Mahindra & Mahindra: SUVival of the fittest; Mahindra has become the pin-up of Indian capitalism—a home-grown automotive champion. Now it must resist complacency and be prepared to take bigger risks

Mahindra & Mahindra: SUVival of the fittest; Mahindra has become the pin-up of Indian capitalism—a home-grown automotive champion. Now it must resist complacency and be prepared to take bigger risks

Nov 2nd 2013 | MUMBAI |From the print edition


INSIDE Anand Mahindra, an Indian tycoon, there is a rebel bursting to get out. He works amid aircraft models and walls of framed posters and has a mildly indiscreet Twitter account with a million followers. A former film student at Harvard, he describes his country’s malaise using the metaphor of “Star Wars”. Graft and cronyism in India are like an evil Empire that has struck back. His hope is that middle-class and young Indians become Jedi knights to battle the Dark Side.Most of the time, though, Mr Mahindra, aged 58, is a senior statesman—the acceptable face of Indian capitalism, especially since the retirement in 2012 of the admired Ratan Tata from Tata Sons. Mahindra & Mahindra dominates India’s market for sport-utility vehicles (SUVs) and is the world’s largest tractor firm by volume, selling them in India and abroad—it is sufficiently entrenched in America to sponsor Texan bull-riding tournaments. It is not huge, being the fifth-biggest Indian family group by sales ($16 billion) and the 17th largest Indian firm by market capitalisation ($15 billion). But it is notable in several ways.

First, it is a rare Indian manufacturing success—and has created its technology at home. Indian conglomerates are often financial quagmires but Mahindra has high returns and little debt, and uses capital efficiently. In a country where power is dynastic it is the business house closest to being controlled by outside investors: the family and its allies own only 25%. Mr Mahindra is the third generation, and probably the last, to be boss—there is no obvious family successor. Lastly, the group is known for avoiding cronyism. Mr Mahindra has kept away from industries that require “a competence for lobbying”, and says he avoids Delhi, India’s capital, like the plague.

Making the right calls

The magic formula has ordinary ingredients: luck and judgment. When India liberalised in 1991 Mahindra was sprawling and flabby like many of its peers—making everything from jeeps to lifts. It slimmed fast, perhaps because the family’s low stake made it vulnerable to a takeover. In 1993 it hired Pawan Goenka, a veteran of Detroit, who now runs the automotive unit. Then came a fall in property prices, in 1997-98, which stretched the firm’s finances and forced it into some hard choices, says Bharat Doshi, a director. Rather than put more cash into a joint venture with Ford, Mahindra backed its own SUV project. By 2002 a model called the Scorpio was born and by 2005 it was a huge hit.

More good decisions have come since then. New SUV models were launched. In 2007 Mahindra had a sniff at Jaguar Land Rover (JLR), a British carmaker, but backed off. Although JLR has since prospered under Tata’s control, the $1 billion of cash it ate up in the first year of its new ownership would have overwhelmed Mahindra, which then had a market capitalisation of only $4 billion. In 2009 Mahindra bought Satyam, an IT-services firm that had been floored by a huge fraud. It fully merged Satyam with its own IT arm in June, lowering its stake to 26% in the process but helping to boost the value of the combined entity, which has reached $6 billion.

The big worry is that Mahindra will have a “Nokia moment”, when an apparently unassailable position crumbles. The Indian SUV unit contributes about 55% of operating profits and cashflow. It has a market share of 41% according to Hitesh Goel of Kotak, a broker. Its returns on capital are tremendous, partly reflecting a relatively low level of technology investment. Tractors, also with a 41% market share, contribute one-third of profits—and demand is booming thanks to this year’s heavy monsoon rains.

Max Warburton of Sanford C. Bernstein, a research firm, notes that the global SUV craze has created other successful specialists—China has Great Wall, a firm now worth $20 billion. But Mahindra’s strong position in its home market is vulnerable to attack from the global carmaking giants, as they seek to diversify away from the unprofitable mass market for conventional cars towards such profitable niches. Renault and Ford have launched new SUVs and now “everyone and his uncle, cat and dog is leaping in,” says Hormazd Sorabjee, editor of Autocar India. In tractors, too, foreign firms are developing the smaller machines that tend to do best in India, says Abhijeet Naik of CLSA, another broker.

Mahindra is not asleep at the wheel. It has new SUV models in the pipeline and a rural distribution network that will be hard for rivals to replicate. Still, it makes sense for it to invest in new areas. In 2011 it bought SsangYong, an ailing South Korean firm, and is nursing it back to health. Mahindra hopes to use its brand to build a presence in pickup trucks and two-wheelers—efforts which analysts tend to hate, arguing that both product lines are losing money and face formidable competitors.

Yet taken together these three experimental areas are hardly big bets, consuming only about one-fifth of the group’s underlying cashflow. Mahindra spends only $170m a year on research and development—1.9% of its market value. It has a conservative balance-sheet, with no almost no net debt once you exclude the liabilities in its listed finance arm.

Sometimes being an admired firm is a trap. Investors get addicted to steady cashflows and become jittery about risky new projects. Mahindra could legitimately invest heavily in developing big tractors for the American market, trying to export more SUVs under its own brand or SsangYong’s, and broadening its rural presence into new areas such as logistics. It could also buy a Western car firm, to acquire better technology—already it is considering a new research centre in Britain. Mr Mahindra says “it is not in our culture” to bet the ranch. But it must not be too conservative either. Capitalism only works when the best firms rebel a bit and take some risks.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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