Mahindra & Mahindra has decided to curtail its capital expenditure of Rs 5,000 crore (Rs 50 billion) in view of the ongoing slump in demand for cars and sports utility vehicles in the domestic market.
M&M, which makes SUVs such as Scorpio and Bolero, had initially set aside the amount to be spent in the next three years. The company has opted to cut its capex without providing further details.
This year's sales figures for the domestic passenger vehicle sector (cars and SUVs) has left the industry majors disappointed as credit squeeze, lower buying sentiment and high interest rates have left a dent on growth charts. In fact, the company has already begun to cut down production and resorted to job cuts.
On the sidelines of announcing the brand name for the company's latest model Ingenio, which has been rechristened as 'Xylo', Pawan Goenka, president (automotive sector), M&M, said, "The market is definitely going through a turmoil. We will come down hard on cutting down our capex. However, it does not mean that we will go slow on our ongoing projects. I am not in a position to provide the exact details of the cut (in investment)."
The company will look at cutting investment in basically three areas. One, it will look at further optimisation of its funds, which means that the company will now spend only 5 per cent as buffer funding instead of 10 per cent.
Secondly, the firm will relook at its funding of automation plans at its production facility. Automation is a tool used at manufacturing facilities, which serve the purpose of robots controlled by computers used in building vehicles.
Lastly, M&M has decided to conduct business with new players in the components or allied areas, which will perhaps provide cost benefits to the company. For instance, the company had outsourced a part of the component manufacturing activity to a lesser-known Korean player, which in turn offered rates that were half of then prevailing market rates.
"We will take more risks now and do business with new players who will offer us competitive rates to save on costs," added Goenka. Despite posting an overall growth of almost 22 per cent in sales in domestic and 18 per cent growth in export market, the company recorded a drop of 20 per cent in net profit in the recently concluded second quarter.
Despite a slowing sales growth, the company said today that it will go ahead with the scheduled launch of Xylo. The vehicle will be the company's first offering after the successful launch of Scorpio six years ago.
The company has targeted to have an initial capacity of 25,000 units a year for Xylo, which will be seen in showrooms by December. Pricing details, however, were not disclosed. The company has spent four years and Rs 550 crore (RS 5.5 billion) on the development of the Xylo.
M&M will join Chennai-based TVS Motors, makers of two- and three-wheelers in announcing a capex cut. TVS Motors had recently said that it will cut investment by 20 per cent to readjust itself to the current turmoil.