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

Hello, everyone. Good day, and welcome to M&M Q1 FY '22 Earnings Call. Let me start with the safe harbor statement. Certain statements 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. Please note that this conference is being recorded. I would like to welcome the senior management of Mahindra & Mahindra Limited for this call. We have with us today Dr. Anish Shah, Managing Director and CEO; Dr. Rajesh Jejurikar -- Mr. Rajesh Jejurikar, Executive Director, Auto and Farm Sectors; Mr. Manoj Bhat, Group CFO; and other senior management, including the IT team. We will have a presentation by our management team before opening the floor for Q&A. [Operator Instructions] Before handing over to Anish, I just wanted to bring to your notice that from this quarter, we have started reporting M&M + MVML financials as M&M stand-alone financials as all the formalities for the merger of M&M and MVML have been completed during the last quarter. With this, over to you, Anish.

Thank you, Sriram, and good morning, good afternoon, good evening, everyone. I know you're joining in from various parts of the world, so thank you for joining our call today. We're going to cover the 4 key messages that are listed here. One is significant headwinds in Q1 as we've seen across many companies. But despite that, we've seen a very strong performance in Farm, good recovery in Auto. Mahindra Finance has been hit hard, and we'll talk a little about what has caused that and what has Mahindra Finance said in terms of how it's getting back on track. And Tech M's very positive momentum continues. So that has been a huge -- all of that together has helped deliver very strong results for M&M. And we continue to maintain a very stringent fiscal discipline, and we'll talk about some of the actions and outcomes on that front as well. First, just a quick highlight on the headwinds that we saw. The impact of wave 2 in many ways was very different from wave 1 because, first, it did penetrate into rural areas a lot more. The effect was much higher on our associates, on dealers and their families, and that caused a significant disruption in operations, not only for ourselves but for the entire ecosystem around us. And we obviously saw commodity price increases, supply chain issues as well as semiconductor shortage and higher freight costs. But despite all of these challenges, what we really felt good about as a team was that the Farm business came out really strong. And when we see Auto, we've seen a fair amount of spend, but obviously not as much. But the Farm business delivered its highest ever profit for the first quarter at INR 1,081 crores, up 59% from first quarter last year, which had April as a washout but a very strong May and June. Volume up 52% and volumes, in fact, even up 7% quarter-over-quarter after a strong fourth quarter of fiscal '21. Market share is up 2.6 points to 14.8%. Commodity price increases were largely offset by cost management and by price increases. And the one point that we were really focused on through all of last year was profitability of international subsidiaries. And today, very glad to report that every single subsidiary, international subsidiary of the Farm sector, was profitable in the first quarter of F '22. So good momentum, strong volume and good momentum on cost and market share as well. As we look at Auto, there has been a lot more challenges in Auto. But despite that, Auto managed to get INR 103 crores profit, up from INR 584 crores loss. In contrast to Farm, Auto was much worse hit last year in the first quarter. So in many ways, that's really not as much of a comparable number. But the key aspects in Auto are market share improvement for both UV and PV segments, very strong product pipeline as well as recent launches. Rajesh will talk a little more about the Thar and the XUV300 as well as the Bolero Neo and the excitement we have around the 700. Commodity prices, same comment as in Farm. And in Auto, there has been a lot more supply chain issues. But I would say the team has really managed them very well and come out much stronger than we would have expected at the start of the quarter. Mahindra Finance deserves a deep dive. And many of you may not have been at the Mahindra Finance analyst call, so this in some ways is a summary of what was covered there. Profit after tax dropped significantly to INR 1,529 crores. The key drivers were GNPA, up from 9% to 15.5%, which resulted in P&L provisions going up from INR 735 crores, which is a little more of a normal quarter -- probably a little higher than a normal quarter because it was, again a tough quarter last year to INR 2,517 crores. The INR 2,517 crores has 2 aspects to it. One is an ECL provision increase of INR 2,124 crores. That is essentially driven by forward flows of loans into Stage 2, which is greater than 60 days and Stage 3, which is greater than 90 days. And the second aspect of the provision was a INR 393 crore overlay provision. This is done from a prudency standpoint, just to make sure that the business is staying extremely safe. We had put in some overlay provisions last year as well because of some uncertainties that we've seen over the last 18 months. And with the addition of INR 393 crores, the total overlay provision is INR 2,709 crores. The way to think about the overlay provision is this is over and above what our models would estimate from a loss standpoint. So this factors the uncertainty in the environment. And once the uncertainty in the environment