In my four-five years of looking back, this perhaps is the year when everything has come together positively for the agri economy, says MD & CEO, Mahindra & Mahindra.
Mahindra & Mahindra stock is outperforming every major stock! Is there a change of season and change of timing there?
In the last two months, a lot of things have changed and mostly for the better for the rural economy and the agri sector and that obviously is driving our performance in terms of share price, profits and everything else that you would like to count.
Markets are excited about your capital allocation policy. We are getting the sense that Mahindra & Mahindra now wants to focus on businesses which have double digit ratios and you will not in a sense go ahead with loss making ventures.
What we had said last time that remains, we remain consistent with that. We are going to look at our businesses outside the core business a lot more prudently and look to get financial performance from these businesses in the short and medium term. In case they are strategically very important, we will give a longer rope and we have already made some very important announcements starting with SsangYong in April, GenZe in June and two days ago, we announced that we are not participating in the US Postal Services bit that we are working on for last two to three years.
In terms of capital allocation, we are looking outside the mainstream businesses of auto and tractor verticals that have a domestic market.~
These are all clear indications that we are serious about what we said on capital allocation and right now all the businesses are going through an analysis to see which businesses belong in a portfolio and which businesses we should exit either by virtue of selling them off or slowly tapering them off. That decision is happening real time and as we come to a conclusion on any specific business, positive or negative, we will take action on it and move forward.
What is the right way of looking at the resurgence in the rural economy? Is it one off or could it be a multiyear trend for a tractor company and a rural facing company like Mahindra & Mahindra? Will the headwind become tailwind?
Right now, almost everything is going right. With the rural economy, one of the indicators is government spending. For example, in the April-May-June quarter, the government spending in rural economy, agri economy was almost double of what it was last year in the same quarter. That certainly brings in more money in the economy and therefore it has a cascading effect.
Obviously, the rabi crop has been very good, the revenue for the farmers is about 12-13% higher than last year. The monsoon is extremely good both in terms of the amount of rain and distribution of rainfall. The kharif crop sowing so far has been 19% higher.
One cannot say that this is going to be there forever but I would have to say that in my four-five years of looking back, this perhaps is the year when everything has come together positively for the agri economy. If I look forward, undoubtedly the government’s focus on agriculture and rural India will not come down and therefore we will continue to see that kind of input coming into the economy from the government.
All the announcements that were made by the honourable finance minister in her five phase announcement lot of them were on agri economy and lot of them have already been implemented or are in the process of getting implemented. All these are going to make a huge difference to the rural economy. Unless we get some extremely bad news in terms of monsoon, we should see a good run for the agri economy for a few years.
Right now reserve wise also, it is one of the highest that we have seen in a long time and all these things make a huge difference for the rural economy. So, it is not a one off and we should see a good run for a while in the agri and rural economy.
You have managed to clock double digit margins in a weak quarter. Would it be fair to assume that going forward the capital allocation is going to be more towards the tractor division because that is where the growth is coming from?
I do not know if that would be right to say so. We look at the auto business and the tractor business separately and these are the two largest businesses in Mahindra & Mahindra Ltd. Both businesses have their own requirements and their own sort of future potential.
The first quarter obviously was not so good for the auto industry as a whole and Mahindra being part of the industry, was roughly at the same level of the industry, give or take some segments which did a little better. Some segments did a little worse but more or less like the industry, the auto segment has a potential that we cannot let go and we have to work on it.
This is a bigger business in terms of revenue and good years in terms of profit also but certainly we would provide a significant impetus to the rural business and there is a lot that we are doing for every business. That will continue but in the auto business, new products are coming up. We have electric vehicle investment happening. We do not need any capacity enhancement for a few years to come because everybody in the industry has enough capacity.
But as far as products are concerned including electric vehicles, we will continue to support the auto business in terms of capital allocation. In terms of capital allocation, we are looking outside the mainstream businesses of auto and tractor verticals that have a domestic market. We are thinking whether we should allow those businesses to continue.
