float: left; margin: 10px;" src="/public/uploads/editor/2017-02-08/1486537149.svg" alt="" width="147" height="650" />Having the big guys around has proven to be a boon for SMEs in more ways than one. Not only are they forging long-term partnerships with the best names in the automotive industry, but also imbibing their best practices when it comes to manufacturing. “We have learnt a lot from our parent company in terms of production techniques. We have improved our processes and reduced the inventory cycle, thus bringing down our costs. Today, in fact, the situation is such that when our Indian employees go to Italy they are able to suggest a change or two,” says Kamal Wadhwa, executive director at Dell’orto India, which is the local venture of Italian firm Dell’orto that specialises in manufacturing carburettors.

“Any company that set up shop here would like to have their suppliers or vendors to be as efficient and productive as they are. Once that happens at a mass scale, it becomes the norm and a key advantage for the clusters such as Chakan where productivity skills are already embedded,” adds Anant Sardeshmukh, director general and member of executive board at Mahratta Chamber of Commerce Industries and Agriculture (MCCIA).

D-Day
Demand for both automobile and engineering units, which account for about 90% of business in this cluster, was fairly stable till demonetistation played spoilsport. The automobile industry, which saw signs of a demand revival in FY16, saw the cash crunch hit sales post November. Total vehicle sales across categories declined over 5% to 15.63 lakh units in November, the steepest decline in 43 months. “While demonetisation has impacted sales of two-wheelers quite significantly, it hasn’t been as severe for four-wheelers. Our loss in revenue will be in the region of 15% in four-wheelers and 30% in two-wheelers,” says Vineet Sahni, CEO, Lumax Industries, which provides automotive lighting solutions to two-wheelers, four-wheelers, commercial vehicles and tractors. The company, which clocked revenue of Rs.1,250 crore, earns 30% of its revenue from two-wheelers, while four-wheelers bring in the rest. Almost 95% of its revenue comes from the domestic market.

Tarang Jain, managing director of the Rs.10,000 crore Varroc Group, echoes a similar sentiment. “Demonetisation has had a significant impact on the two-wheeler industry. Only 30% of our revenue comes from India amounting to Rs.3,000 crore. But, since 80% of our domestic business comes from two-wheelers and as 60% of two-wheeler buyers pay in cash, the business got hit,” he explains. Varroc supplies exterior lighting systems, power train, electrical, body and chassis parts to leading passenger car and motorcycle manufacturers worldwide. The company has a presence in 10 countries with over 10,000 employees. According to Jain, revenue was down by 20-25% during November and December. But given their international presence and diverse revenue streams, the group has largely been insulated. “Given our size and overseas focus, our cash flows have not been impacted,” he says.

For smaller firms the problems are only mounting as payments get delayed. “In one recent case, we had to actually form a group of suppliers to get our dues. On the one hand, there is a risk of rising credit period, while, on the other hand, if you do not give credit, you are sure to lose to competition. While direct suppliers are getting their money on time from OEMs, they are not releasing it to their suppliers because that money is being used to make up for shortfall in their cash flows caused by demonetisation,” says SR Chudhary, owner of the Rs.8 crore Jitendra Profile, which specialises in cutting machine tools for auto component companies.

In the engineering space, thanks to demonetisation, most companies are now seeing a significant increase in debtor days. “There are payment issues and clients are asking for extended credit periods. We used to have debtor days of about 35-45 days about a few months back and that has now reached 90 days,” says Shrikant Athawale, executive director at Innovative Electrosoft. The company designs and manufactures industrial motors, rotors and regulators and supplies them to private and co-operative sugar mills in UP besides steel and cement majors such as SAIL, Jindal Steel, Ultratech, India Cements and Lafarge.

Anant Sardeshmukh, Director general, MCCIA The only saving grace for engineering companies is that demand is picking up. “We are operating at almost full capacity and planning to add further capacity next year. Certain industries such as textile, sugar and few others have seen a pick-up in their capex. Next year we are expecting a pickup in economic activity and, hopefully, that should bring in more business,” says Athawale. His company is hopeful of producing 500 units next year as against 350 units in FY17. Considering the demand, it is also working towards adding two more production lines and take its capacity to about 600 units a year.

Steady days
Despite the short-term pain, a majority of the companies surveyed are optimistic that the coming fiscal would be slightly better. The optimism primarily stems from the view there would be higher economic activity post March as the government will step up spending and the demonetisation effect would wear off. “The third quarter was extremely difficult and I think a recovery in the fourth quarter looks possible. While sales in FY17 will see a marginal increase, we expect FY18 to be a good year for us,” predicts Sahni. He expects a similar fall in January, too, before things start looking up in June-July. However, they are not too worried about rising raw material or labour costs since they are able to pass on the costs to their customers.

Vineet Sahni, CEO, Lumax Industries Some of the companies are using this lean period to become more efficient. “It might take some more time for the actual impact to be felt. We have to be prepared for any eventuality. Rather than focusing on growth, we are now looking at how we can improve our cost of production by reducing our overheads,” says Sujit Nadkarni, proprietor of Aditya Automation, which supplies parts to companies such as M&M, Tata Motors and Daimler. The company is looking to lower employee costs and opt for cheaper loans. More importantly, to reduce its dependence on automobiles, the company is also catering to clients in the defense and aeronautics space.

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