Forget the cola wars, recent news reports suggest that India is witnessing what can only be called the "car wars". The glut of new entrants into the domestic car segment seems to reflect the intensification of the battle on hand. Auto manufacturers have also quickly realised that despite being technologically superior, "the price" of the vehicle has thus far been a definite clincher for a purchase in India. Economies of scale and volumes have since then become the all important numbers game.

However, recent newsreports suggest that the entrants such as Daewoo, General Motors, Ford, Peugot, Hyundai etc, plan to increase production capacities to a staggering 11.81 lakh units per annum. This figure incidentally is not said to include the current capacities of existing players like Premier Automobiles, Hindustan Motors, Telco and Maruti Udyog (which alone has an estimated capacity of 2.5 lakh vehciles). Obviously the first question that springs to mind is -- does India possess such an enormous demand potential?

Going by the figues available, the answer to this question lies in the negative. Consider this - total passenger car production (inclusive of the multi-utility vehicle segment) for the twelve months from April '96 to March 1997, stood at 4.83 lakh units. This figure incidentally includes the capacities of all the players including MUL, Telco, HM and reflects a mere 16 per cent growth on the year-on-year basis.

Compared to this, sales stood at 4.89 lakh units, which represents a 19 per cent increase over the last year. Now if one were to calculate a 30 per cent growth (which is on the higher side) for the next two years, sales could touch an estimated 8.27 lakh units. Calculating on a more conservative 20 per cent growth for the next two years, this figure stands at 7.04 lakh units in 1998-99.

Given that even if the hypothetical demand did grow at 30 per cent, India would still have vehicles in excess of 4.5 lakh units (ie adding up the production by players like MUL, HM, PAL etc). Exports currently stand at 38,500 units and even given a growth rate of a highly improbable 60 per cent for the next two years, exports would increase to a mere 98,560 vehicles.

Given that the production for the first two months ie April-May 1997, has actually dipped 0.2 per cent and that the mere 0.4 per cent growth in sales is an indicator of the impending demand glut in the market, what is to become of the expanded capacities. Could it be that we are likely to witness a shakeout in the auto industry in the near future? Will it be that only the players with deep pockets survive?

Steel prices

Reports that prices of steel are once again on the rise do not necessarily mean that demand for steel is firming up. In fact, analysts say that the very fact that domestic steel is quoting at a discount to the landed cost of imported steel is indication enough that steel demand has not picked up. The demand for galvanised steel, however, normally rises at this time of the year because of the need for galvanised sheets used for roofing. Further, players like Tisco had already raised their HRC prices earlier and Lloyds was merely following suit.

Analysts say that all that has happened is because international prices of steel are moving up, and local steel producers are merely maintaining the discount at which their products are sold compared to the landed cost of imported steel. Perhaps more importantly, they emphasise that the price of long products has not shown any rise, which means that demand from the construction sector remains elusive.

Kirloskar Pneumatic

In an industry which is characterised by thin margins, capital intensive operations, high inventory requirements and an increased level of debt funding have all taken a toll on Kirloskar Pneumatic's (KP) bottomline for the year ended March 1997. Also slower industrial growth and delays and/or shelving of capital projects, have impacted offtakes from the company. This is reflected in the mere 20 per cent growth in sales achieved in the second half of the year.

Net profit at Rs 6.77 crore dipped marginally by 2.17 per cent compared to Rs 6.92 crore. As a result of which earnings per share also dipped from Rs 6.68 to Rs 6.53. The negative earnings growth can be attributed to the increased tax provision, higher depreciation charges and a burgeoning interest burden. Fresh borrowings to fund the working capital requirements also saw the interest burden swell 41.34 per cent to Rs 10.94 crore. A drop in the other income component which comprises of erection charges and job work from Rs 8.04 crore to Rs 7.81 crore also did not help.

However, the company has performed quite admirably on the operational front. Year-on-year sales growth was 34.06 per cent. Income from operations for the twelve months stood at Rs 209.84 crore, up from Rs 156.53 crore last year. Revenues grew 57.41 per cent in the first half compared to 20.5 per cent in the second half. But stringent cost control has helped KP improve its margins at the operational level. With total expenditure increasing 31 per cent, operating profit margins improved from 6.86 per cent to 7.83 per cent.

With most economists expecting rural demand to help improve the industrial growth rate with a time lag of six to eight months, KP's bottomline could get further squeezed. Also fresh borrowings for the company's new projects could also squeeze margins in the interim.

EMCEE (with contributions from Percy Dubash)

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.