Mahindra & Mahindra Limited (MM) Earnings Call Transcript & Summary

Okay. Good afternoon, everyone. Wish you all a very Happy New Year. Thanks a lot for taking time on a New Year's Day to be here. Really, thank you for being here. Before starting the call, I would like to make a safe harbor statement. Certain statements from the conference call -- on this conference call with regard to our future growth prospects are forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. So with that safe harbor statement, I would like to welcome Dr. Pawan Goenka, Managing Director and CEO; Dr. Anish Shah, Deputy Managing Director and Group CFO; and Mr. Rajesh Jejurikar, Executive Director, Automotive and Farm Equipment Sector; and other senior colleagues who are there in this call. Welcome, all, to the call. Now I hand it over to Dr. Pawan Goenka for making his remarks and setting the context of making the remarks for this call. Thank you.

Thank you, Sriram, and good afternoon, everyone, and wish you a Happy New Year. Sorry to pull you out on a New Year, but this is a very important announcement that we have made at midnight tonight and I'm sure that you would like to hear more details about it. What we'll also do today is talk about SsangYong. We have not really made any formal statements on SsangYong for a while, so I'll give you some update on SsangYong. And then Anish will add his remarks, and then Rajesh will come in to talk a little bit about the automotive narrative going forward, though we will perhaps do a more formal session later on the automotive narrative. So let me start with SsangYong first. As you are well aware from the various news items that have appeared that we are in discussion with a serious potential investor for taking majority stake in SsangYong. We have been discussing with the investor for some time on the terms and conditions, both commercial or otherwise. However, we have not yet completed the term sheet. In the meantime, SsangYong was not able to pay its debt to some of the foreign banks and later on to KDB, and therefore, SsangYong had to apply for a rehabilitation process under Korean law. The law also allows a process called ARS, which is something where the court allows the company to find a solution to its current financial problems. And during this time, the company has managed, in a normal way, by the management of the company and the Board of the company remains active. The court has granted us that approval for 2 months. That means we have until 28 February to find a solution with the potential investor to invest in SsangYong. And if that happens, then the business is back to normal. If that does not happen, then that court will take over and go through a process of rehabilitation. Just to put it in context, if the ARS process goes through and the investment happens, then the new investor would have a majority stake in the company. Mahindra's stake will be reduced to below 30%. Mahindra will also do a capital reduction as allowed by RBI under the regulations of foreign investment of 25% of its equity. And there will be some implications on overall financial impairment or financial write-back, depending on what happens, and Anish will talk more about that. On the Ford side, as you are aware that we had made an announcement October 1, 2019, of signing a definitive agreement with Ford Motor Company to form a joint venture between Mahindra and Ford in India, whereby FIPL business by -- will more or less would have been transferred to the JV, and they will then be managed with Mahindra being 51% partner. As you are well aware that from the time that we signed that agreement to now, the world has almost turned upside down, and there's significant change in the fundamentals of global economic and business conditions. And obviously, because of global pandemic and other things and therefore, both partners decided that when the long stop date, which was 31st December midnight, came up, we decided it is -- we should not be extending that date and decided not to pursue a joint venture between Mahindra and Ford. Obviously, having worked on it for Mahindra and Ford for over 2 years, it was a difficult decision. But both partners agreed, Mahindra and Ford, that it was the prudent decision at this time given the overall scenario that we have globally and also in India. So with that, I'm going to hand over to Anish to add his comments on both Ford and SsangYong, and after that, for Rajesh to talk a little bit about the automotive narrative going forward. Thank you. Anish?

Thanks, Pawan. So with regard to SsangYong first, let me just outline the financial implications. When we -- when I say we, our Board took the decision in April that we will not invest any more in SsangYong. We had planned for SsangYong to run for 3 months. And if you recall, we had -- the Board had agreed to put in KRW 40 billion, which at that exchange rate was about INR 245 crore, in today's exchange rate, it's about INR 270 crore, as debt in the company to allow it to continue. That has helped tremendously because it's helped us get a potential buyer. It's helped reduce some of the debt on the books from SsangYong from that time until today. And it has helped keep the company alive in a much stronger shape by launching a new product as well. So all of those actions have helped. Now where we are today is there are only 2 potential parts. One is that the buyer comes in and closes the deal and takes it out of bankruptcy. And the second is there's a prepackaged bankruptcy, which could result in another potential entity continuing SsangYong or maybe the management control continues. But in both cases, Mahindra would be out of a majority stake and out of operating control. So from a financial standpoint, as you've seen, we've been incurring close to INR 600 crores of losses every quarter on SsangYong. And the buy -- before this fiscal year ends, that will stop in either scenario. The second financial implication is with regard to the equity holding. We currently have INR 982 crores of equity holding. We have written down a fair amount of the earlier equity holding already, which you've seen in our previous financials. And of this INR 982 crores, the amount that we write down will depend on where the share price settles after the company comes out of bankruptcy. And it is difficult to give a number as to what that is at this stage. What I can say is that the share price that the company had before bankruptcy was significantly higher than what our holding is today, but it will all depend on how it comes out and what the deal is in terms of the buyer taking it. And then the third aspect is with regard to debt. We have a INR 680 crore guarantee for foreign banks and the INR 270 crore that I mentioned that we had put in, so total about INR 950 crores. A fair amount of that, we feel, would be recoverable. And whatever is not recoverable in either scenario, we would write off. So that is a set of our obligations on SsangYong. To recap, we will stop taking the losses on SsangYong. Second, we will -- may have to write down some element of equity from INR 982-some crores number. And third is, on the debt front, if something is not recoverable from the INR 950 crores we have there, we may have to write that down as well. From a cash flow standpoint, the only cash flow would be with regard to the foreign bank loans or whatever is not recovered from the INR 680 crores. The remaining is not cash flow. So if you are -- if there are further questions on SsangYong in terms of financial implications, we can go through that. With regard to Ford, as Pawan mentioned, the circumstances have changed. And as we've talked also over the past few months, we are ensuring that anything that we do is right from a capital allocation standpoint. Ford's press release talks about that. We are both on the same wavelength with regard to capital allocation. And we felt that it wasn't the right thing to invest in a JV. The capital requirements had gone up. We had talked about investing INR 1,400 crores in Ford 1.5 years ago. That number would have gone up substantially, and the returns from that would have come down substantially as well. So therefore, as Pawan said, we decided not to extend the long stop date as we had reached that point and both parties felt that it wasn't -- it was the right step to take. We will look at other forms of collaboration, but we will stay firm with our focus on capital allocation and a focus on profitable growth. With that, over to Rajesh.

