We will exit international cos that do not have a strategic quantifiable link: M&M

‘Our farm business sold more tractors in May compared to May last year’

ETMarkets.com
Today, auto sales are roughly about 40% of pre-Covid level. For auto to go back to 80- 100% will take a few more months, says Anish Shah, Deputy MD & Group CFO.

For the quarter gone by, the lockdown effect is visible on M&M. Now that the lockdown has been lifted, what is your understanding of the economy? On the demand front, how are things looking up for Mahindra & Mahindra?
The rural economy is actually doing very well. Our farm business sold more tractors in May as compared to May last year and that honestly was a surprise for us as well. We are seeing a fair amount of income and spending capacity in rural households. They have not been impacted by Covid as much. Similarly with auto as well, we are seeing a lot of demand from rural sectors and also demand for small commercial vehicles. Demand for tractors has gotten back more or less to pre-Covid levels. We have still somewhere to go from a demand standpoint. It is strong. From a supply standpoint, we are at roughly about 85% of capacity utilisation right now and we have the remaining 15% to go. Suppliers are online. There are some challenges in terms of ramping up completely but these are fairly small at this point in time given the overall situation.

For auto it is going to be a slightly longer haul. In May, auto sales was 20% of what it was last year. It has ramped up since then. Today, it is roughly about 40%, but for auto to go back to 80- 100% will take a few more months.


I am looking at your revenue split for the tractor business which now accounts for more than 30%. Can I say that 30% of the business is in good shape both in terms of demand and market share?
Market share is north of 40%. We actually grew market share by 1% last year and we feel that we should be in a good position to grow this year again.

But you are losing market share in the utility vehicle (UV) market and you have already said that the auto business will take some more time to normalise. How much of drag will that be on the aggregate picture on the automobile front?
The numbers for this year are pretty open in terms of what happens with Covid and whether there is greater demand to make up for losses for a few months. We do not know all of that as yet. In case of small commercial vehicles, we actually gained market share there last year as well. We went from 44.5% to 45.5% market share and that is a pretty significant segment for us that is doing well. We started to see good demand for that segment right now as well. UVs have really become much broader and include a large number of passenger vehicles as well. We have lost some share on that front last year, but we are hopeful of at least managing to maintain our own over the next few months. Then with few new launches, it will start growing as we go forward.

Mahindra & Mahindra is a tractor company which has moved into big SUVs and now you have also stepped into the EV space and the mobility business. So, Mahindra & Mahindra business has two parts -- the tractor business which is rural dependent and the automobile business which is a combination of rural as well as urban. The mobility business is a future business. How would you like to identify the auto business for your shareholders?
We have got strength in large SUVs over time. We have made some headway in MPVs with the Marazzo and smaller SUVs. What we are going to look at right now is how do we continue to consolidate our strengths and also link directly with our strength in small commercial vehicles. So that is one area.
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The second area is electric vehicles. We have a lead there as we were the first in India to manufacture electric cars and we have that capacity for the last 10 years. Our lessons from that segment in India are significant. I would say, it is at the low end of the electric vehicles. At the high end, we are launching a global vehicle under the brand Automobili Pininfarina and that will bring us new electric vehicle technology. So we are fairly well positioned there as well. It will take some time for the EV market to scale up in India but as it does, we are well positioned to benefit from it.

The M&M management has come out and said that it is going to be very conscious about a capital allocation strategy and loss making subsidiaries may not find too much of weightage in future capital allocation policy. Let us talk about it.
Let me take a step back here because there has been a lot of pressure from investors, shareholders, around what has happened to the Mahindra stock price in the last year or two and whether Mahindra is really getting the value for what it stands. We have to go back in time. In 2002, when the Nifty was started at, there was also the birth of what we call the bluechip companies. There was a conference to focus on how to showcase value and ensure that Mahindra beats its full potential.

From 2002 to 2018, over a 17-year period, Mahindra was a top performing Nifty stock with an annualised growth of 31% every year that was driven by very strong underlying performance from an EPS standpoint which was 34% annual growth in EPS and a 22% average ROE. It was also underpinned by strong cash generation of about Rs 2,000 crore a year.

After that, we have losses in the international subsidiary, starting in fiscal 2018. That became slightly larger in fiscal 2019 and even larger in fiscal 2020. Our cash generation was still strong. We generated a lot more cash over the last three years than we have prior to that in many years. But our EPS was hit by the losses in international subsidiaries. That is the reason why we are going back to the capital allocation policy. For 17 years may be, we had an excellent run in the market and we are going to tighten that up, making sure that there is a clear path for every loss making business. It can either make profits at 18% ROE, in which case we will stay with it. If it has a path to doing so in a reasonable timeframe or has a quantifiable strategic benefit.
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For example, Sampo makes agriculture implements which is a nascent market in India with huge potential. So the investment we have made in Sampo is really to have them coming to India and tap into that nascent market where the benefits will be far greater than the potential losses that may take place because of the transfer of technology and as a result, it is a company that we want to stay with.

