M&M Outperforms Despite Loss-Making Subsidiaries

No other company in the Indian automobile industry has a presence as extensive as M&M (Mahindra & Mahindra) does. Name a segment and the company is present in it. The automobile manufacturer has a presence in tractors, cars, utility vehicles, trucks, tempos, motorcycles, scooters, three wheelers, electric cars and luxury vehicles.

The point to be noted here is that there is a bold line of distinction between presence and stronghold. Although M&M’s spectrum is wide enough to accommodate all the segments in the automobile industry, it has yet to taste success in many of them.

The company has gained tremendous success in utility vehicles, on account of the Bolero, Scorpio and XUV500, in tractors because of its long-standing heavy foot and in LCVs (Light Commercial Vehicles) as a result of Gio and Maxximo. However, it has been lagging behind when it comes to trucks, which it earlier operated through a JV with Navistar, two-wheelers, where it hasn’t been able to outperform competition, and electric cars, which is yet to form a strong market in India.

Among its not-so-successful spaces were passenger vehicles which came into existence as a result of its joint venture with Renault. The Verito, which has evolved from the Logan, has got a tepid response from the market. It has been managing sales volumes of a little over 1,000 units per month, which is a fraction of successful models like Maruti Suzuki’s Dzire.

Recent media reports have been indicative of the launch of Vibe, a notchback on the Verito platform. It is competitively priced at around Rs 6 lakh and will take on Maruti Suzuki Dzire, Tata Indigo CS and Honda Amaze. Since it is based on the same platform as the Verito, it will help competitive pricing. However, the series (Logan and Verito) has not been able to charm buyers since its launch and whether this model will further boost the prospects of M&M remains of reasonable question.

On the M&HCV (medium and heavy commercial vehicles) and two-wheeler fronts, the company had invested Rs 410.4 crore and Rs 472.3 crore on a cumulative basis till FY12. Even with heavy investments, the subsidiaries have not been able to cut through the segments and emerge as strong players.

But what’s noteworthy is that these segments are currently functioning under multiple pressure points that have been restrictive on their performance. The M&HCV market in India has been facing troubles, as a result of low industrial output and weak construction and mining, among other unfavourable macroeconomic conditions like high interest rates. At the same time, the two-wheeler industry has been facing tough competition and a slowdown in demand. These conditions have made the markets particularly difficult to break through and make lucrative.

However, the performance of M&M continues to be strong on the tractor front and in the segment of utility vehicles. It has made up for all the underperformance in the noted categories and helped M&M clock an average YoY growth of 34.87% in revenues and 28.18% in net profit, in the last 4 quarters. Although this doesn’t do away with the fact that there exist loss-making subsidiaries, we are of the belief that value unlocking will take place once macro conditions improve, enough to incubate growth. This will further improve the outperformance shown by M&M and continue to steepen the trajectory of the company.