The Hindu Business Line : ‘Our cost savings initiatives helped check losses’

At Rane, we are assuming that the next fiscal is going to be tough and plan our costs accordingly. The capex will be minimal. . — Mr L. Ganesh, Rane group Chairman

T. Murrali

Chennai, Feb. 24 The Chennai-headquartered Rane group comprising eight companies manufacturing auto components has had a bad quarter due to a combination of factors. In addition to the economic slowdown, it was hit by its own conservative policy of covering all forwards in foreign exchange fluctuation. It was also hit by unstable raw material prices.

The Chairman of Rane Group, Mr L. Ganesh, tells Business Line that the group has taken several initiatives, but for that the losses would have been much more. Excerpts from the interview:

There seems to be a positive blip in sales in January for the auto industry, what is your view?

From an abysmal low in October, there seems to be some inventory correction taking place. The commercial vehicle manufacturers began building some vehicles in January. However, it will take a while for this segment to come back to normalcy.

The car segment is picking up due to a combination of inventory correction and demand since some companies cleared inventories by giving special schemes. If the demand continues till April, then it can be taken as beginning of revival. If not, it could be a kind of year-end effect. The general consensus is that the domestic market has bottomed out during the third quarter. It will take a while for the auto component industry to get the feel of the positive blip.

When did your group companies feel the pinch? What have you done to counter this?

Companies that depend more on exports such as Rane Engine Valves and Rane Madras have been affected from last July. Others witnessed a drop from October.

The export segment is still in bad shape and indications from the US and Europe are that it is going to take much longer for exports to recover to original volumes. There is a 30-50 per cent drop in our exports.

From November, our objective was to preserve cash. We froze capex except in critical items. At the beginning of this fiscal, the group planned to invest Rs 250 crore for capex. Now, we may probably end up with Rs 120 crore.

On the employee front, we reduced the number of working days and then stopped all contract workers and trainees. We did not retrench any permanent work force. Instead we have rationalised among the locations by freezing recruitments and transferring from other companies. We have not replaced retirements. While we did not cut wages for workforce, the middle management and upwards have taken a 5 per cent cut in salary from December.

What are the lessons from the slowdown?

One important lesson is that the more flexible and lean you are the quicker you are able to respond. Deutz in Germany is the single largest customer for Rane Engine Valves and its requirement reduced by 50 per cent from July. Since then we began manufacturing other valves in those manufacturing lines. Today, we are manufacturing six different valves in the line for domestic customers and exports. This would not have been possible a year ago.

How did you manage your inventory?

We worked on reducing inventory in raw material, work in progress, finished goods, stores and consumables at all our manufacturing facilities. In some of our companies, we have even reduced working capital borrowings. Except for some imported raw material, we have reduced inventories by about 40 per cent. Inventories of consumables and stores have been reduced by 10-20 per cent while work in progress has been reduced by 20 per cent. These initiatives have helped us to tide over the crisis.

What are the other options you had to reduce the impact?

We looked at reducing fixed and variable costs. Rane Madras’ Puducherry plant has achieved an annualised cost saving of Rs 28 lakh. We have asked all our companies to document the cost savings.

When did you see the benefits of these initiatives?

It started flowing in during the third quarter. December was better than the previous two months. It took a month or so to get used to the reality. But for the benefits, the third quarter results would have been much worse. Some of the companies have reduced break-even points and managed cost well.

We have covered most of the companies against foreign exchange fluctuation between Rs 41 and Rs 42. We were hit despite being conservative. Multiple factors such as the currency volatility, the general slowdown, raw material price fluctuation, reinstatement of ECBs, affected our performance. I can tell you that the losses would have been much more but for these initiatives.

In the fourth quarter, we will certainly do better than third quarter. However, it will take time for normalcy to return, as it needs at least 90 per cent of sales. The businesses average around 50 per cent in supplies to commercial vehicles segment and 80 per cent in passenger cars.

This year, in terms of volume, it will be negative compared to last year. In rupee value, you might see the figures close to last year due to commodity price increase and foreign exchange fluctuations. That is not the real picture. The bottom-line will be affected. This was primarily because of our conservative foreign exchange policy of covering everything forward. Now we are revising our policy.

What is your outlook for the industry next fiscal?

It is very uncertain. At Rane, we are assuming that the next fiscal is going to be tough and plan our costs accordingly. The capex will be minimal.

What are the other factors that will affect bottom line?

The lag in recovering raw material price increase from customers has affected most of the vendors. Last year, prices of steel and petroleum based products such as seals and plastics went up . While we recover most of it from customers, there is always a lag because the frequency at which it has to be recovered was high. So we end up absorbing the price differential in one quarter. We don’t get exact compensation, affecting the bottom line. This is true of the entire component industry. Also, the second half, particularly the third quarter was a wash out since all the good work that was done in the first half could not reap benefits.

Will India continue to attract investments in the auto sector?

India may still continue to be a good destination for auto industry, like China. However, the cycle in commercial vehicle segment and the effect of jumping in on to the bandwagon during growth mode has created excess capacity. That is being corrected now. There is also another theory that because of the slowdown more outsourcing may take place from competitive countries, including India.

At the same time, there is also some protectionism kind of mindset coming in due to bail out packages. When all these things settle down, I feel India can still aim at achieving targets of Automotive Mission Plan, which envisages the industry turnover to reach $145 billion and generate employment for 25 million people by 2016. However, it is necessary to improve the infrastructure besides bringing in flexible labours laws.

What is your take on auto component imports from China?

The share of business has come down now due to poor performance of the domestic industry. However, it is very alarming when it comes to the share of business they are garnering. It is a constant item to discuss on the agenda of steering committees of ACMA and to make representation to the Government. It is threatening more since they are worst affected by the US recession and are dumping in other countries. I think India has to be very wary of Chinese imports as it is unfair competition. Several OEMs now import tyres, wheels, steering, crankshaft, bearings, windshields and few engine components. The Commerce Ministry is supportive by tracking imports and is prepared to even bring in safeguard duty.

What about quality and warranty issues with Chinese products?

The OEMs use Chinese products where the competition is less and end customer contact is least such as commercial vehicles. We learnt from customers that the Chinese companies send about 2 per cent of the products free of cost to manage warranty. When there is 30-40 per cent different in price, OEMs can afford to take risk.

Related Stories:
Rane group yet to decide on plant at Sanand
Rane Engine Valve drops on re-listing
Rane Brake opens new facility

More Stories on : Interview | Automobile Components

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page