In times when conserving cash is critical to survival, Mahindra and Mahindra (M&M) has taken some tough decisions on loss-making international subsidiaries, which severely dented its March quarter earnings. The company has decided to shut down the electric scooter and bike business in the US and has also decided not to invest any further in Ssangyong. The company, which was expected to report a profit for the March quarter, actually ended up reporting a loss of Rs 3,255 crore, 80% of which was due to two international businesses. Losses from international subsidiaries have been persistent overt the last three fiscal years and dragged the return on equity, forcing the company to take a relook at its capital allocation policy. The company does not expect the losses at its international subsidiaries to persist in the new fiscal. Anish Shah, deputy managing director and group chief financial officer, M&M, said: “The company’s board has said ‘no’ to investing more in Snagging, shutdown GenZe (electric scooter and bike business in the US) and looking at many other businesses, and we are very serious about acting decisively on all our loss making subsidiaries”. There was an impairment of Rs 2,719 crore that came in from the company’s international business during the quarter. In April, M&M had announced that it would not invest further in Ssangyong, the Korean automotive company.
Given the challenges and uncertainties that the pandemic has thrown up, M&M will be focused on conserving cash and defending operating margins this year as it looks at capitalising on opportunities in the domestic market. The company will also look at unlocking value in some of its unlisted businesses and look at listing them. While the company will marginally cut back on some capital expenditure this year, a bulk of the cutback will happen over FY22-24. Rural markets are expected to do well and the company’s farm equipment division is already operating at 80% capacity. M&M posted a weak set of numbers on the back of losses made in international businesses, exacerbated by the impact of Covid-19, during the quarter ended March 31, 2020. The company posted a consolidated net loss of Rs 3,255 crore versus a profit of Rs 969 crore in the corresponding quarter last year. This was after taking into account an impairment of Rs 3,578 crore, largely driven by losses in the international business. Before the exceptional item, the company reported a net profit of Rs 323 crore.
Revenues from operations declined by 35% to Rs 9,005 crore on lower volumes. The company sold 86,351 vehicles in Q4FY20, which is a decline of 47% year-on-year, while tractors sold remained flat at 57,164. Operating income (earnings before interest, tax, depreciation and amortisation) fell sharply by 34.4% to `1,224.68 crore. Ebitda margins increased marginally by 10 basis points to 13.6%. Commenting on the company’s performance, Pawan Goenka, managing director, M&M, said, “In my 41 years career I have not seen a challenge anywhere near what we have seen in the last few months”. He said in the tractor business, the Covid impact was seen just before the lockdown was announced. But in the auto business the impact started showing in mid-February due to supply chain disruptions coming from China. To add to that, there was a fire at one of the company’s suppliers that was followed by the lockdown. “All this happened when the industry was in a slowdown due to transition to BS-VI. M&M has had a good operating performance in terms of OPM, which we have maintained margins this year and increased market share in tractors and commercial vehicles,” Goenka said.
Highlighting that the times are challenging and the company will have to count its pennies closely, Rajesh Jejurikar, executive director, automotive and farm equipment sector, M&M, said that in the short term — till September — the company will look at managing cash, operating margins and safety. The company has divided its trajectory ahead into three phases of ‘walk, run and fly’. In the short term, the company’s focus will be to manage cash, operating margins and safety. Between September and March, there will be very clear focus on core domestic businesses. Capex and investment prioritisation and not giving up anything strategic. As for the ‘fly’ phase which will come in FY22, Jejurikar said that the company would see a full SUV core brand differentiation strategy play out. “We will work towards conserving today for a stronger tomorrow, manage cash and then turn around global businesses,” he said.
Moreover, M&M has decided to take every single business that is a loss-making international subsidiary and put these under three categories. Businesses with a clear path to profitability in a three- to five-year timeframe with 18% RoE, and companies where there is a delayed path to profitability but has a strategic quantifiable impact, will continue. However, subsidiaries where there is no clear path to profitability with no strategic quantifiable impact will be put on the exit path. “We have already started on that path for some businesses and some others are in consideration. All international businesses will be put under the scanner. We have to return to the heydays of growth,” Shah said.
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