Hello, everyone. Happy New Year to you, and we said, sorry to pull you all out on 1st January. I'm sure some of you had late nights and not a great time to get on the conference call at this time. So what I'm going to do is build a little bit around our strategy in the automotive business, and you may find some of these just building on the blocks we've been talking about over the last 2 or 3 analyst interactions. The SUV business is a core business. We've spoken about how we need to build a strong SUV brand because that's our heritage and that's been a core part of who we are. And that's really where our right to win rests. And I use the word core in a very deliberative way because it really means playing in the space in which we have our strength, which is really the core SUV and not any other form of SUV. We believe that over the last 3 years, we've created some very, very strong, robust platforms. The success of Thar is an outcome of that, a very, very strong product, a head-turner with a very strong technology backbone. The automatic transmission, the gasoline all have been very well received. And in fact, when we look at our total bookings of 32-odd thousand, 50% of that is out of automatic, which indicates that it is a very mainstream, upscale target group which is buying the Thar. The bookings of Thar continue to be robust. And even in the month of December, in spite of such a long waiting period, we have had more than 6,000 units. We have 2 other new platforms, which we are working on, the 601 and the Z101. Both of these are going to be very, very strong products and very strong offerings. And we are very certain that they're going to do well. We also have the Bolero and the XUV300 as 2 other platforms on which we will be able to build and complement our strategy. So from an overall offering point of view, we believe that we are very well-placed now. We have the right aggregates, very strong aggregate strategy. We've built -- completely bridged the gap on gasoline with very modern and the latest technology engines. As we go forward, we will work further on renewing our brand, making it more connected to our proposition of exploring the impossible and also creating and building communities. The Mahindra Adventure is an initiative we run. We'll strengthen that and work on making the brand more aspirational with higher affinity and using communities to create engagement. We believe that we will only have to now make optimal investments because we've invested in the platforms. We will create very differentiated category-creating offerings out of the platforms that we have, and each of these will require only marginal investments and not the kind of investments that we've needed to create full platforms and aggregates and also preparing ourselves for BS VI. On the international front, our focus right now will be to prioritize the India-like markets and/or markets in which we already have a strong presence. We will not, hence, expand our international scope beyond the markets in which we already are. The important new part of our automotive strategy will be to build leadership in electric SUVs. As we prepare for the future, what we need is a very strong portfolio of electric SUVs, which would mean born electric as well as IC-derived electric SUVs. So even the electric strategy in the passenger vehicle space will be very focused around delivering the core, which is in the segment in which we play, which is SUVs. We believe with all of this, we would have been able to manage our strategic priorities while ensuring that we build brand and deliver strong financial returns. And hence, we feel very comfortable that this strategy would take us strongly and comfortably into the long term. With that, back to you, Pawan.

Pawan, if you're okay, should we open it for Q&A?

Please start. Please go ahead and start the questions.

Okay. I think to ensure that we could answer -- we could cover all the couple of -- both the subjects properly, first few questions, let us focus on Ford. So we would ask the participants to ask questions related to Ford JV and then we'll come back to SsangYong. The first question is from Rakesh, Kumar of BNP Paribas.

My first question was, so what are the investments we have already made in the JV with the Ford? We had been working on this for the last 2 years. And how much of that can be recovered?

Rajesh?

Rakesh, since the JV has not been formed, Rakesh, there have really been no investments made in the JV specifically. And in fact, even people who were to get deployed to the JV, there were very few from the Mahindra side, have not moved into the JV since the company didn't get formed at all. So really, the quantum of money spend related to the JV has been very marginal. It would be mainly around transactions related to leading our legal, that kind of thing. But no real investment has gotten into the JV.

Okay. And can you help us understand where the partnership has ended, essentially, from here on, how the 2 companies are going to proceed? So will we still be working together on developing common platforms or sharing engines or sharing capacity? Or we have completely parted our way and would be entirely working independently?

Could I take that Pawan? Or...

Yes, go ahead.

Yes, so Rakesh, the -- what we've concluded the discussion on is, at this stage, related to the joint venture formation. Through the next quarter, we will have discussions on trying to see if there are areas which are mutually beneficial to both. And that would -- has been going through a fresh review to make sure that everything that we've outlined, or of the things we've outlined, what makes sense to continue with, which will be mutually beneficial to both. So at this stage, we're not -- we've not actually concluded on what we will continue with or not. But given that we have had a very amicable separation on the joint venture, we look forward to constructive dialogue on what could be the avenue on which we could continue to collaborate. But there is no closure at this point.

