Can you explain the difficult calls made on capping investments in loss-making subsidiaries?
It has been a difficult period over the past two years for our loss-making subsidiaries, which therefore had to intervene directly. We looked at each loss-making subsidiary and classified them into three groups: category A: companies that have a clear trajectory towards 18% return on equity, category B: which has an uncertain trajectory to profitability but can offer a quantified strategic advantage, and category C: which is neither from A nor from B and calls for a possible exit, either by alliance or by sale.
A strong team of people experienced in consulting and a financial world with sales and marketing training work closely with each company to understand what are the growth levers of each company. It is not a one-off exercise; this will be constantly reviewed every six months to ensure that companies are on track to meet milestones for a set period of time.
When was this review mechanism launched and when will it end?
If you look at loss making companies over the past four years, in fiscal year 17, 1% of the company’s profits were taken by those companies; in FY18, 12% of profits were eroded by losses of international subsidiaries; in FY19 25% of profits were withdrawn and in FY20 over 107% of profits were withdrawn. The board of directors launched what is called a “round of challenges” about two years ago.
Almost 60% of the losses came from SsangYong and Gen Z~
In my previous role as head of group strategy, the board asked me to challenge every proposal that came up, ask the tough questions and recommend to the board whether or not we should invest. . So we took tough calls on the two-wheeler sector, Baby Oye and Mom and Me, among others. And in the fourth quarter, we called SsangYong and Gen Z.
Almost 60% of the losses come from SsangYong and Generation Z. We are no longer investing there and by the end of this fiscal year, the remaining loss-making subsidiaries will be processed. If there is no clear path, then we will officially close it.
As we move into FY22, a lot of these issues will be behind us. Implementation may take a while, but we’ll be on the right track.
Is it time for consolidation?
We will have a simpler structure in the future; it is not about the number of subsidiaries and their management. Our approach is to look at loss-making subsidiaries and get them back on track. Step two takes a look at low-profit companies – which offer a 0-10% return on equity – and see if we can put them on the path to higher profitability or if they are important to us. Once that was done, we would have settled the issue of profitability.
Entrepreneurship is something we don’t want to change. What we are coming back to in many ways is a path to a high level of financial discipline. There are several reasons why we have suffered losses over the past two years. The environment is a part and in some cases perhaps an overconfidence in some of our businesses. But now it’s about getting back to basics and introducing financial discipline.
Reaching a target of 18% seems steep in the current context …
When Nifty hit a new high in August 2018, Mahindra was the best performing stock with an annualized growth rate of 31% over a 17-year period – it has fallen in the last 18 months. In our opinion, three factors have led it to earnings per share growth of 34%, cash generation of Rs 2,300 crore per year on an annualized basis and an annual return on equity of 22%. These are the numbers that led to the compound annual growth of 31%.
ROE in recent years has increased from 20% to 12%~
To get back to that, we need to get back to a 20-22% return on equity and we need to achieve a growth rate of over 30% of cash generation. Fortunately, in the last three years we have generated almost Rs 5,000 crore. The losses in the subsidiaries are a bit of a loss on paper; we had invested in them earlier, so we had to write off some of them, but the cash generation was strong.
We failed in BPA, because of losses and therefore ROE (return on equity). The ROE in recent years has increased from 20% to 12%. I can confidently say, if we fix our loss making subsidiaries, we should get back to 18% ROE. And then we look at 0-10% ROE companies and fix it, and we should be back to 20-22% ROE.
What is the rationale for supporting Mahindra Finance?
It’s a solid business, although it has been criticized for not growing so quickly. We viewed Mahindra Finance as a strong and conservative company. Our preference is to have a strong and conservative business rather than a fast growing risky business. The company is strong; we invest capital to make sure that in all scenarios, if things get worse, there is no impact on the business.
Mahindra Finance has always raised capital before it’s needed, so we didn’t wait until capital was needed. The analyst’s concern was that Mahindra was not putting in more than Rs 1,600 to 1,700 crore and what if other people do not agree (to the rights issue), but depending on where we’re at right now, in terms of where Mahindra Finance is, we’re pretty confident that we should have a very high subscription level. It is a solid strategic investment for us.
Is this the right time to review your investment in hospitality and Meru? After Covid-19, they risk being affected.
We would basically see Mahindra as the gateway to the most important and dynamic themes in India and hospitality is one of them. We have a different hotel model from other companies. Ours is a timeshare model and our connection to consumers is long term. We believe our hotel business may not be significantly affected. Once we get through this crisis, our hotel business will be able to grow much faster. As for Meru, we’ll take a close look, as we take a look at other companies and see what the real path to profitability is. We still don’t have an answer on this.
Read also: ETAuto Originals: Is India Running Out of Cars?