Indian companies are conserving cash to focus on the domestic market
M&M will continue to back overseas units, with a target of 18% return on equity in the next 3-5 years
Mumbai/New Delhi: Automakers in India are reducing investments in loss-making overseas arms to conserve cash and cut costs as the pandemic limits their ability to raise fresh funding. Instead, leading companies such as Mahindra and Mahindra Ltd (M&M), Tata Motors Ltd, Minda Corp. Ltd and Lumax Auto Technologies Ltd are focusing on the domestic market.
For instance, M&M, which was in talks with the South Korean government for a bailout of SsangYong Motors, said on 12 June that it will not make further investments in the subsidiary. M&M has also decided to shut down its US-based electric scooter unit, GenZe, to control mounting losses. The two units accounted for about 80% of M&M’s overall losses from international operations. The company will, however, continue to back overseas units, which have a clear path to profitability, with a target of 18% return on equity (ROE) within 3-5 years. It will also finance subsidiaries having a clear quantifiable strategic impact, even if there is a lag in achieving profitability, said company officials.
All loss-making businesses will be evaluated for the next 12 months, said Anish Shah, deputy managing director and group chief financial officer, M&M. “M&M’s board has decided to not infuse cash in many of its loss-making entities, which is a bold move to cut down cash burn. This may set an example for other auto companies to follow during the crisis," said Mitul Shah, auto analyst, Reliance Securities Ltd.
Tata Motors has also reduced its capex exposure for Jaguar Land Rover (JLR) to conserve cash till demand revives. The firm said it would invest £2.5 billion in JLR this fiscal year, instead of the earmarked £4 billion. It has also written off assets of up to ₹353 crore from its wholly-owned units, Tata Motors European Technical Center (TMETC) and Trilix Srl, besides the passenger vehicle business in India.
“The TMETC write-off could be of some project that turned out to be too heavy on costs against the company’s earlier estimations. Similarly, the capex reduction in JLR could be shelving some projects, such as factory automation or autonomous driving," an analyst said, requesting anonymity.
Shah at Reliance Securities, however, said the cut in JLR’s capex is in line with the slowdown, but is still “sizeable".
In a board meeting on 9 June, Minda, one of India’s top parts makers, decided to halt further investments in Minda KTSN Plastic Solutions GmbH and Co. KG. The German unit has filed for bankruptcy.
“We expect a positive outcome for all our stakeholders in the long run despite the insolvency filing. We are focusing on channelizing our precious capital towards business opportunities of profitable growth, and enhancing Ebitda margin and ROCE (return on capital employed). This move is expected to enhance Minda’s Ebitda by 2% and ROCE by 5%," said Ashok Minda, chairman and group CEO, Minda Corp.