If I could squeeze one last question. With no SsangYong and Ford to share the platform and the capacity, would that not mean that we would now need much higher investments in developing new UV models?

Rajesh.

Yes. Rakesh, yes, that's the reason I kind of spelled out the investments we've already made over the last 3 years in M&M. So when we decide that we are going to have a very focused SUV strategy, the investments we've made over the last 3 years in the 4, 5 platform that I spoke about prepare us very well for the future. And we've already created the full aggregate portfolio which is strong. And hence, the investments now that will be even needed will be on creating new top hats or new derivative products on existing platform. And that order of magnitude of those investments will be significantly lower compared to the creation of a full platform. So if I was to be more specific, we had spoken about saying that the next cycle of CapEx would be INR 9,000 crores compared to INR 12,000 crores compared -- which was previous 3 years, we would hold down to the INR 9,000 crores number.

Just to clarify for -- to leave that out, it's INR 9,000 crores over the next 3 years.

Yes, yes. And that still holds despite all these changes?

Yes, we'll still hold that, yes, and not doing the joint venture investment actually will make us free cash flow accretive after you look at CapEx plus investments as a collective whole. So we would actually be -- have a positive outcome from a free cash flow standpoint when you combine everything together.

Thanks, Rakesh. Can I request Kapil to come online, Kapil from Nomura?

Yes. Sir, just to clarify this, we had signed 5 MOUs with Ford, right, for B-SUV, C-SUV, connected vehicle, powertrains in 2018. So have we already been doing development work? And what is the status of that?

So if I could just comment, there are 5 things that you mentioned that we had signed up for, out of which, one was already implemented, which is the connected car. And both Mahindra and Ford Cards today in India carry a common solution. Two, which was the eAspire, Aspire-based EV, and the mobility services MOU that we had signed, those were shelved already because we did not find, at that point of time, a business case for it. And the 2 are in state of development. One is engine applies to Ford EcoSport and one is the W605 project.

Okay. Sir, so this announcement has no implication for those products?

As Rajesh mentioned, that will be a separate conversation that will happen with Ford on a case-by-case basis on what continues and what does not make sense. And in fact, there could be some new things that will come up depending on how Mahindra and Ford see value and opportunities ahead of us.

And a couple of -- this is Anish. Just to clarify, these MOUs were signed prior to the JV discussions. So they were not dependent on the JV as such.

Right. Right. Hence, I had asked the question. The second question on SsangYong is Dr. Goenka has talked about the deal possibility in India as well. But just from M&M's point of view, because we keep hearing different news reports, et cetera, what is the maximum...

Your voice is trailing off. Can you come closer to the mic, please?

Yes. What is the maximum possible liability that we can expect in case the deal does not happen? Are there any other guarantees, et cetera? And if the deal does go through, we had talked about INR 680 crores liability. Will that be borne by the new investor or SsangYong, and hence, M&M will not need to pay that?

Yes. Anish had already given those numbers. Can you repeat those, Anish, please?

Yes. So a couple -- what I mentioned was around the equity and debt numbers. And to answer your question first, beyond that, there is no liability. So there are no other guarantees beyond what we've disclosed. There is no other liability from any other areas as well. So where we stand today is, on the equity side, we have a INR 980 crore number on our books. And on the debt side, INR 680 crore guarantee for foreign banks and a INR 270 crore debt that we have given. So that's INR 950 crores. So the maximum possible write-off is INR 980 crores plus INR 950 crores. We don't expect to have that maximum possible. I mean that's a very, very low probability, in fact, negligible or close to 0 because the company will have some the ability to continue, even postrehabilitation, even if the buyer does not come in. And in that scenario, there will be some recovery. Even if the company has to go through bankruptcy, there will be some recovery. So the debt, we will pay only if there's recovery. So this is the absolute maximum amount. From a cash flow standpoint, the maximum amount is INR 680 crores because the rest of it, we already paid out. And we would expect it to be a lot lower than that. But we don't know the number right now because it will depend on whether the buyer comes in or, if the buyer does not come in, how does it go through bankruptcy? And does it come out of bankruptcy? Or does it pay off the creditors? All of those things will affect what the exact numbers are.

Just to put the number in perspective, and you can confirm this, the current holding of INR 980 crores translates to about KRW 450 valuation of the share price. Anish?

I will verify that exact number and get back, but it seems in the ballpark. But Kapil, does that answer your question? Or is there anything else?

No, that is clear. And just if you can, lastly, just talk about the product, if you have made any assessment of production impact because of shortage of semiconductors. Was there any shortage in December and for the next quarter as well?

Rajesh, why not take this question anyways? That has been on many people's mind.

Yes. Kapil, so yes, we are affected by the semiconductor issue impacting primarily ECUs, but some other things like infotainment and different products. Some of our products are not impacted at all with the current ECU shortage or not significantly. For example, XUV300 is not, our 3-wheeler portfolio is not, LCV is not, ICV is not, so on and so forth. So it's not that everything is impacted equally. The situation in December was better than what we had planned for. The situation in January, at the moment, seems to be better than what we had anticipated. But it is going to be very dynamic, Kapil, very, very hard to predict. The good news is that most of all our other supplier issues are behind us. And what we would do as we wait for ECUs to come in is at least inward as much material as we can from other suppliers so that when the issue is resolved, we don't run into newer issues with other suppliers. So that's what we are going to try to do to derisk ourselves overall. So -- but it's a wait and watch. And December was better than what we expected. And you see that somehow in -- some -- also in the numbers that we put out for December, where we've shown a 5% growth in UVs.

