On Episode 941 of The Core Report, financial journalist Govindraj Ethiraj talks to Sai Giridhar, Vice President at FADA as well as Aviation Experts, Sean Mendis and Sanjay Lazar.

SHOW NOTES

(00:00) Stories of the Day

(00:50) Markets Steady As Traders Wait For A Potential Deal To End The War

(03:42) Auto Sales Hit Records, Again. What Is Driving Higher Sales?

(12:21) Honda Will Outsource Development Of A New Vehicle To Tata Group Company

(13:28) Microsoft Announces New Data Center, Google Faces Opposition For Its Project

(15:13) What Should Air India’s Priorities Be And What Can The Incoming CEO Bring To That Table?

EVENT: Spotify x The Core's "Building Wealth for a Longer Life" with Saurabh Mukherjea of Marcellus Investment Managers. Register Here

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Friday, the 7th of August and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital

Our top stories and themes…

Auto sales hit records again. What is driving them?

Markets steady as traders wait for a potential deal to end the war.

Microsoft announces a new data centre. Google faces opposition for its own.

What should Air India's priorities be and what can the incoming CEO, an ex-Ethiopian Air veteran, bring to the table?

And in a first for Honda, it will outsource development of a new vehicle to a Tata Group company.

Markets, Oil and Gold

There is an interesting contrast in consumption preferences, confidence and behaviour. Auto companies are reporting record sales across all categories of vehicles while the Reserve Bank of India's bimonthly Urban Consumer Confidence Survey and Rural Consumer Confidence Survey find that consumer sentiment has weakened in both urban and rural households as they became less positive about present economic conditions. Now, the two are not necessarily related or directly correlated, but it's interesting nevertheless.

The Reserve Bank report says that consumer confidence weakened across both urban and rural India in July with households becoming more cautious about the current economic situation, employment prospects and inflation, a business standard report quoting both the surveys said. The surveys typically gauge households' assessment of the current economic situation compared with a year ago as well as expectations for the year ahead on the economy, employment, prices, income, spending and inflation. The urban survey touched about 6,000 respondents across 19 cities and the rural about eight and a half thousand in rural and semi-urban areas across all states and three union territories and were done, that's the surveys were done between the 11th and 20th of July.

Overall, consumers, however, continue to expect conditions to improve over the next year. So what's driving auto sales? It is a good problem to have but nevertheless merits a deeper dive which we will do shortly. And of course, most consumer goods companies have been reporting and continue to report strong numbers and moreover in their conference calls are projecting an equally good if not better second quarter as well.

Meanwhile, on the energy front, oil prices rose slightly though were overall steady providing some tailwind to Indian markets on Thursday. Investors remain cautious on the outcome of Iran-Oman talks and whether they will restore flows via the state of Hormuz while reports of attacks on Saudi tankers in the Red Sea and Gulf of Aden renewed supply tensions according to Reuters which pointed out that Brent crude futures were at about $80.20 on Thursday morning. Sticking to energy, India's cabinet has approved a roughly 23,000 crore rupee programme to scale up production and distribution of compressed biogas.

And in the markets, the census was up 374 points to 78,954 and the nifty 50 was up 11 points to 24,636. In the broader markets, the nifty mid cap was down 0.4 and the nifty small cap was up 0.5. Meanwhile, gold prices, which we had of course stopped looking at, at least closely for the last few weeks, are rising again. Gold rose to its highest level since late June on Wednesday, thanks to weaker than expected payroll data and hopes for reopening of the state of Hormuz, according to Reuters, which added that spot gold rose as high as $4,295 per ounce on Thursday and about $4,268 when last checked.

Lower oil prices did not help the rupee, which came under pressure from also a stronger dollar. The rupee was down 16 per se to close at Rs. 95.24 against the US dollar on Thursday.

Alternative fuels and other Auto Sales Trends

Sales of vehicles powered by alternative fuels have come within striking distance of petrol-powered vehicles in the month of July, according to the Federation of Automobile Dealers Association, or FADA, and it does appear that they could overtake petrol in a month or two going by the current run rates. The reasons are several and include, of course, the higher cost of fuel and some concerns on E20 or petrol blended with E20 fuels. Alternative fuel passenger vehicles, which include CNG, hybrid and electric, account for about 40.6% of total sales and petrol-powered vehicles are at 41.68 or 41.7. Overall, this is the best July for the auto sector, with registrations rising 26%, according to FADA, with all six categories of vehicles doing well.