For example, we are not investing in the US postal services. That would have been a $300 to $400 million investment and we decided that really does not fit in the core and given the Covid situation where the cash is tight, we should not get into that.
Tell us about the big launch for the year — Thar – given that your SUV segment has seen a bit of a decline over the years?
We have been working on this product for four years and this is the first time we have done a new platform for Thar. Thar owes its legacy to the products that we had from CJ3B and MM540 and so on. This is the first time we have seen a brand new platform. It is not a launch, it is a reveal on 15th of August. The buzz is the product is very high and we had done a short social media teaser two-three days ago and we have had already like 2 million hits within two days on
Markets had lauded the M&M decision to stop capital support to SsangYong earlier in the year. But you have not shared any specific plans for other loss-making businesses so far. When do we see a substantial value creation following the new framework?
I do not know what you mean by substantial value creation following a new framework. In terms of P&L, as we get out of loss-making subsidiaries, there is no doubt that the P&L will improve. But it is not something that can happen overnight as we have to properly evaluate it and not be driven by the Covid-19 situation.
While in SUVs we have lost market share because of a lot of players coming in, there are other sectors where we are increasing market share.~
Many businesses are under stress and we should not be driven by any one-off event. We have to look at the business in terms of what are the mid-term prospects to do justice to the potential of the business and even after we made a decision, it is not like we can switch off the lights overnight.
It takes time to slowly get out of a business. There are many factors involved, market, customers, employees, suppliers, dealers. We have to take all these things in account before we can shut down a business.
By the end of this financial year, in all businesses, we would have decided on their future. It does not mean that we will announce about all the businesses from 31st of March or 1st of April, but we would have probably made a decision on all the businesses by that time frame and we will start an execution process.
There will not be any kind of ad hoc decision and it does not mean that we are going to be getting out of everything. Covid-19 in a way has given us a window of opportunity to look at everything that we have done, see what is working, what is not working and become very prudent about where we put in money. Obviously markets are liking it and we have gotten very positive feedback saying that one of the things that was missing in Mahindra in the past was a very clear policy and this is what we are in the process of doing. Iis going very well. We have made three major announcements. We will continue to make announcements as we see appropriate but do not expect that everything that we do we will be bringing out in the open media.
You talked about, of course, the rural recovery. Are you looking at something other than SUVs or will you continue to look at models that have evolved a little bit because we have seen a slight tapering in SUV market share?
Even in our core businesses of auto and tractor, we are looking to see how we can make it more core. That is linked to the narrative in the automotive business. We have been doing too many things and we will look at what we should not be doing in the auto business. What is our core, where do we focus on, which regions of the world do we focus on? So all that is going on right now.
Our focus is where we have strength, even though we have lost some market share in SUVs. But we have strength in SUVs and small commercial vehicles and pickups and these are the segments we would perhaps focus on, bringing in many more products. In pickups, for example we have increased our market share to almost 70% in the quarter gone by. In small commercial vehicles, we are increasing our market share.
So while in SUVs we have lost market share because of a lot of players coming in, there are other sectors where we are increasing market share and we will have a very strong focus on these sectors but some things perhaps do not have strength in. We will look to see whether we should not be doing those things and again these are not overnight decisions.
So I do not think that we have any concern on the future product launches. We have already talked about the three launches that are happening in the next one year starting from Thar that we will reveal in less than a week, W601, Z101 and we have already done planning for what happens beyond that. These products are under development right now. Electric vehicles are another area where we have tremendous focus. Nothing has changed in that because of Covid-19.
Tractors is a sector where we are strong and which appears to be growing very well going forward. We are spending significant amounts of resources in developing global products and a product that we have code named K2. We expect to bring out that product in about two years from now and that should be a significant revolution in terms of the kind of product portfolio that we have in Mahindra.