Thanks, Kapil. The next question is from Raghunandhan of Emkay Securities.

Raghu here. Am I audible?

Cannot hear you, Raghunandhan. Can you speak up, please?

Am I audible now?

Yes, better.

Yes, Raghu. Go ahead.

Yes. Firstly, a clarification. INR 9,000 crore would be the CapEx for next 3 years, right? So what would be the investment outlay for the next 3 years? Any plan there? Or would it be subsumed under this INR 9,000 crore?

So Kapil, on -- sorry, Raghu, on that, investment amounts are not included in the CapEx. The investments will be lower than they have been in the past. What we have shared before is that by the end of this year when we complete exercise on capital allocation and we have a good sense of where we're going to spend that capital going forward, we will come up with specific numbers on what the investments will be over the next 3 years. So at this point in time, not in a position to share that because we have to complete the exercise on capital allocation, but we'll do that as soon as we complete it.

Secondly, in SsangYong, would the potential buyer be expecting further funding support from M&M? And would M&M be open to one such option?

What was that?

Pawan, the question was whether there's any funding commitment expected from M&M from the buyer in future. And the quick answer to that is no. We have been very clear that our Board has made the decision that we will not be funding SsangYong anymore, and we are staying firm with that.

Thanks, Raghu. The next question is from Shyam Sundar of [ AVS Fund ].

Sundaram Mutual Fund. Yes, sir, this is Shyam Sundar Sriram from Sundaram Mutual Fund. My first question is on the Ford JV. So you have mentioned that it doesn't really impact our near-term product plans per se. So just trying to understand, so we were supposed to develop 3 new SUVs there with the collaboration. Are those plans in play -- have already been done to an extent where we don't need the incremental forward assistance there? That is my first question. Secondly, also trying to understand on this further technical collaboration, what would be Ford's motivation to help M&M continue with the product development plans if Ford does not see India as a very strategic, like, geography to be in? These are the 2 related questions.

Rajesh?

Yes. Shyam, on the first question, by way of our product portfolio, as I said, we already have 4 or 5 very robust and strong platforms. And we believe we are very well covered with the new focused SUV strategy that we would have in mind. There was one platform which we were going to leverage from the Ford ecosystem as per the earlier signed agreement, but that had not yet got converted into an approved product plan on the M&M side. That was still at a stage of concept. So there hasn't been an approved M&M project to leverage that platform still at a concept stage. We could meet the needs of that by adapting either the XUV300 platform to make it bigger or to adapt the 601 platform and maybe make it smaller, but that's something we'll work on. But the way we are right now conceptualizing our strategy over the next 4 to 5 years, we have a lot of concepts and category-creating ideas which we would want to fully leverage and bring to the market. So that's the reason, I think, Pawan indicated that we don't see a very significant impact out of the -- on the product portfolio and the product strategy offering that we have in mind. We do anyway want to create a very strong EV-focused SUV strategy. And that is where we want to consume or use some of the resources that get saved, if I may use the word saved, out of the investments we may have made in the JV.

And just to be sure, you mentioned 2 platforms. One of them actually is a Mahindra platform. That is the W601.

Right, right. So the platform that we have not gone forward is the compact SUV, the Brezza competition or -- I mean -- I meant to put it differently.

That would be 1 level higher than that. The Brezza, in a way, is an XUV300 switch.

Okay. Right. Got it. Got it. Okay. Sir, on the second part of the question, sir, what would be Ford's motivation to help M&M further the technical collaboration given that they don't see India as of very strategic importance per se?

Yes. So Shyam, as we said earlier, let's wait through Jan-March while we have these conversations with Ford. At this point of time, the focus with Ford has been around what we would do with the JV, and we've just had a very amicable conclusion around the way forward. We will engage with Ford and see if there are win-win opportunities which are mutually beneficial to both. And if yes, then we'll do it. And if not, then we'll not do it.

Sure, sir. My second question is on the joint IP rights, for example, on the products or solutions that we may have developed with Ford. So how does -- is there any threat to our future or the current product pipeline that we have? Similarly, with SsangYong, we are using the Tivoli platform, for example. Are there -- is there any issue in terms of using those platforms going forward both on these 2 counts?

Go ahead, Rajesh.

I'll take the SsangYong one. I'm not sure what Shyam is referring to in Ford. I think he may be talking about connected. But -- so we can just clarify that, clarity on that. On the XUV300, Shyam, which is a derivative of the Tivoli, as you said, we have all the IPs. And it is a product which has been modified quite a bit for India, localized in India and we have all the IPs. So we're completely protected for that from what may happen to SYMC in the future.

On the Ford side, the W601 obviously is completely Mahindra platform for Mahindra use. So there is -- IP is completely all Mahindra. W605 would have been a Ford JV product. So if that product happens, as we -- as Rajesh mentioned, that discussion will happen over the next couple of months. If that product goes through, that IP of that product will be owned by FIPL, and again, that will be only for FIPL. So it does not, in any way, affect Mahindra. Connected car IP is jointly owned, so there is no issue there. And the engine, obviously if the engine supply continues, as we have talked about in the past, that engine IP is owned by Mahindra. So there's no IP constraint or concern that we would have because of not going ahead with the JV.

Thanks, Shyam. I think in the queue...

I'll fall back in the queue. I'll come back.

Yes. Yes, that would be good. Yes. Okay. The next question is from Sonal Gupta of UBS Securities.