Moreover, some 88% of dealers are optimistic about the August-October period, even as the festival season kicks in. Consumer uncertainty over E20 petrol is pushing buyers towards vehicles powered by alternative fuels, and more on that in a moment, because finally, that's only the choice of fuels. People are, in fact, buying more cars.

I spoke with FADA Vice President Sai Giridhar, based out of Jaipur, and I began by asking him what indeed were the reasons behind the higher sales numbers, where it was coming from, and what kind of models.

INTERVIEW TRANSCRIPT

Sai Giridhar: We should give credit to GST 2.0 because this all surge started from GST 2.0 because if you talk about same period last year, we're actually struggling to make ends meet. It was only when GST 2.0 kicked in, the vehicles became more affordable. It was the kind of interventions which the central government took as far as the income tax reforms are concerned or probably your repo rate reduction is concerned.

So it was three times in a row that the repo rates were reduced. Today if you talk about they're still maintaining the repo rates at the same level which per se means that today as far as the auto retail is concerned or in fact most of the consumer durable loans are concerned, they're at a lowest ever with which we have ever seen. See all these parameters put together, they give more disposable income at the hands of consumers.

This is a proven fact, you've seen it across the globe that once you've got more disposable income at your hands, the first thing which you buy is not a house but it's a vehicle for yourself or because it's a kind of your livelihood, you commute from one place to another, you go to your office, you go to your business. So that's one thing which is the first that you spend as a disposable income is concerned. Second I would like to highlight over here is if you've seen how urban versus ruler demand is taking place.

So this demand which you're seeing as you rightly people have been pointing out that now this GST 2.0 reforms are close to what year old now and most of the OEMs have kind of absorbed that price over last one year. The inflation has gone up with the middle east crisis, the input costs have gone up, the exchange rates for OEMs which actually are dealing in euros or in dollars, for them the exchange rate has gone up. Then also why this surge?

If you see this demand which we're seeing is a Bharat based demand I should say. It is not a kind of a urban demand which earlier which we used to see. Suddenly something happens, some crisis and the demand used to go down.

It is more of a Bharat led demand. Ruler actually is outplacing urban demand I should say to correctly place this. And one of the reasons why it's been able to do is that a again disposable income available.

Last few years the sowing has been good, there's been a lot of cash incentives, direct payments being given by government to farmers that's also playing its role. Then most of the OEMs today if you talk about especially passenger vehicle, two wheelers were already there, especially passenger vehicle if you talk about. Most of the OEMs they've penetrated deep into the Indian ruler market today.

Because see people living there always had the aspiration to buy products. The problem was a the dealership was not there, even if the dealer was there it was only a selling point, the service centres were not there. So today you got the sales and service network which is there.

So you got the ingredients there for the people staying in Bharat I should say. The affordability was never a question.

Govindraj Ethiraj: Right that's interesting. So you're saying the distribution reach and diversity is one key reason why demand is picking up. If you were to say that rural is driving let's say most of demand including in passenger vehicles, what would be the categories as in is most of that happening at the entry level or are there other levels also that are growing as fast?

Sai Giridhar: It's more towards entry level segment. That's what we've seen especially in ruler bed. If you talk about subcompact SUV, the under four metre SUV, those are two segments which are actually doing good in ruler.

Govindraj Ethiraj: Right so we are almost neck on neck now between alternate fuels and ice engines or internal combustion engines. So and it looks like at this rate by next month alternate fuels could overtake. Is that your sense?

Sai Giridhar: Absolutely. This I think it's just a matter of time probably. If not next month then next to next month definitely. It's more to do with the availability of these alternate fuel vehicles.

Probably the availability is there. We can't say that our is a developed economy. We still are developing economy.

Your usage, your average, it plays an important role in consumers mind. That's the reason you see the surge towards electric or towards CNG or hybrid vehicles. They're to stay I believe.

