Tough conditions for Mahindra, especially tractor biz, could end soon

Mahindra is among the few business houses spread across diverse industries such as automobile, software, real estate, financial services. Automobiles contribute to 73 per cent of the group’s assets (excluding M&M Financial Services). While it is exciting to operate across diverse sectors, the strategy hasn’t been too rewarding, especially the past two years. This is mainly because of its bread-and-butter business going through a rough patch (especially tractors, due to weak monsoons in 2014 and 2015) — standalone sales and profits thus haven’t moved much since FY14. The recent ban on diesel vehicles in Delhi region this year has added to the woes. Businesses such as software and real estate are also under pressure.
 
All this is reflecting in the group’s financials. The consolidated M&M entity accounts for most of the group’s financials and holds significant stakes in Tech Mahindra, Mahindra Holidays and Mahindra Lifespace. Consolidated return on capital employed has consistently fallen from 14.8 per cent in FY13 to 10.2 per cent in FY16. Constant infusion of debt in the group in the last five years has skewed returns profile.
 
At the standalone level, M&M saw a 21 per cent compounded annual growth in debt during FY11-16. Revenue growth of the group has grown at a slower pace than debt, resulting in declining return ratios in recent times. M&M standalone revenue has stayed flat since FY14. Revenues of Mahindra Lifespace, Mahindra Holiday and Mahindra CIE have also been volatile in the last five fiscals, and profitability has not been too steady. But, given that the group would benefit from a good monsoon season, there is hope that the tough business conditions, particularly for tractors, should end soon. This can reverse its fortunes.