M&M: Pride And Purpose

The world was facing an unprecedented crisis in the last 18 months but for the Mahindra Group, the alarm bells had gone off much earlier. After being the top-performing stock in Nifty for 17 years, from 2002-2018, the company saw a phase of decline. “Our stock price came down 70 per cent between August 2018 to March 2020; that is a journey we don’t want to see again,” recalls Anish Shah, the CEO & MD of Mahindra & Mahindra, often described as the first professional CEO & MD to oversee all Mahindra businesses comprising  150 companies across 22 sectors, with a presence in over 100 countries.

Reflecting on this low phase that pushed the 75-year old giant to revisit its business strategy, Shah says, “We have learned our lesson. With the actions we took, our stock price tripled, and went higher and beyond (from Rs 250 to Rs 900 in 2021).” The 52-year-old Mahindra big boss is driving a wave of change at the company, a transition that began a while ago and was articulated in the company’s 75th annual general meeting by Chairman Anand Mahindra.

An oversimplified summary is that Mahindra has divided its businesses into three groups, each of which has a specific playbook of tightening operations and establishing clear paths of economic returns, which, in turn, decides capital allocation. The respective strategies and goalposts are different but the larger objective is generating value for investors and consumers. In a nutshell, 2021 not only marks Mahindra’s 75th anniversary but arguably an evolved Mahindra.
“There are changes but much will continue as well,” Shah observes, reflecting on the new plan. He elaborates, “Our values, our focus on associates, customers and investors in terms of rewarding will all continue. What will be different is that in many ways, we will be much bolder in our approach.”

He acknowledges that there was a short patch when Mahindra lacked in rewarding investors and that all the changes are geared towards correcting this.

Giving a topline, Shah says, “We are looking to regain our number one position in SUVs and lead the world in electric vehicles. We are number one in tractors in terms of volume globally, and we want to take this forward for farm machinery. All our businesses will create much more value for stakeholders and consumers. We are staying true to the Mahindra purpose of Rise, while taking leadership in ESG (environment, social, governance).”

Businesses Blueprint Revisited
To achieve these objectives, one of the steps Mahindra has undertaken is creating a new group blueprint that divides the group into three buckets — core businesses, growth gems and new businesses. The core businesses include Mahindra’s companies in farm and auto, technology and finance sectors. Incidentally, this is the group that has done well for the company so far. Based on its recent financials, market experts tracking the group say that courtesy of the farm equipment and IT business, the group’s overall results are attractive.

Shah states that all of Mahindra’s ‘core businesses’ are strong in the areas they play in. “In farm, we aim to consolidate our leadership to enter new markets, taking advantage of our scale and cost position. In farm machinery, last year our tractor sales were at Rs 20,000 crore and farm machinery at Rs 490 crore. Globally, farm machinery is twice tractor sales — this is a huge runway for us. We have made several acquisitions with expertise in farm machinery, that we are bringing to India. There is new vigour on the auto side as well,” Shah says.

M&M’s standalone (farm equipment and automotive) Q1 FY22 results stood out in the auto OEM pack, driven by QoQ margin increase amid gross margin expansion. “Automotive demand is seen picking up pace with local lockdowns now largely behind us and the company’s order book for key models like Thar (waiting period at 10 months), XUV300, Bolero Pickup, and Scorpio being healthy,” informs Rajesh Pandey, Head of Research, ICICI Securities, adding, “The company’s commitment to new launches (23 new products by 2026) across the core SUV, EV, as well as LCV category, is a big positive.”

In its IT business, Tech Mahindra reported a robust Q1FY22 despite seasonally weak mobility revenues. The company saw improving order book, client mining (added one client in $50 million and another in $20 million), and large deal traction. Experts say Tech Mahindra is expected to be a key beneficiary of the revival of telco capex and 5G as around 40 per cent of the revenue mix comes from communication.

Mahindra Finance faced many challenges exacerbated by the pandemic. Rural India is a strength for the company but according to Shah, its ability to manage through cycles came in handy again. “Mahindra Finance has 1,400 branches across India and understands the rural consumer better than anyone else. We have to do several things to take this forward now. Much more use of digital and data will come in. We will have multiple products because our gross sell ratio is low. There is a set of actions outlined for the business that will take it to the next level,” Shah informs.

No Return, No Capital
Shah’s leadership has taken a tough stance on fiscal discipline, admitting that there was a point where the company had deviated from it. In this next normal of the company, Mahindra is stricter in its capital allocation, wherein a company will get fresh capital only if it meets its financial milestones.

“We are coming back on track. If you see our past, it is not easy to be the best performing stock for over 17 years. You need something special and it cannot be done without fiscal discipline. We had this in place but we saw a phase, where we deviated. This can happen, but now have course-corrected, going back to our fundamentals,” declares Shah.

Market analysts appreciate these steps. “Company’s clear focus on cash flow, return ratio, complete restructuring, revised capital allocation policy would improve overall profitability and optimise capital towards an efficient business structure,” notes Mitul Shah, Head of Research, Reliance Securities.

