“We had laid out a cash plan already and a cash generation is very strong right now. The deal was essentially done to establish valuation and to have the benefit of a long term partner like BII, where climate change is an important part. I want to highlight that this is really bringing our ESG commitments to life and those were the reasons why we did this deal,” says Anish Shah, MD & CEO, Mahindra Group.
The deal with BII (British International Investment) is a fantastic one for Mahindra & Mahindra and its shareholders. This clearly demonstrates the engineering capability of Mahindra & Mahindra. Why did you need a foreign partner? Is it just an endorsement or has this deal been done with the whole idea of getting capital in the company?
This is a very exciting deal for us. It is in many ways an endorsement of our path to EV leadership. We have a very exciting range of products that we will be revealing on August 15 and as we were in discussions with BII on a number of things, we felt this was a partner that was committed to climate change in the long term.
That is something that we are very passionate about and a partner that could really help us on multiple fronts as we go forward which was really the reason for the deal.
It also helps to have someone who is a very reputed global investor come in and endorse that we are on a path to EV leadership. They have obviously done a tremendous amount of diligence, looked at the plans and products. We are going to put it out there for consumers. and have concluded that yes we have a winning strategy and that is a genesis of this and that really drives the ability for us together to agree on a valuation of $9.1 billion because this is what will drive our success going forward.
It is a great deal in terms of the gravitas, the valuations and also what this proves about Mahindra & Mahindra and the engineering capability is excellent, But my follow up question is do you require the cash or has this deal been done to establish valuation for your EV portfolio?
We had laid out a cash plan already and a cash generation is very strong right now. The deal was essentially done to establish valuation and to have the benefit of a long term partner like BII, where climate change is an important part.
I do want to highlight that this is really bringing our ESG commitments to life and those were the reasons why we did this deal.
Since the deal comes with riders, which is there is a lower yardstick and there is an upper yardstick. What are these riders and how will the entire relationship move?
EV today is an area that will develop and penetration in EV is something that no one today can say with confidence. So, the range essentially is dependent on EV and penetration of our portfolio. Therefore at 30% EV penetration, the upper end is $9.1 billion. At 20%, it is a lower end and that is really the range. The riders are not very meaningful in that sense.
The basic set of conditions that we are working through for the second tranche of investments is that we will bring in other investors as well which is something we are on board with as we go through this first round and as we show that we can develop and deliver very strong EV products. We will look at higher valuations as we go forward and bring in other investors.
As a development institution, that is important from a BII standpoint to be able to show that this space is developing very well and that is really all we have in terms of riders.
On a longer term basis, how much ownership does Mahindra & Mahindra like to maintain in this subsidiary? Is there a threshold below which irrespective of new investors and further dilution, you will not go?
Our objective is to maximise value for shareholders and it depends on what valuations others are willing to give in future and based on that, we will assess what level we want to divest further. Our lens is essentially around value creation and to the extent, we can create more value. We do not have a specific benchmark in mind and it will just depend on the value we create for these businesses we go forward.
The company in a sense has indicated that the future portfolio of Mahindra & Mahindra will have a 20-30% EV component. Given that you are a late starter and some of your peers have already taken giant steps, when will you be able to achieve this mark?
We have set out FY27 as a target for that and this. Also this deal endorses the fact that despite being a few steps behind, we have the ability with the new portfolio or the range of products that we are coming up with to establish or re-establish leadership in the EV space for us.
As I have said before, we are in the first 5 to 10 overs of a test match in EV and there is a long way to go and the new products are very exciting and that will get us back to EV leadership. As we look at FY27, we are very confident that we can get to 20% to 30% penetration. It may be even higher depending on how we go but at least for the contours of this deal, that is what we have set up.
I am assuming that your EV portfolio will not be restricted to just SUVs. You will go beyond SUVs in the EV portfolio?
As of now, we are focussing on our core strengths which are the large and compact SUVs. We are not going to get into the micro SUV segment or the sedans. That may change over time as we establish leadership in the SUV segment overall but we are starting with our strengths and also recognise the fact that the reason BII has come in is because they see the success of the launches we have had.
We have had five blockbuster launches in the last 12-18 months and we are number one in SUVs today in India from a value standpoint. So that success is also essential to be able to foresee the future and say that it is not just the powertrain which is electric, it is also about the car overall and the models that we have got and the success we have seen with consumers is really the barometer of what we see success like in the future as well.
Your SUV portfolio has rerated the stock and it has really endorsed the engineering capability of Mahindra & Mahindra. A couple of days ago, you had a successful Scorpio launch. The XUV series has done rather well for Mahindra & Mahindra. Don’t you think that you may end up cannibalising your own SUV ICE success with the EV launch?
We have to be brave enough to cannibalise our own success. That is really what will drive future success for us because we have to deliver products that the consumer wants. We will continue to deliver very strong products on the ICE front as we have done and in many ways even stronger products on the EV front and let the consumer choose where they want to go.
Our sense is that there will be a greater transition towards EV and that is where the auto industry is going. But what we feel good about is the foundation is really the strong manufacturing and the product development skills that we have built for ICE and those are skills that will translate into EV.
If one has to understand the EV trajectory versus the ICE engine trajectory we pretty much know what the margin in the ICE engine category are but EV right now is at a nascent stage, it will grow and it will scale up and the margin trajectory could be very different. Do you think that EV business on a long term basis will be a high margin and high growth business for Mahindra & Mahindra and it will overtake ICE business or the traditional business at some point in time?
Our sense right now is that margins will be similar and if you look back at petrol versus diesel different powertrains similar questions would have been raised when diesel started becoming more important at some point in time but overall it comes back to what is the vehicle. And while you have different powertrains it is the vehicle that really matters so overtime we would see margins really be very similar to what we have today.
Six months from now will you be using the new Scorpio or the new EV launch the new EV avatar which would be launched?
I would say all of the above including the XUV 700.
How would you paint the big picture of the EV market for us because right now the initial start is quite encouraging but do you think it is more than a sugar rush considering there are challenges in terms of getting the infrastructure right and challenges in terms of getting the entire framework right?
What is happening is a lot of consumers are also feeling that there is first an element of contribution to climate change. Second, EV cars are often more exciting cars because they have a much better pickup, more space in the cars and that will go towards EVs taking over from ICE as we go forward. Infrastructure and other things will be hurdles but for the short term and which is why today we say 20-30% penetration by 2027 but as we go beyond 2027, we would see that penetration going up and it is just a matter of addressing those issues.
What are the lessons to be learned from the recent semiconductor issues which the industry has faced? If the industry and M&M is migrating towards EV, that means the supply chains have to be efficient and better prepared. Covid has taught us not to be dependent on supply chains forever?
Absolutely right. The lessons we have learned from Covid are agility is critical, the ability to see around corners and start forecasting events or scenarios before they happen is important and preparing for them or having plans in some cases putting down money for options that may be exercised if certain scenarios happen and having relationships not only with the tier-1 suppliers but even sometimes with their suppliers to make sure that we have an early read on what is happening in the industry across the value chain and can react very quickly to it.