Shah Rides SUVs To Drive M&M's Top Line

MAHINDRA GROUP managing director and CEO Anish Shah places great emphasis on ‘capital allocation discipline’, something the 79-year-old conglomerate has done well in the past. “By capital allocation discipline, we don’t mean only where we put capital, it is also ensuring that the capital we put in is generating the returns we had committed when we infused the capital. And it’s also being very clear about what the milestones are, what the execution metrics are and being able to make big decisions if something is not going as per what we had expected,” he says.

Since Shah took charge as group MD & CEO, M&M has exited 15 underperforming businesses, including South Korean automaker Ssangyong, which it acquired for $463 million in 2010.

Mahindra & Mahindra’s single-minded focus on sport-utility vehicles (SUVs) has paid off. The automaker bucked the industry-wide trend of de-growth in passenger vehicle sales in June, August and September, thanks to its recently launched compact SUV XUV3XO, a timely overhaul of the erstwhile XUV300. Its market share in domestic passenger vehicles rose from 8.96% in FY23 to 10.75% in FY24. M&M pipped Tata Motors to become India’s third-largest carmaker last month. The company is eyeing mid-to-high-teens volume growth in SUVs this fiscal amid tepid industry growth.

The automaker is taking a calibrated approach by investing both in internal-combustion engine (ICE) and electric vehicles. It plans to spend ₹27,000 crore on auto business during FY25-27. More than half of the total investment plan in automobiles is still in the ICE portfolio. The company plans to invest ₹14,000 crore on ICE and ₹12,000 crore on EVs over the next three years. “We are not going to ignore ICE because ICE continues to be an important part of the portfolio and will continue to be important for consumers over the next five-seven years,” says Shah.

M&M plans to launch nine ICE SUVs, seven EVs and seven light commercial vehicles in the sub 3.5 tonne segment by 2030. The automaker is ramping up its manufacturing capacity to meet growing demand. It ended FY20 with SUV production capacity of 19,000 vehicles per month, which has now increased to 49,000. As a result, waiting periods across products have decreased significantly and vehicles are now much more accessible to customers. “It is enabling us to be a little more aggressive in the market and also gain operating leverage, which is helping in margins,” says Shah.

Mahindra’s farm business has also been resilient. India’s largest tractor maker gained market share in FY24 with the launch of Oja. It will compete very well in India, in the U.S. and in Southeast Asia, says Shah. “It sets us up very well for future growth across the world.”

Shah’s playbook has helped the company post improved financial performance. M&M delivered 18.4% return on equity (RoE) in FY24, against the company’s commitment of 18%. Before Shah took over as MD and CEO, the company’s RoE was 13.9% in FY19 and 4.4% in FY21. “When we said 18% then, a lot of stakeholders — including investors, analysts and media looked at us and said you’re crazy, you’re not going to get to 18%. I explained to them that we have given a target of three to five years and we got there in one and half years,” Shah had told Fortune India earlier. However, growth in auto and farm was offset by Tech Mahindra, where profits plunged 52% in FY24.

To unlock the full potential of M&M’s two large services businesses — Tech Mahindra and Mahindra Finance, Shah is making efforts to close the margin gap with peers. “Mahindra Finance is finally unlocking its potential. We are starting to see this in numbers. We have talked about the turnaround that we started one and a half years ago. We are starting to see the impact on asset quality.”

Margin is a key focus for Tech Mahindra, says Shah. The company, which gets a majority of its revenues from the telecom vertical, commenced a three-year turnaround plan to shore up its top-line growth and double its operating margin to 15% by FY27. “Tech Mahindra turnaround will be a two-three year journey. We want to make sure we do not set expectations of any immediate outcome. It will take that time. The demand cycle continues to be muted but the operational rigour is very strong,” says Shah.

Mahindra Group classifies its relatively smaller businesses as ‘growth gems’, future value creators that possess the right mix of opportunity, one which aligns with the India growth story, and a definitive right to win within the sector. The aim is to achieve a five-fold increase in scale and value.

These businesses include solar power developer Susten, steel component maker Accelo, real estate firm Lifespaces, hospitality brand Club Mahindra, supply chain firm Logistics and electric three-wheeler maker Last Mile Mobility. Mahindra Accelo, which is already in vehicle-scrapping business, is exploring options to enter the battery recycling space as the EV ecosystem develops.

In the hospitality business, M&M is counting on the rising spend on travel, especially with increased connectivity. India’s hospitality industry is set to remain a supply constrained market for some time to come, translating into high occupancy and average room rates.

“Logistics has had some challenges due to the integration of Rivigo, which impacted financial results last year. Hospitality continues to do well and has a lot more potential. Real estate has seen a strong momentum,” says Shah. “Our growth gems have enhanced valuation by 4x to $4.2 billion over the past four years. They are targeting an additional 5x growth over the next five-seven years.”

On electric vehicles, Shah says EVs address a couple of things from the government perspective — vehicular pollution in cities and reduced fuel import bills. He believes India’s EV industry will not need government subsidies by 2030. On EV slowdown in advanced economies, Shah believes western markets facing problems from a charging standpoint are already at about 20% EV penetration level. Whereas, EV penetration in India’s car market is still below 2%. “We have got a long way to go. The lesson we have to learn from the world is how to create a better charging infrastructure at a much faster pace so we don’t face the same level of hiccups as some of the markets around the world have.”

Having learned from the difficulties the auto industry faced during Covid-19, M&M has taken measures to make the supply chain more resilient. The group is working on multiple initiatives to mitigate the impact of raw material price fluctuations such as long-term contracts for imported materials like semiconductors and electronics. On the recent price cut undertaken for the flagship SUV XUV700 to drive volumes, Shah says, “As costs come down, operating leverage goes up. It was a right action to take as our margins are going up. We don’t expect much of a financial impact because of this due to other balancing factors.”

Responding to an analyst’s question on a possible alliance with a German carmaker during the first-quarter earnings meet, Shah says, “The bar is very high. It has to make sense for us from a financial standpoint. It has to be able to generate returns that would be outsized. If all of that happens, that is something we will look at.”

The best piece of advice Shah ever received has been the one he did not understand for many years. “One of my prior bosses told me the only way to get control is to give up control. I found it intriguing but puzzling. I understood it when my sons became teenagers, when I had to go through that phase. This is something that has been valuable from a business standpoint as well,” Shah had earlier told Fortune India.

Shah says he may not win any popularity contest but will likely come fairly high on values-based decisions. “The approach that I have used is that values will drive decisions. And that’s the moral compass. So do what’s right. In the long term that is beneficial for everyone. In the short term, some may say that it is not adding value or profit for shareholders – that’s fine. Does that mean you can be unpopular? Yes, in many cases, it does mean that you can be unpopular.”