goes away, then this may not be required at that point in time. From a capital adequacy standpoint, despite all the provisioning, the business continues to be extremely strong at close to 24% from a capital adequacy standpoint. And I will also add that the provisions are 54% of Stage 3, which is industry leading. So from a safety standpoint, we make sure the business is very safe. Now let's go to the right-hand side and talk a little about what happened? Why did it happen? And what else from here? We talked about the ECL provisions being driven by Stage 2 and Stage 3. So let's start with Stage 3, which is greater than 90 days. What drives the GNPA? Stage 3 contracts at the end of June were 294,000. They had gone up by 180,000 between March and June. Of this 294,000, 78,000 contracts were partly paid back in July. 92,000 contracts have an outstanding loan amount, which is less than 50% of the loan value, which essentially means that the value of the assets, because these are all asset-backed loans, the value of the asset is much higher than the value of the loan. And historically, what we've seen is when this happens, there is no loss on it because usually customers will repay back because they don't want to lose the asset. And in the event they just cannot repay, then the asset is repossessed and sold and typically, there's enough value in the asset to cover any losses. So a combination of 78,000 and 92,000 is 170,000, which essentially is close to 90%, 95% of the 180,000 increase. Similarly, in Stage 2, this had gone up to 402,000, an increase of 316,000. Of the 316,000 -- right now, we feel that 334,000 are solvable. Some of them possibly may stay in Stage 2 and continue making some payments. So even on a conservative basis if we assume that 250,000 are solvable, the Mahindra Finance team feels fairly confident right now that they could reverse 80% to 90% of the additional ECL provision of the INR 2,124 crores that I talked about in -- that was taken last quarter, and this will be done by the time we get to the third or fourth quarter. What also gives us a little more comfort is that over the cycles, we've always seen the Mahindra Finance portfolio of higher GNPAs. The credit losses have always stayed within a tight range. And a similar trend, as an example, during demonetization was a peak GNPA of 14.5%. And 3 quarters after that, it was 9%; and further 3 quarters later, it was 6%. So the Mahindra Finance team essentially sees this as higher provisions due to COVID-related liquidity impact with a number of earn and pay customers in various segments, a clear path to reversal and a business which is well capitalized and has prudent provisions. If you look at Tech M, which for this quarter at least is at the other end of the spectrum, just an outstanding performance, up 39% versus Q1 last year, which also was a very strong quarter for Tech M. In fact, up quite significantly over last quarter as well to INR 1,353 crores of profit after tax. Lot of traction in various sectors, health care, BPS, communications, high-tech manufacturing, the pipeline is very strong. The total contract value is double the historical run rate at $815 million, driven really by cloud data, customer experience, AI. Margins are improving. So everything is going great guns at this point for Tech M, and we do see the momentum continuing there. We also want to focus on our growth gems and talk about 3 of them, the listed entities. We've talked about each of them reaching a $1 billion market cap, while logistics seems to be headed there faster than we had expected because logistics has gone up to $720 million in terms of market cap, up 2.7x or 173%. Hospitality has close to doubled. Real estate is almost 4x, at 273% compared to a Sensex of 54% growth during the same time period. Logistics is really driven by core execution, hospitality because of the business model that was, in a sense, protected through COVID and growth that is being driven through various initiatives right now. And real estate was a combination of core execution and growth. So we are seeing each of these 3 businesses really start to function well, and they should be great value additives for our investors as we go forward. So summarizing all of this in terms of stand-alone operating PAT and PAT after exceptional items. Operating PAT is at INR 934 crores, up many multiples compared to a quarter last year, which, in many ways, is really not that comparable. But similarly, PAT after EI is INR 856 crores and up significantly. So despite the headwinds, our teams have given a very robust operating performance. As we look at the consolidated numbers on the next page, as reported, INR 473 crores profit on the consolidated side. If we look at last year, we had a negative INR 20 crores from a continued operations perspective. But if we include Ssangyong, it was really negative INR 582 crores. And that essentially is the INR 1,000 crore swing despite the significant loss of Mahindra Finance. If we exclude Mahindra Finance, then we're looking at nearly a INR 2,000 crore positive swing on the profit side as we would have been at INR 1,300 crores, whereas the Ssangyong would have taken it down much further. So this is really capital allocation showing results plus the strong operational performance that helps us overcome the impact we think from Mahindra Finance this quarter. Rajesh will take you through more details on Auto and Farm. Manoj will then cover the financials, and I'll come back and talk about where we go from here. Rajesh, over to you.