Though probably Middle East crisis probably has played its role to accelerate that surge towards EV and hybrids and probably this new Fiasco as well as the social media hype on E20 probably. Even that's playing a spoiled sport as far as petrol is concerned because it's only the petrol segment in passenger vehicle which is losing the market share. If you talk about diesel was 17 odd percent last year.

It's still 17 odd percent. There's hardly any change as far as diesel penetration is concerned. So the segment on which these alternate fuels are thriving is only and only petrol.

One of the reasons which we see is probably even the E20 Fiasco has taken some kind of a share in this.

Govindraj Ethiraj: Okay. Yes there is concern that E20 blended fuels or rather petrol blended with E20s leading to lower mileage and maybe some damage to engines particularly older ones. So there is a concern.

I guess it's being addressed but maybe not fully.

Sai Giridhar: More of a myth I should say. It's not a concern. It's more of a myth.

And I would like to clarify over here because it's the onus is not only on the government. See probably we as dealers we are the front face for consumers and even the OEMs. We could never preempt that this E20 will become such a big fiasco because the blending was happening for last so many years. And it was just another uptick as far as blending is concerned.

No one preempt otherwise we would have been far far much better ready for answering customers query. These FAQs which now you see flowing from OEM they would have been at least three months back if you would have had those FAQs. I don't think this fiasco would ever have lasted.

Govindraj Ethiraj: Okay. So anyway you're saying that the fact concern is leading to higher alternate fuel sales. So let me ask a slightly a broader question.

What do consumers today when they walk into dealerships including yours what are they looking for and what does that reflect in terms of their aspirations and their desires and so on?

Sai Giridhar: So it depends on segment to segment. See if it's an entry-level segment consumer he is looking for more of reliability, more of affordability. His concerns needs or queries need to be answered especially as far E20 is concerned in most of the showrooms today we've got standees because what we understood was that consumers are not opening up when they're coming up at dealerships.

They're not even raising their flags because only thing which they talk about is that we want to buy a diesel or we want to buy a CNG or an electric vehicle. And we understand the prices of all these alternate fuel vehicles are much higher than petrol. So somewhere down the line the conversion rate at which we generally close an enquiry even those rates were getting affected.

So that's the reason we've been doing these hand-holding with consumers. So every segment has got a different aspiration. Every segment has its own share of I should say necessities or because most of the consumers I can say when they are walking into a dealership irrespective of the segment they've already done their basic research.

They've already zeroed down on at least couple of models or probably they've zeroed down on the company it's only the variant or the colour which they want to choose in. So internet or these things are playing a major role as far as influencing consumers behaviour is concerned.

Govindraj Ethiraj: Right Sai, Thank you so much for joining me.

Sai Giridhar: Thank you.

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Honda Motor Company has outsourced development of a new vehicle programme to Tata Technologies, according to a Bloomberg report, adding this is the first time the automaker is entrusting an Indian engineering services firm with building an end-to-end platform to help cut costs. The platform is expected to support multiple car models, according to the Bloomberg report, and is intended to accommodate conventional fossil fuel-powered models as well as electrified powertrains for hybrid and electric vehicles.

Data Centre or No Data Centre?

The data centre rush has kicked off in more ways than one. Microsoft launched its largest India data centre in Hyderabad on Thursday, which we knew was coming, and brings Microsoft's cloud regions in India to four, adding to existing centres in Pune, Chennai, and Mumbai, and also cementing its position as India's largest cloud computing provider, according to Reuters.

The news agency also travelled to the ground in neighbouring Andhra Pradesh to report that work on Google's $15 billion data centre hub is in full swing, but there is mounting opposition from environmentalists. Google has faced several legal challenges over its impact on water supplies and proximity to a wildlife sanctuary that is home to leopards and pangolins, according to that report. In recent weeks, activists and have marched in Visakhapatnam, a city holding banners saying we cannot drink data, and painting handcuffs on the Google logo, according to social media posts reviewed by Reuters.

Meanwhile, a Bank of Baroda research report has said that the sum of investment announcements made between April and August this year was about 26 lakh crore rupees. Now, this is impressive, it says, because the period coincides with one of uncertainty in the global markets. But here's interesting part, the study shows that 56% of the proposed investments are in the information technology sector, of which 99% or about 14.9 or 15 lakh crore rupees is towards data centres and AI by 13 companies.