Yes. So just on the IP question, I wanted to confirm or even on the SsangYong, re joint development of the engines, is that -- I mean like where does the IP rest for that? And the second thing is on the -- I mean like this is a question that I asked over -- previously also, right? Like -- I mean, while you're following a niche strategy, but again, I mean the issue has been that the volume scale versus the number of platforms you have is very, very large. So -- or I mean the volume scale is lower compared to the number of platforms. So -- and then you've created a huge engine family of engines also both on the diesel and the petrol side. So I'm just wondering, I mean, like even with your focused strategy, do you see a decent return on capital for this business going forward even with your focused strategy?

So I'll answer the first question on the IP for the powertrain. So basically, there are 6 powertrains that Mahindra has in its current portfolio and -- the 1.2-, 1.5- and 2-liter gasoline and 1.2-, 1.5- and 2.2-liter diesel engine. In all the cases, there is no occasion where Mahindra depends on SsangYong for the IP, IP rights. In most cases, IP is owned by Mahindra. In some cases, IP is jointly owned.

Second question?

Anish, second question.

I'm taking on the question, Sonal, about will we get enough financial returns from a standpoint of volume to platforms, right? That's your question which you asked?

Yes. I mean like do we have enough scale to be competitive and have a decent return on capital?

Yes. Well, our current estimation is clearly, we have -- we are projecting a decent return on capital. We have learned a lot out of the pandemic and have also reengineered our cost structure as we've been talking about in previous analysts' conversations over the last 3 quarters. So we do believe that with the restructured costs and a focused strategy, thus, we would be able to get reasonably good financial return in this business out of the platform that we have and the volumes we are projecting for the next 3 years. Anish, do you want to add?

I would agree with you, Rajesh. And if we just look at some of the things that we've taken away in our capital allocation actions, that will start improving the outlook of the auto business very significantly.

Okay. Next question.

Yes. Sonal, are you through?

Okay. I mean like what I was trying to understand was, is there any platform consolidation strategy that you have in mind?

Yes, Sonal, that is part of the whole focused strategy, and we will be zeroing in on basically 2 chassis and 2 modern core platforms. And we believe that's a reasonable number of platforms for us to work on. Like we said, we already invested in both. So that's all into our cost structure. Platform and aggregate investment is already taken.

Thanks, Sonal. The next question is from Vimal Gohil of Union AMC.

Sir, I just wanted to get some more clarity on the CapEx number that you provided for the next 3 years, which is INR 9,000 crores. Just wanted to get a sense as to how this entire amount will be spent over maybe new platforms, greenfield or CapEx, et cetera? If you can just give some more color on that. And how much will be for R&D?

So Vimal, this is not a new number we are giving. In the last few analyst meets, we have been saying that the previous 3-year cycle was INR 12,000 crores, which we are planning to bring down to INR 9,000 crores. The INR 9,000 crores is an auto and farm combined number. It is not only automotive. So I just want to clarify that is a number which includes both the businesses. Quite a bit of the INR 9,000 crores is still the carryover investment that are going to go into the 601, the Z101, which will all get concluded the financial year F '22. So even out of the INR 9,000 crores, there is the balanced investments that are going to happen on these 2 major platforms, which comes into F '22. The K2 program of FES is also part of this number, which is, as you know, we are doing 4 new tractor platforms there in collaboration with the Mitsubishi business. So there is very little on capacity expansion. Most of it is around products and projects.

Fair enough, sir. My other questions have been answered.

Thank you. The next question is from Binay Singh of Morgan Stanley.

Binay may be on mute.

Okay. Binay, if not there, can we go to [ Pratik Poda ]? Pratik, are you online? Okay.

Is there connectivity issue or what happened?

I don't know. They were online. But -- okay. What about Gunjan? Are you okay to go right now? Gunjan, are you ready with your question? Gunjan from JPMorgan.

Just check on connectivity, maybe there's some connectivity issue.

Yes. Gunjan is coming online. Yes.

Sure. Can you all hear me now?

Yes, Gunjan.

Yes.

Yes. Most of my questions have been answered, but just 2 broad-level questions I had. Firstly, on this whole UV strategy that you're putting out now that we'll play to our strength of big UVs and off-roaders. So how should we think about the market share aspiration here? And I mean the sense that I'm getting is that it is not about market share, it is more about playing to your strength. In that case, what kind of profitability and return improvement we should think from a next 3- to 5-year perspective? I mean some broader-level thinking on UVs, that's my first question. And the second question is on the electric side. You also mentioned about taking a leading role in the electric SUVs. Could you just spell out more around what kind of investments this business will need? And how is this structured? Some part of it is within the auto subsegment, which is there in the stand-alone and there is also an electric subsidiary. So could you just give us more clarity on the thought process on electric and the kind of investment needed here?

Rajesh?

So Gunjan, the first question is, I guess, the most hotly debated question about what happens to market share. So let me try and answer that question a little indirectly, to begin with. It's not that we would not aspire to get a higher market share. We just don't want the aspiration of market share to drive our product side. And just -- it's what comes first. So when I say that Thar has got 8 -- 6,000 bookings in December, in spite of a wait period of 24 to 40 months, it means that you've hit a sweet spot, which is also getting new volumes and you're still on strategy, right? So it doesn't mean that if we have a niche-focused strategy, market share will not come our way. It's just that what we are saying is we don't want market share to decide what we should do. We need to do what -- where we believe we will have a competitive advantage and we win. And we believe if we do that well, market share will follow, right? So it's not like we will not have volume aspirations, but we don't want the volume aspirations to come in the way of deciding the right thing to do. Gunjan, does that makes sense so far? And then I can answer the second part, which is the financial part.

