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Anish Shah will take charge as MD and CEO in 2021.
Anish Shah will take charge as MD and CEO in 2021.

M&M on track to improve return on equity: Group CFO

In an interview with Mint, Anish Shah discussed the group capital allocation plans which has so far entailed pulling the plug on fresh investments in loss making overseas units

Anish Shah, Group CFO at Mahindra and Mahindra who will succeed the current MD and CEO Pawan Goenka from April 2021 is working overtime to implement greater financial discipline aimed at delivering 18% return on equity (ROE) across group companies. In an interview Shah discussed the group capital allocation plans which has so far entailed pulling the plug on fresh investments in loss making overseas units. Edited excerpts:

Q) What is the overarching intent behind going after the 18% return-on-equity (ROE) and evaluating all group companies for future sustainability?

If you look at 2002 to August 2018, M&M was the best performing stock on Nifty. The key driver of that the financial performance, the earnings grew 34% annually and we had an average ROE of 22% and there was a very strong cash generation. So we are going back to those 3 metrics.

Since we were at 22% average ROE at that time and the interest rates are slightly lower in the economy since then, so we are saying 18% ROE at this point in time. We have to go back to the fiscal discipline we had then.

There were some bets that were taken which did not quite work out as planned and this will happen sometimes. But it is important for us to re-adjust and go back to that fiscal discipline and that why we said we have to lay down a path to 18% ROE.

The approach here in terms of what we are communicating is no different than what had happened in 2002. The mindset is to ensure that all our businesses are using capital wisely.

That said, 18% ROE is not a firm line drawn in the sand. If we have a business, say, at 15% ROE but a 35% growth rate, we would love it because we need to measure the ROE, growth and free cash flow (FCF). The benchmark will help us ensure that we allocate capital appropriately across the group. If we have excess cash that we are not allocating into the business then we will give it back to the investors.

Q) What other business units are being evaluated under the 18% ROE plan?

We looked at every international subsidiary that made a loss in FY2020. It included SsangYong Motor Company, which involved the largest losses, followed by GenZe, Mahindra Automotive North America (MANA), Mahindra AG North America (MagNA, US-based farm business), Erkunt Traktor, Hisarlar,

Sampo Rosenlew and Automobili Pininfarina.

The four farm business are doing a lot better now, so the chances of them bouncing back to our benchmarks is pretty good. Sampo particularly offers a strong quantifiable strategic benefit.

Q) You had previously said that M&M wouldn’t invest in MANA anymore. What happens going forward, will it continue to produce and sell vehicles?

Mana was set up to create a toehold in the USA, and the US Postal Service contract was also big (over USD 6 billion). We wanted to build upon that toehold over time. While that construct still remains, we said no to the large investments required under the contract because we did not feel that it would fetch the desired financial returns, and we were not convinced about the ability to execute.

Meanwhile, Roxor is a much smaller investment that got caught up in this legal battle with Fiat Chrysler Automobiles or FCA. At this point in time we are still waiting for the outcome of that.

We have sold out all the units we made as part of 2019 and 2020 models. We are not revisiting that anymore. The 2021 model is in court right now, the initial ruling that came was in our favour, that the model does not infringe anything. The final ruling is expected soon. The first thing we are looking at is a clear path from a legal standpoint. Once we have a clear path then we will look at the business plan and it has to be sustainable as per our benchmarks. If this works then we will invest or we won’t.

Q) In the passenger vehicle business, when we look at Maruti and Hyundai, the volumes project a V-shape recovery. However, M&M’s recovery still shows some lag. Why so?

There are two aspects to this: when the lockdown was implemented at the end March, it coincided with the transition to BSVI emission norms. We were at never seen before stock levels because BSIV inventory had to go down to zero by 31 March. While we had almost exhausted our BSIV stock by 24 March, there were no BSVI vehicles in the pipeline.

Because of this transition, we were far lower in terms of stock levels than a Maruti or Hyundai, and we had to build back from there.

Secondly, there were localized supply chain problems for certain areas, which impacted the ramp up as well. We do see the demand out there, we see some customers waiting and others who cannot wait by the time delivery is possible in this festive season. The demand is there but sales have been fairly slower for us due to these reasons. We have returned to a fairly high level of normal and therefore we don’t see problems going forward.

Q) M&M was the leading SUV maker in India until Korean and Japanese companies overtook in volumes. How does M&M plan to regain lost market share?

The starting point of our differentiated SUV narrative is the new Thar. The key for us here is to build on our strengths. We have a lot of excitement around the next 2 products coming up as well. If you were to look at our launches over the last 3 years, many of them were not the products with core Mahindra DNA. It ventured outside of who we have been in the past. So our auto narrative is getting back to who we were. The Thar is a clear example of that, and so will be the next upcoming model, the W601 (expected to be next generation XUV500). You will see us getting back to our core strength of SUVs.

Also, we have more work to do in terms broadening that narrative to include electric vehicles (EVs). We are working on that currently.

Q) What are your top priorities?

I have four top priorities: to ensure proper capital allocation across group companies, to put the 10 identified growth drivers (business units across mobility, clean energy, infrastructure and technology and rural and financial services) on a path for growth, ensure continuity of strong performance in domestic auto and farm businesses and setting up a clear narrative in auto business.

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