The second largest investment category is in the conventional electricity space, which is about 6.8 lakh crore rupees and seven companies. Interestingly, says the BoB report, four of them with an envisaged outlay of about six and a half lakh crore rupees would be or could be in the nuclear space.

Air India’s Future with its New CEO

Air India has named Tewolde Gebremariam as its new CEO and Managing Director, who succeeds Campbell Wilson, who led the airline through the initial phase of Air India's revival after the Tata spotted in 2022.

So what could Tewolde bring to the table in the context of where Air India as an airline could or should go strategically speaking. Air India is of course carrying a basket full of problems ranging from financial to reputational, but solving these problems will eventually be a smaller part of a bigger challenge as we look ahead. And we'll come to that in a moment.

A little about Tewolde, who spent more than 35 years at Ethiopian Airlines before becoming Group Chief Executive Officer. Under his leadership, the airline established Addis Ababa as a major global aviation hub connecting Africa with the rest of the world. It expanded its international network from 64 to 128 destinations, including several in India, while annual revenue grew from about a billion dollars to five billion dollars.

According to reports, passenger traffic rose from three to 12 million during his tenure. Air India Chairman and Tata Suns Chairman N Chandrasekharan in his remarks said that Jebrameriam's operational expertise, commitment to safety and vision for hub development would be instrumental in Air India's next phase of growth. So what is the strategic way forward for Air India and how could that use the incoming CEO's experience and skills? And what should Air India's positioning be as a product and service going ahead? And that's the question I put to aviation expert and former Air Indian Sanjay Lazar and also to Sean Mendes, aviation expert now based out of Malawi and who has run several airlines in operating roles across Africa.

And I began by asking Sean, who's worked with Tewolde closely, what kind of skills he could bring to the Air India table.

INTERVIEW TRANSCRIPT

Sean Mendis: I think, you know, to really understand, you know, what the world there brings to the table, you want to really look at his career and what he accomplished at Ethiopia. There's a couple of interesting points there. Number one is he actually has a pretty long history with India.

He was based in India as the regional director of Ethiopian Airlines for South Asia back in the late 90s at some point. And, you know, whenever you talk to him and you mention you're from India, one of the first things he'll always tell everyone is, oh, I spent time in India. I really love India and so forth.

So, you know, going back many, many years, he's got a love for India. He's got experience with India. And I think that's important because he's coming into India with his eyes open.

And, you know, this is not your typical expat who's just like, oh, I'll manage over there. He knows the unique challenges that India brings. But, you know, more importantly, when you look at what the world achieved at Ethiopia, I mean, I got to know him early 2000s when he was head of marketing, and then he became chief operations officer.

And then 2011, he took over as CEO from Atogirma when Atogirma retired there. But the main thing that drove Ethiopians restructuring or growth during that period was that they developed a project called Vision 2025, which was a 15-year plan for them to grow Ethiopian from what was then, you know, a very strong regional player with an African focus into what they envisioned to be a much larger, at least globally relevant, if not globally dominant player. And Tewolde was part of the team that came up with Vision 2025.

But most importantly, he was the CEO that led Ethiopian to not just achieve Vision 2025 in 15 years, but to achieve it about four years ahead of schedule. So they actually hit Vision 2025 in about 11 years rather than 15. And I think the way he was able to execute that, both in terms of getting results, as well as being able to have all the stakeholders, whether that was the government, to keep the And every time there were situations where the government may have looked greedily at Ethiopian, he turned it to his advantage in terms of we can help the government if the government, you know, helps us this way.

And, you know, he did not have labour issues. He did not have management issues in terms of people leaving management. It was his human skills, as well as his business skills.

I mean, as I say, he is a politician and a businessman rolled into one. I think that's what really makes him quite unique to be able to come into Air India as an expat, but still to be an expat who's quite familiar with conditions.

Govindraj Ethiraj: Right. So Sanjay, as we look ahead now, I know it's a broad question, but what is the strategic outlook or role or future for Air India as we stand today? I mean, can it be a hub-focused operation?

Should it be one? And which, of course, would draw more on, let's say, Tewolde's strengths?