Sure. Okay.

Okay. So we would have volume expectations. We don't want to be a company which is not aspiring for growth or volumes. We certainly want all of that, but with the right strategy and the right product offering. And I think Thar is a really great use case to demonstrate that and so will, we believe, the other 2 new products which are going to come in, in 2021. We believe that with the kind of investments we've made, we will get a financial return. And the volumes we are aspiring for, based on the numbers that we've done internally for the next 3 to 5 years, will give us financial returns. Taking onboard the current competitive context, which we know is aggressive, but we also have a very strong cost-optimization strategy to make sure that we are very competitive from a product offering as well as from a cost-management angle to be able to book their financial returns. So financial, the 2 keywords in our mind are brand affinity and financial return. These are the 2 things we should play for. The market share should be an outcome of that. So that's...

Is there any target ROC that you have in mind for this? Because there has been a lot of investment which has gone in this business, right? So is there any -- a margin or an ROC target from a 3-year perspective that you can share for this subsegment?

So Anish, you want to take that?

Yes, yes. I was going to. Gunjan, in terms of target ROE at the group level or at the M&M parent level, we would look at an 18% ROE. In terms of subsegments, that's something we have not disclosed as yet. We're working through all of the subsegments in terms of how it adds up. Based on the actions we've taken on capital allocation already, we're pretty confident we can get to 18%-plus at the M&M level.

Rajesh, the other question on electric vehicles also that Gunjan had.

Yes, I was coming to that. So Gunjan, on electric vehicles, there were going to be 2 key approaches and -- though we are focusing right now on the high-level passenger vehicle strategy today, but there will be the last-mile electric strategy, and that's what we would want to play out through the Mahindra Electric subsidiary. And we already have Treo there and a few other things that we are working on. And that's going to be our last-mile mobility strategy. The areas where we think we need to build on and which we are working on is creating an entire SUV/EV portfolio, which will make us and keep us ahead of the curve as we talk about the period 2025 onwards. And that's really the area we're saying we need new investment, new -- and a new approach to. We already have an XUV300 electric, which is in play. But we would want to look at a more significant electrification of the SUV offering that we make, which would -- could be a combination of IC-derived products and born-electric platforms. But more on that when we are fully ready with the detailed plans of.

Anything on the investments needed in this business? And how do we plan to fund it?

Yes. So if I was to make a very high-level comment, which I think I did a little earlier, the free cash flow, when you look at CapEx plus investment together, we think will be accretive compared to what it may have been if we had gone ahead with the JV. So in a way, we're saying that the money that we may have put aside for investing in the JV is what we would want to use, some of that, to build the EV platform.

Let me just add to that. Gunjan, as Rajesh mentioned, I just put that in 3 phases of EV. The first phase is around last mile. That is here and now. If we were to look at what are the drivers of adoption of EV, it's going to be range anxiety, addressing that, cost parity and infrastructure. All 3 aspects are met from last mile. With regard to investments in last mile, they are more or less in place. We've got a good set of products there, and we're very well positioned. That's been done through Mahindra Electric brand. That's last mile on both passenger and cargo, and they're effectively 3-wheelers and some small 4-wheelers there as well. The second phase in EV is electrifying current vehicles. And that investment is included in the CapEx numbers that Rajesh mentioned, of the INR 9,000 crores over the next 3 years. That's taking a e-KUV -- or KUV and electrifying it into a e-KUV. There will be some others like that. So that's basically electrification of current vehicles. Then third is a medium- to longer-term approach in terms of a born-electric platform. Those will be incremental investments. And there, we will be making those investments out of the free cash flow that, one, is saved from the JV and from other sources as well. The Battista that's run by Pininfarina will help from a technology standpoint. But we will be looking at a born-electric platform in it, too.

Thanks, Gunjan. The next question is from Nitin Arora of Axis Mutual Fund.

Just my first question is on the SsangYong. As Anish and all the team explained that the maximum financial liability is to the tune of INR 680 crores. Let's assume the case to court. It could be lower than that. But let's assume a case to where the court decides in terms of bankruptcy, and we don't get the buyer you mentioned. Anish, just want to understand from you is there's a lot of pushback we get globally from a lot of clients saying that, look, Korean government is a very, very nasty government to look at that. They don't allow companies to come out from Korea. Eventually, Mahindra has to pay a big financial package to the existing employees and all. So I just want to understand from you, we have seen that you, yourself bought a company, Mahindra itself bought a company when it was into bankruptcy. Are their laws very stringent? Or it's more of court ruling the way you explained the law like ARS? How we should look at it? It's more of a macro question but just wanted to clarify from you.

Okay. And I'm glad you asked this because this is something that plays on the minds of various folks. Korea has a very strong rule of law, and there's a very structured process with regard to the bankruptcy filings, even in terms of what we've gone through right now. Let me explain that in a little more detail. When the Board or the company believes that they cannot meet the creditors' requirements or cannot pay the creditors on the time lines that have been set out, they have the option to file for bankruptcy. After they file for bankruptcy, there's an option to file for something called an ARS, which is automatic restructuring, in effect, a standstill. That standstill allows the company to operate, at the same time, work with potential buyers to structure something without being in a formal bankruptcy as such. Even to get into the ARS, the bankruptcy court and the judge spend a lot of time with all of the key constituents to understand their views. And after understanding their views, if they feel there's a -- some possibility of the company being able to create a deal and everyone agree to it, then they agree to an ARS. ARS has a specific time line. So the court has ruled that the ARS will end on February 28. So the deal has to be completed by February 28. The court will continue to monitor it. In fact, there are meetings that will be held very regularly through this entire process. If their court, at any point, feels that the ARS may not work, the court will ask the company to look at what sort of prepackaged bankruptcy. And the process, therefore, is very well laid out. The liabilities of the shareholder do not extend beyond what has been put in from an equity standpoint. So we don't expect any further liabilities. And if the ARS does not work, then we would look at a prepackaged bankruptcy option, and we follow the bankruptcy process as outlined by the court.

