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Last year, flanked by a group of high-level executives, Pawan Goenka, the president of Mahindra & Mahindra's automotive business, made a last ditch attempt to save the group's beleaguered truck business which had been consistently losing money.
Goenka urged the board to give him three years to bring about a turnaround. The first task at hand was to assume full control of the businesses - Mahindra Navistar Automotive and Mahindra Navistar Engines - after its US-based partner, Navistar, announced its intention to exit the joint ventures because of financial trouble in its home market.
Despite mounting losses, the board showed trust in Goenka's turnaround plan. In December last year, at the peak of the slowdown when the industry saw its truck sales slump 26 per cent, Mahindra & Mahindra paid Rs 173 crore to buy Navistar's 49 per cent stake in each of the two companies. It later renamed them as Mahindra Trucks and Buses (erstwhile Mahindra Navistar Automotive) and Mahindra Heavy Engines (Mahindra Navistar Engines).
Nine months on and after more losses, the company has taken another step to pull the business out of the slump. Earlier this month, it decided to demerge the truck business from Mahindra Trucks and Buses and merge it with itself. The move, subject to regulatory approvals, will allow the demerged business unit to operate as an independent vertical of Mahindra & Mahindra, just like the tractor and automotive business units.
With the merger of the truck business with Mahindra & Mahindra, assets to the tune of Rs 256 crore, including plant and machinery, receivables and inventory of Mahindra Truck and Buses, will be transferred to the parent company. The losses of the truck business will help Mahindra & Mahindra secure a tax write-off this year if the merger plan gets completed before April 2014. The merger would also help the truck business as it will enable it to have access to Mahindra & Mahindra's financial resources.
But the road ahead is not going to be easy. Mahindra Navistar trucks have not been able to gain traction despite being in the market for over 36 months. Since starting commercial production in June 2010, the company has only managed to sell 8,000 trucks. In comparison, market leader Tata Motors sells more than 10,000 trucks every month. The company's accumulated losses also mounted to Rs 920 crore as of March 31, 2013. But Goenka is not giving up yet.
"If we had wanted, we could have sold our trucks business," said Goenka recently. He believes, the business will create a lot of value in the long run.
"Our board has given us three years of free hand and certain amount of money. They have said make the business profitable in that time. We are not going to look at quarter-to-quarter performance," adds Goenka.
The company, which has so far invested more than Rs 800 crore on its truck business, has earmarked another Rs 200 crore to strengthen the product line-up. However, other players in the sector have already taken note of its plans. Tata Motors, for instance, which is determined to guard its market share against any slippage, intends to launch over a dozen trucks this year. Ashok Leyland too is going aggressive on new launches and product diversification. The company after reporting losses in the June quarter is banking on its light commercial vehicle, Dost, and a new version of Stallion trucks to shore up sales.
"With weak macroeconomic indicators and the stretched viability for fleet operators, we expect medium- and heavy-commercial vehicle sales to remain weak in the near-term. The recovery prospects also appear to be gradual during the current down cycle given the surplus fleet capacity on ground which may put pressure on new commercial vehicle sales even as freight availability improves," said a recent report by ICRA.
Goenka is confident about the long-term prospects of the business. Part of it stems from the good feedback from customers and dealers about the product quality, especially about the engines which were developed jointly by Mahindra and Navistar.
"The good news here is that the product is performing well. Nobody complains about the product; what the dealers complain about is business viability because they are not selling enough trucks. We are just waiting for the industry to turn around," says Goenka.
Another pivotal point for Mahindra & Mahindra's faith in the truck business is the structure of the Indian commercial vehicle market. Little more than 80 per cent of the domestic market is controlled by Tata Motors and Ashok Leyland. In other words, there aren't too many players in the market, which leaves enough room for Mahindra & Mahindra to carve out a space for itself. According to data provided by the Society of Indian Automobile Manufacturer, the two companies sold 177,000 trucks last year from a total of nearly 222,000 trucks.
Analysts support Mahindra & Mahindra's decision to stay put in the market. "We expect medium- and heavy-commercial vehicle volumes to decline by around five per cent this year and start witnessing growth from 2014-15. We also expect gross domestic product growth to gradually start improving from 2013-14 which along with potential for further interest rate cuts would be positive for the commercial vehicle industry," the ICRA report said.
Mahindra & Mahindra trucks at present are sold through 57 dealers across the country. The company's sales at 2,977 units last year fell 15 per cent compared to 3,490 units in 2011-12.
"I am quite confident that the commercial vehicle industry cannot be down for long. Demand will improve and three years are enough to make the business profitable. When the industry turns around and we have the new products, the business will turnaround," adds Goenka.
While Goenka has been given a free hand to run the business, Mahindra & Mahindra Chairman Anand Mahindra has made it clear that the group will not shy away from exiting loss-making businesses. The company in June merged all its component businesses into one entity and sold part of the stake to Spanish component making giant, CIE Automotive.
"Mahindra as a group always makes some short-term bets and some long- term bets. The board had recently reviewed how our different bets had performed over the years. On average, we have done very well. Right now there are at least two-three long-term bets we have on the table: Mahindra Two-Wheeler, Mahindra Trucks and Ssangyong," adds Goenka.