Sanjay Lazar: I'd like to carry on from where Sean spoke and very interesting points he makes about Tewolde being a politician and a businessman. He's also a career aviation expert. And that's what Air India has needed for the longest time.

And we've tinkered around, we've got people who are learning on the job and stuff like that. And, you know, Air India is such a complex, you know, prominent airline in India and in Asia and in the world. It needs a lot more work.

And I do believe that someone has experienced, and I've studied his background, I don't know Tewolde at all, but studying his background, I do believe that he will have the analytical capability of looking at where Air India has gone wrong in the last four, four and a half years, which they've racked up massive losses in those four and a half years, and how it would be going forward. You know, whether the vision of Vian was correct, or in hindsight, whether there was a mistake, and whether, you know, cost correction, this is the time. Campbell has built a foundation, they've ordered a number of aircraft, whether those are too many or too little, whether, you know, you want to follow the stratagem that was put in place four years ago, saying we will be the largest point to point operator, you know, in this region, or whether you're now looking at doing more of a hub and spoke and then growing the region first.

All these things will come into picture. I also see Tewolde bringing cargo as a big feature, given his strong background in cargo. Air India has neglected cargo all its life, whether as a PSU or even now, and that is a huge, you know, chunk of business.

Let's not forget, during COVID, that is one of the factors he used to keep Ethiopian growing and afloat. Turkish also did that. So this is something that maybe, you know, he might pull out a leaf off.

I do believe he first have to address a lot of moral issues and post 171 stuff, clean that up for employees and passenger, build trust in the market, because that's going to be a key. You know, Air India has been in limbo because Campbell had announced a resignation because of 141 trauma and stuff like, it's the time to go forward now. And you're going to get aircrafts almost every week throughout 2027.

So that's very important, I think.

Govindraj Ethiraj: Right. So, Sean, when you look at the region now, and that includes, I guess, Asia and Africa and Middle East, what are the prospects for an Air India to or an airline like Air India to go beyond what they are today? And again, sort of linking to maybe the success Ethiopian Airlines has in building the hub model.

Sean Mendis: I think there's a lot of similarities in that, because, you know, just like Air India has the very strong India market, Ethiopian Airlines may be the national airline of Ethiopia, but for practical purposes, it's the national airline of the entire continent of Africa. You will see parallels in that. I cannot see Tehualde backing a strategy that does not consolidate around strong hubs.

Now, that may not just be a single hub like Delhi, but you will see strengthening of hubs, probably Delhi, Mumbai, Bangalore, not a significant difference than what Air India has been doing at this point right now. But at the same time, there will also be opportunistic flying. So if there is a route that they believe that there is, you know, the ability to, say, fly between Amritsar and London, or just as an example, Calcutta and Bangkok.

Tehualde has been very good about extracting value. So when he sees there is an opportunity, his legacy at Ethiopian has been able to pivot very quickly. And, you know, Sanjay mentioned the whole cargo pivot during COVID.

And this has been true in terms of route networking. Ethiopian can start a route in a month if they need to and be successful with that.

Govindraj Ethiraj: And that's hopefully a legacy he will bring to the bureaucracy that Air India has built up over decades. Sanjay, that question obviously then comes to you. What's the kind of headwind that he could face in executing some of these things, assuming he wants to go down the path that Sean was talking about?

Sanjay Lazar: In terms of headwind, of course, he's the choice of the Tata's, the choice of the board of Air India. So there could not be too much of headwind because if the chairman of Tata wants this and the chairman of Air India, I do believe it will go ahead. But there will be inner contradictions.

And I think it's time they, whether it's the Tata board and the Air India step back a bit and do an assessment of the last four years. There are a lot of people who've not pulled their weight. And I do believe Tewolde has the background to analyse who has gone wrong or where.

And you have to be a little bit ruthless because at the end of the day, it's the Tata brand name on the line, it's the Air India. So they'll have to be a little tough on that and then start building from there. I don't think his vision is going to face too much of contradiction within the company or within the board because they've already seen four years of contradictions despite having backed the previous incumbent.

I do think that this is time that the Tata's and the company at large lets an experienced professional who has been there and done that do it on his own with freedom. That's very key.

