Brake on diversification

M&M must focus on reviving its core automotive division

Mahindra & Mahindra (M&M) has just seen a big change at the top, with Anish Shah taking over as managing director and chief executive officer on April 1. But the real big change will happen in November, when Anand Mahindra transitions to the role of non-executive chairman, paving the way for Mr Shah to become the first outsider to have complete oversight of and responsibility for all group businesses. While this separation of ownership and management may not mean much for M&M, which has operated more like a federation than a conglomerate, with group companies functioning independently, Mr Shah is taking over at a time when the group is in the midst of a restructuring after decades of expansion and diversification. His immediate challenge will be to revive the fortunes of the core automotive division, which has turned loss-making for the first time in nearly three decades.

Mr Shah has started off well by articulating his vision of implementing greater financial discipline aimed at delivering an 18 per cent return on capital employed (RoCE) across group companies. This would mean shutting down or divesting loss-making subsidiaries and forcing the laggards to improve their financial performance. But this is a very ambitious target, given that M&M last reported such an RoCE a decade ago and has averaged around 12 per cent in the last five years. Weeding out the laggards won’t be easy, either, given the scale of M&M’s diversification. By its own admission, the group is present in 22 industries, which encompass 150-plus companies. This makes M&M as diverse as the Tatas but with group revenues less than a sixth of the latter. In the last two decades, M&M has spent a fortune to diversify into almost everything from two-wheelers and passenger cars to hospitality and e-commerce. Most of these ventures have failed to be earnings-accretive and continue to be cross-subsidised by the parent company. In fact, the tractor and the IT services businesses are the only two that have consistently generated free cash flows for the parent while others have been either loss-making or cash guzzlers.

What is worse is that the revenues of the automotive division, which has historically accounted for nearly half of M&M’s revenues on a consolidated basis, have not grown in the last eight years and the profit of M&M Financial Services is likely to hit a decade-low in FY21. M&M’s market share in sports utility vehicles is now down to 13 per cent from 50 per cent a few years ago. While the group remains a market leader in tractors and farm equipment, its lead over the rivals is shrinking and the division requires a consistent dose of investment to stay ahead of large domestic competitors and deep-pocketed foreign competitors. Most of the group’s profits came from the farm equipment division, which accounted for just a tenth of M&M’s capital employed. The situation was not very different in FY20. This is a financially unsustainable situation for the group and M&M’s shareholders.

Thankfully, the group has decided to exit some of its international subsidiaries, which together accounted for over Rs 3,300 crore losses. It’s now time that the group under a new CEO took a hard look at its growth and capital allocation strategy. The unchecked diversification by M&M in the last two decades has distracted the management from its core automotive and farm equipment businesses. That has to change —quickly.