With demand for cars, two-wheelers and commercial vehicles expected to stay subdued even post April 2020, when the new emission norms kick in, manufacturers will likely go slow on capex and hiring. Following an 18-month-long slowdown in demand, manufacturers have already deferred capital expenditure of nearly Rs 8,000 crore in 2019. During this time, capacity utilisation fell sharply, obviating the need for any more capacity or network expansion. Over 15,000 people at several manufacturers lost jobs in 2019 while one lakh people were laid off by component makers.
Data from Kotak Institutional Equities show that even in 2018, the passenger vehicle capacity utilisation level at Tata Motors and M&M were 32% and 64%, respectively. Calculations done by FE show that utilisation levels of Maruti and Hyundai in January-December fell to 80% and 85%, respectively, while Tata Motors and Mahindra utilised just 28% and 55% of their installed capacities.
Maruti Suzuki has trimmed capex by Rs 500 crore to Rs 4,000 crore while parent —Suzuki Motor Corporation —has deferred the setting up of a third assembly line in Gujarat involving investments of Rs 3,500 crore. CFO Ajay Seth said : “This year we made special effort to look at all overheads and we are trying to work on all discretionary spends and other expenses. I think moving forward also, if we continue to find the situation not improving, we will put stricter controls on the overheads,” Seth had told analysts post Q2 results.
M&M, which deferred planned capex of around Rs 1,000 crore by a year, said it may need to do the same exercise again if sales do not pick up. Pawan Goenka, MD at M&M, said in September, the company has not slowed down on investments on new products.
“Investments in other activity such as capacity enhancement and discretionary capex like repair and maintenance has been deferred,” Goenka had said. Tata Motors too had cut capex by Rs 500 crore. P B Balaji, CFO had told analysts post the Q2 results the sharp slowdown was real and revival would depends on how fast industry and infrastructure spending comes through. “We will be calibrating our total capex this year to about Rs 4,500 crore compared to the Rs 5,000 crore that we had originally planned,” Balaji had said.
The cut in expenditure is also the fallout of excess capacity created in anticipation of continuing high volume growth — sales of PVs and CVs grew in the range of 4-8% from FY14 to FY18 while sales of two-wheeler volumes grew at 7-14%. FE had first reported on September 11 that Hero MotoCorp has cut down its planned capital expenditure by around Rs 300 crore for FY20, while also deferring part of the expansion at its upcoming plant at Chittoor in Andhra Pradesh. A company spokesperson said capex would be a bit lower than the earlier guidance.
“We will keep re-evaluating this in the coming months,” the spokesperson had said. Among others, while Honda Motorcycle & Scooter India (HMSI) has deferred commencement of production from its third manufacturing line in Gujarat, Suzuki Motorcycle has pushed back setting up a second plant by a few years.
Ashok Leyland had lowered capex by Rs 500 crore. Chairman Dheeraj G Hinduja had earlier said, “We have brought it (capex) down from Rs 2,300 crore to somewhere closer to Rs 1,800 crore at the moment and we are looking at further reductions. Gopal Mahadevan, CFO, Ashok Leyland said the company is looking at every rupee before it is getting spent. ” I will not be surprised if there is another Rs 200 crore to Rs 250 crore deficit,” Mahadevan had said post Q2 results.
Analysts expect a meaningful recovery only sometine in the second half of 2021. Rahul Mishra, Principal at A.T. Kearney told FE he estimates it might take three to six quarters before growth recovers and that during this time the focus on cost efficiencies would increase. “Most organisations will closely review investment plans and organisation sizes and cut down on any discretionary spend,” Mishra said.
Harshvardhan Sharma, who tracks the auto sector at Nomura said the migration to BS-VI would impact the cost of vehicles as also fuel and after sales costs. “We are looking at a good six to eight months before there is a natural buoyancy in performance,” Sharma said.