28 highlights
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The company began making automobiles with the earliest versions of the famous Willys jeep in newly independent India back in the late 1940s, when the country barely even had any metalled roads.
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He was perhaps sure nothing would happen to the company, started by his grandfather, no matter which direction he took it. And so, for years, he spearheaded one expansion, investment or acquisition after another.
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But it looks like the time has come to stop trying to find a new path in the wilderness and return to the highway. Earlier this month, the company reported a massive loss—its first in nearly two decades—for the quarter ended 31 March.
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For the full year 2019-20, the company reported losses of over Rs 5,267 crore, largely on account of losses in its foreign subsidiaries: South Korean SUV-maker SsangYong Motor Co. and US-based electric bike startup GenZe.
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Though deals such as the SsangYong investment are arguably a legitimate business expansion strategy gone wrong, Anand Mahindra’s acquisition strategy has for long been a ticking time bomb. Mahindra & Mahindra has some 200-odd subsidiaries and joint ventures, but only three businesses account for almost all of its profits.
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Three senior investment managers we spoke with—one a co-founder at a financial services company and two ex-fund managers who are considered Indian gurus of investment—pointed to Anand Mahindra’s investment style as the albatross around M&M’s neck.
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But more than 95% of the company’s profits came from only three businesses—automotive, farm equipment and its finance arm
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The company’s international business has perhaps been the most obvious example of money poorly spent. Losses in the international business first surfaced in 2016-17, amount to Rs 53 crore, or just 1% of the overall net profit at the time. In 2017-18, international losses rose to Rs 1,102 crore or 12% of M&M’s profit
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In the latest fiscal year, which ended 31 March 2020, international losses (SsangYong in particular) amounted to 107% of the company’s profit for the year.
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But while its botched global investments are highly visible, the list of failed ventures seem endless. Mahindra made boats, got into the aerospace business, tried his hands at making two-wheelers, cars, online used-car portals, retail, selling Lego toys and more.
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There is, of course, a silver lining. From when he took over, the Mahindra Group’s market capitalization has increased from Rs 4,000 crore to Rs 210,000 crore at its peak in April 2018, with the automotive business accounting for over a third of the total.
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Business analysts, however, argue that Mahindra is not a leader or the strongest player in any of the segments it operates in, except in the tractor business, which it continues to dominate.
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In the auto sector, for the longest time, Mahindra ruled the utility vehicle category.
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The company has been consistently losing ground to the competition in the metro cities, where consumers are increasingly willing to buy expensive SUVs, unlike the earlier penchant for hatchbacks.
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Among the growing middle class and salaried buyers too, Maruti Suzuki’s multi-utility vehicle Ertiga outsold Mahindra’s best-selling vehicle, a compact SUV called the XUV300, 3 to 1.
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Though the company still held more than 40% of the overall utility vehicles market, it was no longer the trailblazer.
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Though Tech Mahindra Ltd got in on the IT services business fairly early on, it is only the fifth-largest player today and is half the size of Wipro Ltd, the fourth-largest player.
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The finance arm, Mahindra & Mahindra Financial Services, is valued at less than a tenth of rival Bajaj Finance Ltd, though both have been in business just as long.
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All in all, it is easy to fault Mahindra’s investing style. But to know why he did what he did, we need to step back a bit.
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When Anand Mahindra moved to M&M in the early 1990s, it had very little spare cash to invest in new projects. The company’s passenger vehicles had no finesse—most of them were used to ferry people in rural areas or deployed by police departments and the army. Mahindra, with his Harvard background, had several ideas.
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He got off to a slow start, though, first re-aligning the board, bringing in younger talent. The company also had little to nothing in the way of formal processes, all of which the new leader worked to change. But the biggest challenge was quite simply the lack of capital to fund Mahindra’s dreams.
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Lore has it that Mahindra’s team wanted its new tractor designed by I.DE.A Institute, an Italian company that had designed the Tata group’s first car, the Tata Indica, for Rs 100 crore. I.DE.A was willing to take up M&M’s tractor project for Rs 40 crore, but the company could afford only Rs 20 crore.
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At the beginning of the 21st century, one of Mahindra’s auto bets finally panned out. He pulled out Rs 500 crore to design and build the Scorpio SUV in what at the time seemed like a make or break decision for the group. The Scorpio, an affordable rugged vehicle, went on to become a hit, and at the same time M&M’s tractor business started looking up.
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What made things more difficult for him is the often-overlooked fact that the Mahindras never held more than a quarter of the company (promoter holding now stands at 21%), which was spread between different branches of the extended family. That posed a challenge in raising capital without diluting the owner’s stake too far.
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It is perhaps for the same reason that M&M never gave out big dividends even when its profits were sizeable. Over the past 12 years, M&M’s annual dividend payout was close to 20%, much lower than automakers such as Bajaj Auto Ltd (40%) or Hero MotoCorp Ltd (55%).1
- It then seemed counterintuitive to deploy more capital in the cash-generating core business as any additional profits would have to be distributed more to others than the promoters themselves.2
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So, in effect, what this meant was that Anand Mahindra had a fairly small window in which to realize his dreams of modernizing not just M&M but also the entire group’s portfolio of businesses. This put him in a very different position when compared to other family-run conglomerates such as the Tata Group or the Aditya Birla Group, both of which had multiple cash-spouting businesses to draw on to expand their empire.
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More than anything, the COVID-19 pandemic and the subsequent economic crisis has magnified the worthlessness of not so efficient business, as well as the need to preserve cash.
Footnotes
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How is the quantum of dividend linked to ownership pattern of company? ↩
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Basically an unseen effect; if the company posts higher profits, the promoters don’t benefit the most. Hence lower dividends. But can this be said with certainty? Also, does this also influence Anand Mahindra investing in new companies (possibly with a higher promoter share)? ↩