The $20.7 billion Mahindra group, which until a few years ago appeared to be spreading itself thin by getting into newer businesses, is focusing on consolidation, scaling up and turning around underperforming businesses, which is evident from the improvement in performance of Mahindra & Mahindra (M&M) subsidiaries.
Revenue of M&M's 134 subsidiaries grew at a 30 per cent compounded annual growth rate over the past two year, with profit at the net level in both years from a loss in 2015-16. Had it not been for Korean subsidiary SsangYong Motor's loss of Rs 5.48 billion if FY18, the cumulative bottom line would have been much higher. The Seoul-based company had made a profit of Rs 2.31 billion in FY17. "There has been a phenomenal improvement in the performance," said G Chokkalingam, CEO, Equinomics Research & Advisory.
Anish Shah, president, strategy, Mahindra Group, told Business Standard, pointed out that investor concerns regarding the group "spreading itself thin" have disappeared in the past few years. "The reason is that few of the businesses that were bleeding have been taken care of," he said citing instances of exits in two-wheelers and retail. Mahindra sold Babyoye to baby product seller Firstcry for Rs 3.62 billion in October 2017. Unable to gain a toehold in the competitive two-wheeler market, the Mumbai-headquartered firm quit the mass market in September 2017 after merging Mahindra Two Wheelers with the parent company in 2016.
It had entered the segment in 2008 with the acquisition of now defunct, Kinetic Motors.
Driven by strong performance of M&M, that houses the automotive and farm equipment businesses, the combined market capitalisation of listed Mahindra firms such as M&M, EPC Industries, M&M Financial Services, Mahindra Holiday, Mahindra Lifespaces, and Mahindra Logistics, has risen to Rs 1.3 trillion at the end of 2018 fiscal year, up from Rs 944 billion at the end of 2016 fiscal year.
According to analysts, while concerns of excessive diversification may ebb, the group needs to do more. "It's an unfinished agenda," said Mahantesh Sabarad, head of retail research at SBICap Securities. There are still concerns regarding capital allocation and intra-group transactions, he said. "There's scope of untangling holdings and simplifying the structure through mergers of entities that have similar interests," he said.
Scaling up sub-scale businesses has also been part of the consolidation strategy, said Shah citing the example of Mahindra Trucks and Buses, which was merged with the parent company in August 2013, after Mahindra bought out the stake of Navistar Inc. The unit broke even for the first time in 2018 fiscal year on the back of strong demand in the heavy-duty truck market.
"Going forward, some of our small businesses that are small- or mid-sized, need to be bigger. Many are on that path," said Shah, referring to group's logistics arm that has been gaining momentum after its initial public offering in October 2017 and solar business, which has started looking up.
The fact that the group hasn't got into too many new businesses over the past three years, has also helped. "Our focus has been to stay with the core strength, consolidate, wherever it makes sense," said Shah, pointing out that while Mahindra is open to looking at an opportunity, it will be guided by whether "it can win".
Having exited loss-making businesses, the group is now focusing on improving productivity, enhancing efficiency and reducing costs with help from new technologies such as artificial intelligence (AI), blockchain, and virtual reality. "We are driving growth by leveraging innovative technologies such as Blockchain, AI, internet of things and Telematics across a range of businesses in India and globally," Ruzbeh Irani, president and chief brand officer, Mahindra group, said.
Shah who has ensured that the group's businesses embrace technology said the group has been able to shave off 75 per cent cost per sale (CPS) on the XUV5OO and 20 per cent in Club Mahindra's international sales using AI. Now, Shah and his team are in the process of helping the M&M's auto division with virtual reality showrooms. M&M Financial Services will launch a supply chain financing business based on blockchain technology, which will help the financing arm to reduce the funding time for short-term bills for Mahindra auto component suppliers and result in improving the revenue by a fourth. An analyst who didn't wish to be quoted said, "With the core business of tractors and automotive doing well, it would generate enough profit for some diversifications to play out over a longer period of time."