Self-reliance should not lead to licence raj: Jairam Varadaraj

It is better to define what the self-reliance policy of the government is, so that over a period time it does not go back to the licence-permit raj, said a top official of industrial air compressor major Elgi Equipments Ltd.

"Self-reliance has two aspects. First, production of critical items by India. Second, companies in India looking for local supplies. The latter should not lead to licence-permit raj. Self-reliance should be defined," Jairam Varadaraj, managing director told IANS.

The global air compressor market is about $15 billion and the Indian market is about $700 million. The Coimbatore-based about Rs 1,873 crore (FY19) Elgi Equipment earns about half of its revenue from overseas.

In the interview, Varadaraj also said that cash will be king and companies will conserve cash as the product brand is not always a risk mitigator.

He also said that there may not be a large-scale migration of companies out of China in the near term and spoke of how his company is gearing up to meet the post Covid-19 situation.

Excerpts:

<strong>Q: A lot is being said about multi-national companies (MNCs) will be going out of China owing to Covid-19. Your view.</strong>

A: It is true the whole manufacturing world gravitated towards China as a cheap source. But post-Covid-19 and with China's opaqueness many companies will look at other alternative sources. Companies having factories in China may look at India.

But their first priority will be to manage the crisis. So, MNCs will not look at creating an alternate source for China immediately.

<strong>Q: Will brand be a risk mitigator?</strong>

A: A brand conveys certain attributes about a product. When industries and others are conserving cash flow, the premium given for a brand will be questioned. People's behavior will also undergo a change. In certain segments, there is bias in favor of foreign brands. But outside the country, the needle will shift slowly. So, there will be a compression in price.

<strong>Q: Looking forward at FY21. Your take.</strong>

A: The whole landscape has changed in FY21. Post-virus, the impact is spread across the sector. Our assessment is that all those businesses involved in supply essentials like food, fast-moving consumer goods (FMCG), and pharmaceuticals will do well. Industries may not be enhancing their capacities. For us, after-market services will be good.

<strong>Q: What is Elgi Equipments’ game plan?</strong>

A: We are looking at a `V' shaped recovery… We have made reasonable estimates based on each industry vertical that we serve.

We are also looking at cutting costs while protecting jobs. A 12-16 per cent cost reduction will reduce the break-even point. It is back to basics, looking at the cost structure and bringing it down. When there is a huge compression in the topline, the bottom line will also get compressed. However, cost rationalization will not impact long-term capacity.

<strong>Q: On the stimulus package announced by the government.</strong>

A: All those loans which are part of the stimulus package will be to support cash flows for businesses. Every country is pumping in money for economic uplift. As regards India's intervention of Rs 20 lakh crore, the direct cash transfer to the hand of people is low. Nearly 65-70 per cent of the gross domestic product (GDP) is on consumption. Hence, the small cash transfer will have not big impact.

<strong>Q: Will there be consolidation in your sector?</strong>

A: The weak ones will have to exit. But who will buy them is the key question. The focus for all players will be to conserve cash as the market behavior is uncertain. It is time for each company to look at their long-term goals and act accordingly.

<strong>Q: How are you gearing up to cater to that market shift?</strong>

A: We will continue to be a complete-system player selling air compressors. We will not be selling components. Perhaps our foundry now for captive use may have some excess capacity due to the slowdown, which may be used for outside orders..