Concall Summary: Mahindra & Mahindra Q4FY20

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Business Update

  • Tractor business witnessed improved performance December 2019 onwards but lost some volume in the last 10 days of March that used to be a good buying period
  • Market share in commercial vehicles went up to 27.7% and have lost some market share in the UV segment
  • Mahindra Electric is now at EBITDA level breakeven
  • The dealer stock currently is amongst the lowest that the company can think of in recent history
  • The disruption started in February when a key supplier factory caught fire and the supplies couldn’t come from China due to the COVID issue. Along with this, the loss of sales in the last 10 days led to the volume drop for the year
  • The rural opportunity looks very strong because of the following factors:
    1. High reservoir levels
    2. Very good rabi output
    3. Significant increase in government spending in rural India
  • Have an internal index for rural assessment which is showing its highest level ever in many quarters seen till now
  • Demand for everything in the rural market is very robust
  • In the tractor division, a key challenge is to ramp up production and already operating at 80% capacity
  • Key priorities at this moment are:
    1. Strengthen our processes 
    2. Focus on capacity building in the farm machinery business
    3. Turning around the global businesses
  • Using the “Krishi” brand name for farm business
  • Have been piloting many precision farming techniques over the last few years and now those are bearing fruits and trying to bring those technologies to markets
  • The North American tractor business is a very strong priority for a turnaround and had some transition issues in FY20 
  • The priority is to conserve cash during this period of April to August
  • Seeing very good momentum in rural India and have a high proportion of portfolio skewed towards rural market so expecting to do well in this business
  • Currently on the automotive side operating at more than 30% capacity
  • In the September to March phase will look at CAPEX, cost optimization and use all the new lessons learned during lockdown to do business differently
  • Will launch the new “Thar” by the second half of the year
  • Will launch two new products in the SUV market by the early part of FY22
  • In the auto business looking very sincerely at profitability in the global subsidiaries
  • FY21 will be about cost management on a very stringent basis
  • Have maintained operating margins in an environment where revenues have fallen
  • The international subsidiaries in the farm and auto have seen losses due to impairments taken. 80% of losses are due to Ssangyong and Genzee
  • Have shut down Genzee and in Ssangyong will sell to a new investor who will take a controlling stake and will not invest any more in Ssangyong
  • Will start showing usage of cash amongst various business during the year from now on  
  • International subsidiaries have been eating up into profitability over the last 4 years and in FY20 international losses were 107% of total losses
  • Foreign business
    1. All loss-making international business to be put into three categories
      1. Businesses that can move to 18% ROE in 3 years
      2. The business that is strategic in nature
      3. Businesses that have an unclear path to profitability will be either shut down or sold off
  • Agenda going forward
    1. Tightened capital allocation
    2. Harnessing value creation from unlisted subsidiaries
    3. Clear path for the automotive business
    4. Exit loss-making business
  • Across the organization have taken multiple steps for cost optimization and putting the focus on profitability
  • The determinant of performance in the tractor division will be my managing supply chain because demand is robust
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QnA

  • The lesson the management has had over the last few years have been to be very selective on capital allocation and not make the mistakes made during the last few years
  • The globalized CAPEX will be far more calibrated but will not be stopped completely. The management will be far more stringent and nimble this time
  • In the year FY21, the CAPEX reduction will not be more than 15% than planned earlier because the SUV program is now nearing completion
  • From FY22-24 the three-year CAPEX should be around Rs 9000 crore than the earlier proposed Rs 12000 crore
  • The specific steps being taken on cost management are:
    1. Reducing miscellaneous expenditure
    2. Working on reducing fixed costs
    3. Renegotiating contracts
  • There is a long runway on cost reduction and have still not reached the full potential on cost-cutting
  • The management was very worried about financing being given to dealers and customers but the month of May has been very good and companies have been using many new remote processes to fulfill the financing needs
  • The cash flows in rural India is very good and the months of May & June have been very well
  • The company is investing money in Mahindra Financials because NBFC’s have been facing issues of funding and through this investment, the management wants to make a statement that business is as usual in that company
  • The management is very optimistic about the APMC act reforms and now the farm incomes should generally double which has been envisaged by the government earlier
  • The company already has petrol engines for all its models available 
  • The introduction of the compact SUV over the last few years have led to the overall market increasing and the company’s market share in this segment falling
  • The major CAPEX on product development for the next few years has already been done and in the automotive market there isn’t any company with a fresher portfolio as of currently
  • Have been experimenting with a digital platform for car bookings in rural India and have seen good order booking on this platform in rural India as well
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Karan Sharma
The Concall Summary Guy | CFA | Investor
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