There are similar examples of companies internationally that bring us technology. So this is not about getting away from the international. We will stay with international but in a very careful manner where we have a clear link and for companies that do not have a strong strategic quantifiable link, we would get on an exit path either through a partnership alliance or shut them down.
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One investment which in a sense has been a big baggage for Mahindra & Mahindra is SsangYong. What is the future of that company?
Our board has decided that we will not invest anymore in SsangYong. We would very much want the company to succeed and have taken all non-monetary actions to help the company succeed. When it made the decision, our board also said that we will give a final investment of 40 billion Korean Won which is $32 million or Rs 240 crore into SsangYong and that has given SsangYong some runway. There are investors who are looking at SsangYong and as they come in, they would help pay the company forward. We will do everything to take the company forward, but we will not invest anymore.

Now according to our numbers, roughly 40-45% of the total capital employed from the standalone company goes into your subsidiaries and which historically have dragged your return ratios down. Are you looking at a substantial drop in fresh commitment in which case, would we have your return ratios suddenly start looking up?
They will start looking up. Also that was for a specific year. We have always invested a fair amount of capital in auto and farm businesses, even in FY20. Our auto and farm business generated Rs 4,300 crore of cash in FY20. We have put in Rs 4,447 crore of capex and Rs 1,700 crore of investments in companies that had a clear strategic benefit for auto and farm. From a net basis, we actually invested Rs 1,800 crore more than they were generating.

Our investments in listed entities and non-listed subsidiaries generated Rs 1,900 crores of cash for us. From that perspective, our auto and farm businesses will always get the capital they need. They are our strong businesses and will continue to grow and our investments really have not taken up as much cash over the years.

Many of them have been started with very small amounts of capital and the returns in many of these businesses are very significant. In some cases, we are looking at 40% plus IRRs over time. In some cases, it is 25% to 30%. We feel that we have been able to harness the value of these investments and that is something we will continue to do.

The ultimate mantra of a management is to create value for the society and create wealth for shareholders. While the Mahindra Group has managed to touch and change a lot of lives and change the way how things are moving at a social level, at a shareholder level, your stock is not getting duly rewarded for the kind of investments you are doing. Why is that?
Again, memories are short. Your statement is absolutely right for the last two years. But if we look at 17 years between 2002 and 2018, Mahindra was the number one performing stock on the Nifty at a 31% annualised growth.

Our challenge is to get back to that 17-year history and get out of what happened over the last two years and to answer your question directly why is that? That is because there were a number of international subsidiaries that for a number of reasons did not perform as we wanted them to. Some things happened there, some things were accelerated by Covid as well and we are now taking very stringent actions to get out of those or put them on a path of profitability. Therefore that will get us back to where we were before.

Even if you were to look at it in terms of our numbers this year, 80% of our exceptional items were driven by SsangYong and GenZe. We have decided not to invest in SsangYong anymore and GenZe is a US two-wheelers business which we have shut down as well. So 80% has been addressed, the remaining 20% needs to be addressed. Over the next 12 months, we are looking at every single business with a very fine comb and understand whether we can get them back to the path of profitability. Some have very good technology as well but there are some that we may not be able to revive and we will have to look at a sale or an exit.

In hindsight when you look back at the last 10 years of expansion for Mahindra & Mahindra -- from building a formidable financial franchise to investments in agri business, electric business or for that matter mobility business, do you think the group somewhere diversified too much?
Mahindra has always stood for the gateway to the largest and fastest growing themes in India. The question is can we generate investor return. Over 17 years we have shown that. Over the last three years or two years we have not again more because of international subsidiaries not because of our diversification in India. As we look at returns from businesses that we set up in India they have been very significant. So the question is can we replicate what we have done for the 17 years and that is what we are getting back to.

No auto company in the world can claim that they have a mobility business, a two wheeler business and also a strong SUV business. Can all these businesses co-exist?
If you think of the synergies there, think of sourcing. That is the key part for one of the businesses. What we are doing now is looking at quantifying all the benefits. Our margins are very good and you can compare them with margins for other companies in the industry. Why are they higher? They are higher because of some of the synergies that we get here. The question is can that translate to outperformance from an investor standpoint? That is what we have to drive.

Let us talk about the non-core businesses which are not connected with the auto theme or with the rural umbrella. Some would argue Mahindra Holiday has been a great investment for you but it would be called a non-core business. Are you looking at diversifying in the non-core businesses also?
Over the next few years, I would look at harnessing nine gems that we have. These are businesses with tremendous potential and we feel that all of them are potential billion dollar candidates. This includes agri business. This includes Mahindra Rural Housing Finance, Excelo which has auto recycling plants, Mahindra Electric Mobility which is our solar business, Aftermarket, a used car business where we have a very strong physical infrastructure and a Powerol business. SoThese are businesses that have tremendous potential and we would look at scaling them up.

The plan is not to go out and diversify beyond a current footprint. If something outstanding comes up, yes we will look at it. But we feel that with these nine businesses, we are well positioned. There are four joint ventures that allow us to supply to the world and that is something we want to do for some of the other businesses as well. We have got a very strong portfolio that can generate good returns as we look at the next few years.
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