And when this prepackage comes in, and that's where we believe that should be the upper limit of our financial implication?

That's right. So by February 28, we should effectively be out of a majority control and out of the consolidation aspect, which will impact Mahindra either way, whether a buyer takes it or whether it goes down the bankruptcy route.

That's really helpful. The second question is you explained it, the team itself explained it, Rajesh said also about that doesn't impact our model cycle export, we don't incrementally look that we can make money here but doesn't impact our model cycle over the longer term. But just one question I had on the auto because now it seems like more commentary is coming from the management of the capital allocation is to improve profitability in autos, specifically auto segment and where we make money is SUV. So generally, do you believe in your auto profitability? I'm talking more in context of EBIT, the auto EBIT. Do you still have low-hanging fruits there, which can turn around faster the auto profitability and the model cycle can flow through? My aspect of low-hanging fruit is, let's assume, a truck business which would be contributing more than 100, 150 bps, you can correct me if I'm wrong, to the EBIT or there are some other businesses could be impacting our auto EBIT. And if it goes out, PAT really turns around faster than expectations because of this low-hanging fruit. And just one more question. Given the kind of cash flows we will generate next year because we will not have SsangYong, Ford incremental investments are not going up, so it looks like a decent amount of cash flows will get generated starting from Q1 itself. Does that have buyback? Or does that really come in the mind, in the thought process of the Board given the kind of improvement we are showing sticking to our capital allocation policy? So these are the 2 questions.

Okay. So let me address all of these. And let me first also just go back to the SsangYong comments for a minute and just add that where we are today from a potential write-off standpoint is, in fact, even better than where we expected us to be in April. So when we took a decision in April, we had certain numbers we're looking at. There has been a significant amount of loans that have been repaid by SsangYong in the time period, and therefore, that puts us in a better position today. So that's a plus. Then moving on to your next question with regard to auto profitability. As you've seen, we are taking hard calls in ensuring that our profit numbers go up or profit percentages go up. SsangYong is also low-hanging fruit actually. SsangYong will make a significant difference in terms of the profitability of the auto business. Other actions have been taken also, which we've talked about in the past. You talked specifically about trucks and buses. Trucks and buses is an area where that we are the challenger brand. And we actually have a very good set of products that the consumer likes a lot. But as you rightly said, it's a drag on auto profitability. What we are looking at right now is a set of some very interesting strategic actions, which I cannot go into detail at this point in time, but we will come back as we have more clarity on that, which will help us significantly on the trucks and buses side. So those are all the things and we -- that will keep the trucks and buses business that will help us be more competitive and it's something that will add to profitability overall. So again, more on that at a later stage. But basically, to answer your question on that front, there's series of actions being taken on improving auto profitability and are improving the overall M&M group profitability. The next part of your question is on having more cash, which is a great problem to have. There, again, you've seen us have the discipline of not invest unless we feel that it really makes sense. And that discipline, we will continue. So what that means is the additional cash will go back to shareholders and we will invest in areas where we feel we will get significant returns. And a buyback is not ruled out, right? So we will look at buybacks as well. But we are, right now, trying to solve our problem on the capital allocation side. We are more or less there. I have promised that by the end of this year, we will give you a complete breakdown on all the actions taken and what the impact of that is. And we are, I would say, at this point, 85% to 90% there. So as soon as that is done, then we start pivoting tools really driving growth and what to do with the excess cash. But as I said, we will not use the excess cash unless it really makes sense.

Thank you, Nitin. Probably the last couple of questions. The next question is from Pramod Kumar of Goldman Sachs.

Yes. Anish and Pawan, my question is related to this JV of this joint venture not being -- not happening now. Does it open up more opportunities for you in terms of -- are you going to still look out for alliance partners or a formal JV with some other players given the interest in India and given the fact that you -- the evolving landscape in autos clearly calls for more consolidation and more partnerships to happen? So is partnership still a path which you'll pursue? Or we are done with it for the medium to long term post the Ford experiment?

Anish?

So Pramod, we will continue to look at all forms of collaboration. In a world that is changing rapidly right now, it's not just JVs. It's looking at various different forms of collaboration as well. So it may be JV. It may be a collaboration. The bar that we have set is that it has to have -- it has to make sense for our shareholders. And we will continue to keep that strong fiscal discipline in place. And with that fiscal discipline, we will look at collaborations that makes sense for our shareholders. So in fact, we will look for more of them as we go forward, not less.

And Anish, how much of this JV not materializing a potential risk given the other MOUs? What does it mean to our 2023 RDE compliance and potential access to technologies like, sir, hybrid, which probably may be needed some time down the line depending on how the RDE is set and how the emission norms evolve? So what are your thought process there, sir?

So on the JV, start...

What compliance? RE compliance?

RDE, real driving emission.

Okay.

Yes. So I have to say that the JV does not -- not doing the JV does not impact any of those because those were not formally laid out as part of the JV. Rajesh, do you want to add anything else to that?