Govindraj Ethiraj: Right. And Sean, I mean, I guess for any product or service, there has to be clarity in brand purpose, the kind of consumer that you want to What is the Ethiopian success, let's say, or rather what lies behind Ethiopian success here?

Sean Mendis: I think what really came through during Tewolde's era in Ethiopia was the discipline. They had a plan and they stuck to it and they ensured, you know, they had benchmarks that they constantly evaluated the plan with along the way and ensured that, you know, something was lagging, they put in the additional resources to it and so forth. I remember when Ethiopian was a lot smaller and then it literally quadrupled during Tewolde's tenure, both in terms of fleet sizes as well as in destinations and importantly in revenue and profitability.

So just watching how that actually progressed, I think is a organised approach. While, you know, as Sanjay just said, which I think everyone has seen here, India has tried to be everything to everyone all at once. And that has been a miserable failure.

It's become nothing to anybody. And I think Tewolde will prioritise. Now, I don't quite know which priority he will go.

Is it going to be products? Is it going to be schedule? Is it going to be route network or which of those?

But he will identify a strength and he will ensure that this is priority A, this is priority B, this is priority C, and ensure that the resources are allocated accordingly and that everybody who is involved with delivering that product is appropriately empowered that you have these resources available. You are going to be held accountable to ensuring that these benchmarks are met or explain why not. And, you know, we'll see how that progresses.

So I think that management style is something that Air India really could use because, you know, I've known Air India for many, many decades. And the discipline within the organisation has largely been what has been missing. And that is the strength that, you know, that Tewolde and anyone from Ethiopians really disciplined management structure can bring to the table.

Govindraj Ethiraj: Right. Sanjay, so we've just seen Indigo also get new CEO, Willy Walsh, who's of course, whose name was announced much earlier, but he's just taken over. And India is fairly competitive or even brutally competitive market already.

So how could Air India be sort of position going forward from here on? Because even if it has international ambitions or hub ambitions, and so on, it has to eventually fight a very tough fight in the domestic market, which also matters.

Sanjay Lazar: Well, you know, Sean made a great point. Air India has tried to be everything to everyone. I said this on the last time on your show.

Similarly, Air India has tried to be a low cost carrier in Express. They've tried to be, you know, a domestic carrier in Air India. They've tried to be an international long haul carrier.

They want to be a premium carrier and compete with Emirates, but you don't have the hard product or the soft product. You know, Air India has been confused in some sense and mixed. Tewolde will have to give it direction and focus, you know, with the owners that if this is what they want, this is where we will go.

And the second point as to where Air India should go forward from here, they will have to fight domestically. They need to first decide whether Air India is going to be the principal domestic carrier or whether Air India Express is. Because 70% of the network is with Air India Express, but the premium metro networks are with Air India.

And they take about 70% of the revenue in any case domestically. So this is a conundrum they'll have to solve. And secondly, I also think they need to look at their fleet network, their route network, because, you know, they're ordering nine variants of five aircrafts, and it's going to be a crazy opex.

And, you know, with pilots, with permits, with spares, I don't know who thought of this when they were doing it, but very few airlines in the world operate nine variants, you know, and that's going to be one pain point. I also see, you know, the long haul routes will be impacted till Iran and USA sort their stuff out, but develop other markets. Air India doesn't have too many to fall back on.

So I think it's going to be a period of introspection and creating a new route forward. Indigo is already miles ahead. And like Mr Bhatia, you know, went on a couple of channels and said, you know, let's not fight with us each other inside.

We're looking at presenting India to the world very nicely put, I must say, sitting on 66% and growing. He would love nothing more than that to happen. But, you know, Indigo has grown on its own.

Let's not forget, 20 years ago, they were not even a percent or two. And airlines have allowed them to grow that much. And they've grown by sheer dint of their hard work.

I'm sure Air India will do the same. Air India has great loyalty amongst Indians. And both of us, actually, we're all Air Indians at heart.

We all want it to succeed. You know, we pray that it does. So yes, fingers crossed.

Govindraj Ethiraj: Right. That's a nice note to end on. Sanjay and Sean, thank you so much for joining me.

Sanjay Lazar: Thank you.

Sean Mendis: Thank you.