Hemant Luthra, President, Mahindra Systech

What is your SWOT analysis for the Indian auto component sector?
Our biggest strength obviously is that demand for cars and commercial vehicles is growing fast, thanks to a booming economy. Though there is talk of a slowdown, everything is relative and interest rates will be a critical factor. Leading banks have announced plans to cut rates, so I am optimistic about the prospects. Our other strength is that we have the ability to design and innovate, compared to say China and Thailand. As for negatives, if the rupee continues to rise we become less price-competitive. The very real threat is that we will have out-priced ourselves if our currency is not managed. The challenge then will be that we will have to reach one more level of efficiency in order to start living with a rupee which is much stronger.Another big weakness is our infrastructure. We have to contend with unscheduled power cuts which disrupt production. Also poor roads, which mean longer shipment times and chances of damage to our products in transit. In fact, one of our foreign customers said that if we were to get their order for connecting rods and camshafts, we would need to fix the road from our plant at Chakan to the port. So we have to spend Rs 15 crore this year to fix the road, which is something that the government should be doing. The other challenge is that even though our labour costs are probably one-fourth of the U.S. and maybe one-fifth of Europe, our productivity is also low and overheads remain high.

How does Mahindra Systech fit into the Mahindra Group and what is its financial contribution?
When we decided to set up Mahindra Systech, we had ambitious targets — achieve a billion dollars in revenue and a billion dollars in market capital by 2010. Anything less than that and we would fall below the radar screen of the top management. By 2010, M&M will probably become a five-billion-dollar company and we want to be 20 percent of its turnover and profits. In the current fiscal, Systech should do a little over Rs 3,250 crore in sales and Rs 350 crore operating profit.

How are you coping with rising input costs for raw materials?
It is a big issue for us particularly for our automotive seals business where higher coke and iron ore prices have eaten into our margins. For castings, even though they use pig iron, the impact has been slightly less. Forgings have also been hit but we are trying to negate this by adding value and offering machined forgings. Forgings contribute nearly 80 percent of our turnover in Germany and the UK, where our customers are willing to work with us to become more efficient. And, thanks to the economic growth in Germany, the extra profits from there will pretty much make up for any loss of profits elsewhere.

Are rising labour costs a concern and how will you counter them?
While managerial costs have gone up slightly, as a proportion of total costs they remain flat or are coming down. In the case of engineering services, we have been able to extract higher prices to compensate for the increase in cost. As for shopfloor workers, we have been able reduce costs at some of the companies we have taken over. But this is a constant process and we will keep working on it.

How are your recent acquisitions performing?
Very well. We had to fix many problems at NGS and had a rough time in the first year. But now it’s doing better. Our first forging acquisition was a very small company in England. Then we discovered the key players in Germany, which is when we did the next round of acquisitions. Those strong companies are doing extremely well. The German economy helps and we are aiming for 33 to 34 million Euros of profit from them, but I think we will probably end up with 20 per cent more.

Are you looking at organic or inorganic means to drive future growth?
I think the emphasis will be on organic growth.

With OEMs looking to hand over more responsibility to suppliers, are you ready to get more involved in vehicle development?
We are working to ensure that we have a design capability on the ground. The challenges is ensuring a constant supply of high quality engineering talent.

How will ultra low-cost cars like the ones Tata Motors and Renault-Bajaj are developing affect supplier economics?
It can certainly put pressure on margins. I think for those who are willing to invest in engineering and design, it may also create an opportunity. Instead of just buying sheet metal from a supplier, these companies might want a module. Perhaps what we lose in margin, we’ll make up for in volumes.

How dependent are you on M&M for component supplies at present? What ratio of Mahindra to non-Mahindra supplies are you aiming for?
About 20 per cent. In some businesses it might be more, in some less, but on average about 20-25 per cent. You also need a diverse customer base if the market is to value you properly. Anand Mahindra has mandated that not more than 50 per cent of Systech’s turnover should come from M&M and not more than 50 per cent of M&M’s requirement should be met by us.

What are the three things you would like to see changed in the current business environment?
Better quality of power and roads, that’s the biggest thing. The second is privatising education so we can get properly-trained employees. The third wish is about the dollar versus the rupee. Of course, it cuts both ways.