Yes, that's right, Anish. And Pawan can clarify as well. But these may have been derivative benefits that may have come, but it will not clearly defined as a scope of the joint venture. And the joint venture was about running the Ford brand in India as an export base. And the other agreements which were synergistic or synergy-driven were outside through separate agreements between Mahindra and Ford and are not necessarily connected directly to the JV. Pawan, do you want to build on that?

I just want to add that neither with Ford nor with SsangYong was there any plan to use their powertrains on Mahindra products. In some cases, Mahindra products -- so Mahindra powertrain was being used for Ford or SsangYong product, but not the other way around. Therefore, the full technology of meeting RDE is a homegrown technology for Mahindra, working with the consultants, of course, globally and no dependence on either Ford or SsangYong for meeting RDE.

Fair enough. And just a couple of follow-ups. You talked about the supply chain disruption. Does it impact our new launch pipeline, especially the upcoming XUV500? Or it's still pretty much on track in terms of the time line, what we're looking at?

Rajesh?

No, the -- so when we are talking right now about supply constraints, we are hoping that will go in this coming quarter and hence, should not affect the proposed time lines. But if the problem does persist, then, of course, that's a question one has to address at that point of time. But our hope and expectation is that this is a quarter 4 problem, and it should improve post that.

And is it fair to assume, Rajesh, that there's some retail impact as well because your dealer inventories were already running quite low going into the season? And I've checked it with myself with few dealers, they're like really kind of a stock or situation on the automotive side. So are we kind of getting affected on the retail side as well? Or do you expect it to be an industry-wide problem? Because we haven't seen other players talk about the supply chain issue as much as what you guys have done.

It does have an effect, Pramod, on retail as well, especially because we didn't have a pipeline. And as you know, in the last call, we had said that we will build our pipelines through November and December, which while we have got the rest of the supply chain in place now, we do have the issue related to subcontractor and ECUs. So it does have some effect on retail. But hopefully, we will see the last of this, too. So yes. The inventories, you are right, are still very low. We haven't been able to build them back up.

Last one on SsangYong, Sriram, just a clarification. Previously, the media reports indicated that the labor union was against the company being sold to HAAH, which is a Chinese-American company. So does the legal proceeding, which is ongoing right now, does it change any of that? Or do you need the labor union to be onboard because we all know how strong the labor unions in Korea are? So if you can just comment on that, that will be great.

SsangYong management have informed Mahindra that the labor union is supporting the ARS process.

Thanks, Pramod. The last question is from Chirag Shah of Edelweiss.

Yes. A question for Anish. When you set this 18% ROE target, when we look at our core business, that is the automotive plus FES business, is the target individually for each of the business, SUV, CV and tractors? Or we look at it as a combined entity?

Combined, combined.

So Chirag, we have to give you both returns and growth. So the way I would look at it is if we have a 14% ROE business growing at 35% a year, we'd love the business. And we may have a 25% ROE business growing at 8% a year, we would love that business as well. So it is -- if we have the standard for 18% for every business, we will not be able to deliver the kind of growth numbers we have to deliver. So we're looking at it as a combination. But if we have, let's say, for example, an 8% ROE business that's growing at 8%, then we might look at it more carefully and say, it doesn't really make sense or what is the strategic benefit there? And so it is a combination. We are looking for every business to have at least a path to 18% growth, 18% ROE over a 3- to 5-year time frame. If they don't have a path there, then it should be is there a strategic benefit for it? Or is it a high-growth rate that can allow us to get to higher ROEs in future?

Okay. And this was helpful. And just a clarification. I presume the tractor business doesn't have any ECU or microprocessor challenges, right? Because you -- Rajesh even indicated that part.

That's correct. That's correct. That's correct, Chirag. So tractors are not affected. 3-wheelers are not affected. At this point of time, LCV, ICV are not affected. Some of our products are less affected because the people who are supplying those components, their back end is not as affected as some others. So the issue is also dependent on the source of supply.

And when you were referring to the shortages, were you referring to the incremental volume that you are looking at or even the base volume itself is under some strain because of the issue? Because, say, December, if I take December as the base volume for you, that base volume is doable. It is the incremental volumes where you will see the challenge, the supplies on that side. Is the understanding correct? Or even the base volume itself is under some questions in near term?

Chirag, there always a very thin line on what you define as the base. So...

Assume that is the base, whatever rate that we did in the month of December.

You are saying the same period last year? You mean that way? For like-to-like period that we considered for that month?

If you did 100 units in December, those ordered units are secured, right? It's the incremental saying over 100, you wanted to grow by 5%, 10%, it is where you are seeing the challenge? Or even the supply for the 100 units that we did in, say, December are -- is a challenge as of now?

I don't think I can give you a specific answer to that, Chirag, because -- and the honest answer, apart from the guidance issue on numbers, which we normally don't give on volumes, is that the situation on the availability of the issues is very dynamic. And we are getting to know availability only week-on-week. And the situation in December, for example, improved a lot compared to what it was at the beginning of the month. So we -- I really don't want to give an outlook right now on whether it is compared to the base or not. We just have to watch and hope for the best. We are working very closely with our suppliers to get the maximum that is possible so that we aren't affected and minimize the impact on us. But it's very dynamic because it's imported, it comes from different places, there are multiple elements of the supply chain. So -- and the supplier is also operating on a weekly basis by way of what they are able to churn.

Thanks, Chirag. So that brings us to the end of the conference. Back to you, Dr. Goenka.

Yes. Thank you, everyone, for participating on New Year Day, and thank you for all your questions. I hope you got all the answers. And with that, we close the conference.

Thank you. Thanks, Anish. Thanks, Rajesh. And thanks, everyone. Thank you.