback,” he said.

Despite this grim outlook, Mr Mahindra said there was cause for cheer in the first quarter thanks to a “nice point of convergence” where the tractor and auto businesses had done extremely well. “When the two happen together, that is when you get this multiplier effect at M&M,” he said.

The fact that commodity prices also got back to a point of stability was welcome though the biggest thing that really helped was volumes.

“They did not come from the environment which makes me very proud of the team. This is because if you look at the utility-vehicle industry, both last year and in the first quarter of this fiscal, it had not grown without M&M. It was not a large pie, which was expanding on which we piggybacked,” Mr Mahindra said.

Product launches

As he pointed out, volumes came due to product launches such as the Xylo and also scaled up as there was zero cannibalisation between the three brands: the Scorpio, the Bolero and the Xylo.

“We had been expecting the Scorpio to be cannibalised to some extent, as also the Bolero, which has been around longer. The good thing is that the Bolero is getting stronger and is still the largest selling SUV. Demand for the Scorpio has also shot up which means that the Xylo is truly incremental demand. When you put all this together, naturally we have had a very good quarter,” Mr Mahindra said.

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(This article was published in the Business Line print edition dated August 19, 2009)
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