The revised capital allocation strategy has emphasised capital efficient profitable growth. Explaining this, Pandey of ICICI Securities argues, “Mahindra sees this as a means for value creation for its shareholders with a consolidated return on equity (RoE) target set at 18 per cent.” The same criteria will be applied for making investments both in the standalone operations as well as group companies wherein the listed entity i.e. M&M has set aside Rs 3,500 crore for group investments over FY22-24.

As the group took difficult actions, Shah informs that it also saw each of its companies look at it with the perspective of “going back to what it was”. Some of these actions ended or stopped injecting capital in its joint ventures such as SsangYong in Korea or Mahindra Renault.

"One Of My Priorities Is To Drive Simplicity In Everything We Do" Ruzbeh Irani , President - Group HR & Comms When we first articulated Rise, I recall Anand (Mahindra, Group Chairman, Mahindra & Mahindra) had said, ‘Rise is converting subtext into headline’. At that time, we were examining what drove us to work every day, what our purpose was and what were our shareholder expectations before coming up with a happy marriage of the two. Rise is not something we pulled off the wall but something that has been in our history; we just made it front and centre.This made the job of adopting Rise easier but it brought changes. Some values were enduring, and we continued them. Then there were others that we needed to adopt. One of the pillars of Rise is alternative thinking. In the last decade, we have seen cutting edge innovations and not for the sake of it but in sustainable and relevant areas. We embedded Rise into our HR levers from recruitment to defining behaviours for all Mahindra managers. These behaviours are being collaborative, agile and bold. Collaboration is about helping others succeed. Agility is speed to ensure customer delight. Bold is about challenging status quo while remaining grounded and ensuring delivery of real outcomes. One of my priorities is to drive simplicity in everything we do to achieve desired outcomes. (As told to Noor Warsia) “

“We took a hard look at ensuring we reward our investors and allocate capital the right way. SsangYong was struggling in profitability and it did not have the path to returns that our investors demand. Hence, we could not invest more capital in it. Other investors may come in to take the company forward; we will continue to partner with SsangYong on multiple fronts. There have been other conversations, where we have had to either exit the partnership or potential partnerships. These are difficult decisions but essential for the business to be on the right path,” Shah explains.

The Next Billion-dollar Businesses
While its IT business was experiencing a golden period, the listed entities — Mahindra Logistics, Mahindra Lifespaces — were impacted during the second wave, and Mahindra Holidays & Resorts suffered some slowdown too. For Shah, however, all these along with some of its other unlisted businesses that together form its growth gems bucket, have the potential to be billion-dollar market cap soon. “We will get some of them to IPO somewhere in the next three-to-five-year mark. These are exciting companies that have scale, profitability and the ability to become much bigger and create value,” he says.

Logistics recently hit a market cap of 720 million dollars that was 2.7 times over the last time. Shah believes that with logistics, now it is about core execution as the industry will grow as India grows. Mahindra is eyeing acquisitions for this business. In Lifespaces, Shah says the business did not capitalise on Mahindra’s strengths but with a new team and growth plan in place over the last year, it has shown success in projects launched, building impetus. The market cap of this business has grown 3.7 times over the last year as well. Shah alluded to the Mahindra Holidays’ “unique business model” to indicate that the focus on growth and customer experience will take it to the next level.

The more interesting action is expected on the entities that Mahindra intends to list soon. Mahindra Accelo, a business in auto recycling, speciality steel, and some areas of EVs, is among these. “Accelo will likely be our fastest to IPO; it has been very profitable and will generate significant value for our shareholders,” says Shah.

The other frontrunners include Mahindra’s renewables business that has one of the largest renewables portfolios in India, the supply chain business, the consulting business in Silicon Valley and also its agribusiness portfolio. There is also Classic Legends that resurrected the iconic brand Jawa with an electric bike. “These are a diverse set of businesses that are well placed, profitable and waiting to be scaled up,” says Shah.

Entreprenuerial In Spirit
The final set, which Mahindra defines as its new-age platforms, is the set of businesses where Mahindra taps into India’s entrepreneurial spirit. “We have multiple examples where we have set up a business, merged with a leader and then let that leader take that business forward,” Shah informs.

First Cry was the starting point. Mahindra merged its business Mom & Me with First Cry and the latter kept a 37 per cent stake. Investors including Softbank came in and the last valuation was at 1.7 billion dollars. Another case in point was the merger of Porter and SmartShift. Car & Bike, a new business emerging from Mahindra First Choice Wheels that is focused on the used cars, is also an example in this segment. “These are three different models but it all comes down to two simple things—living our purpose and as we do that, delight our customers and create value for our investors,” Shah states.

Proud To Be Indian
In its priorities ahead, returns take the lead for Mahindra. “If we can deliver the kind of returns that we did over 17 years till 2018, that is a great start for us. We are going back to that, which is focus on capital allocation and giving back returns. The second aspect is to do much more from a purpose standpoint. While we have been a leader in this, we would like to lead it not only in India but globally,” Shah asserts.

Rise remains relevant in the future with the focus on driving positive change and enabling communities to rise. Commenting on what positions Mahindra for its next big leap, Shah says, “We are proud to be Indian and we make the best products. We have discussed this a lot in the last year. We want to take leadership of a place where people buy Indian products because they are the best products you can buy. This is a very important message because we need to meet that standard. And I believe our recent launches/ products are there already.”

(With inputs from Ashish Sinha)