Good morning, good afternoon, good evening. I guess it's not good afternoon for anyone who are calling. So nice to be with you, and Anish thanks for the first part of the presentation. I'm going to start with a recap of a slide that I had used the last time, and we had broken up this year into 2 phases. The gear up phase, which we thought will be quarter 1, which is about managing cash, costs, inventory and enhanced well being. And then our readiness to fly and some key strategic levers on the Auto side and the Farm side, which we've spoken about. Happy to share with you that one very important part of the enhanced wellbeing and people engagement has been that our automotive and farm sectors were ranked #2 in India's Best Companies to Work For. We're particularly happy about this because it's happened in a year, which was a year of high stress. And we truly believe that our teams really came well together to see us through what had been a difficult phase through the COVID period. The gear up phase has had, like I said earlier, 3 key areas. We believe we've managed the margins very well in a challenging environment in the quarter 1. That doesn't mean under control. We built stocks through the quarter 1, prepare ourselves for the festival season. And a lot of focus has gone into enhanced wellbeing; vaccination drives; family assistance policy; the M-Protect for customers, mainly on the tractor side, but also in rural auto; and COVID-19 package for 80,000-plus dealer employees. All of this has, of course, created positive goodwill, but also we believe that really is a critical and core part of our values. Some highlights. We saw a big increase in the market share of tractors. You know that through last year, we were losing share due to supplies and we're happy that we've gained back and come back to a level of 41.8%, which is the highest in the last 8 quarters. Anish already spoke about the global subs performance on the FES businesses. And the Hisarlar restructuring, which we believe is a part of capital allocation, we moved out of the noncore metal fab business and restructured the ag machinery business into our [ core ] tractors. On the Auto side, we have the XUV700 launch which is on the anvil. We're very excited about it. The Bolero Neo and the Supro Profit Truck launches are off to a very good start. Our brands are in momentum. We'll talk a little around that. And Auto subs are on track, in line with our expectations. Let's look at the Automotive business. The revenue was at a level of around INR 6,000 crores. This is Automotive stand-alone. Last year, quarter 1 was depressed, but quarter 1 of this year has seen a relatively good performance in the context of a large number of lockdowns we had in quarter 1. We did make a profit of INR 100-odd crores in quarter 1. Last year, of course, quarter 1 was a big loss. You can see that we are -- the volumes are lower in quarter 1, which was expected with the various lockdowns, including in the dealerships. And that, of course, has impacted the bottom line. But we think we managed a difficult environment. We've used this time to build up our inventory, still not back up to the levels of the previous years, but we believe now we have a much healthier stock compared to the last few quarters. All our brands are in momentum. We have open booking of 39,000 for the Thar, which has a waiting period of 10 months. Open bookings of 10,000 plus on 300, and we did 6,000 billing, which is the highest ever on XUV300 in July, and products are doing extremely well. 4,000-plus open bookings on Bolero and 6,000-plus open bookings on Scorpio, and a very strong demand momentum on Pickup's as well. The Bolero Neo has got very well received. It's opened up new segments, acceptance in newer markets. And that's what we were hoping for. We were hoping for a launch, which would create new markets and segments for us with a minimal cannibalization of Bolero. We priced it well. And the looks, the design has been appreciated, liked. And it has created its own traction, and we are hoping that this will move on, be yet another new successful launch from our stable. The Supro Profit Truck also got launched in July and has seen a good traction since the launch. It's a good product, and we are sure will create a very strong level of competitiveness for us. The XUV700 launch is around the corner. We would reveal it this quarter, and we hope to start deliveries in the quarter 3 of the year. We are not going to be delaying the launch because of the semiconductor prices. We believe we will be able to see it through with the planning that we've done so far. The response on the 700 has been immense with 97 million views on the videos that we put out and a huge amount of social media engagement and a lot of excitement that has got created out of what we call the snackable videos, short videos talking about some critical tech features, which are going to be segment leading. On the farm equipment side, we've seen a revenue of INR 5,300 crores in quarter 1, a growth -- a strong growth than last year. Last year quarter 1 on FES side was not so depressed, so it's a strong growth. And a strong growth in PBIT as well in quarter 1. You can see from this chart that quarter 1 volumes on the tractor side was not as impacted. It's almost equal to the quarter 3 season volumes. So the tractor momentum in quarter 1 has continued. And you can also see that we've been able to build back stock at the end of quarter 1, which is now at a reasonable level and this said, to recap, is stock with us plus dealers. We've delivered again a very strong margin performance in spite of the inflation on commodities, a margin of 20.3% and an increase in market share as I mentioned earlier. These are the 4 key levers that we have spoken about: strengthening our core domestic business and what is happening around that to drive our market share up through the year; focus on scaling up our farm machinery, which we see that as a big unfortunately; grow the category and gain share; focus on technologies, new programs, K2 program, leveraging our global centers of excellence and building on precision ag; and global growth. As we now see consolidation of our global subsidiaries, we really think there's an opportunity to leverage that for growth and profits. This chart represents how we've done in our key markets where we have on-ground presence. As you can see, all of these are profitable. Anish mentioned that as well. And we are seeing very good momentum in North America. We delivered a positive PBT in MAgNA. And Turkey is seeing a very strong momentum. And again, Turkey was a profitable business operation as well as Brazil. This chart brings alive the turnaround in the FES subs. And you can see that from losing a substantial amount of money in F '19 and F '20, over the last 4 quarters, we moved to breakeven and now a positive in quarter 1. We believe we are on the path for a bold and aggressive growth strategy. There will be some constraints, especially on the Auto side that would come around the semiconductor issue. But we believe that we will be able to address those and say that -- through that -- this is something that is going to be dynamic, and we will have to learn to live with it for a few -- at least a couple of quarters, we believe, and we are gearing up towards that. With that, I would hand over to Manoj. Thank you.

Thank you, Rajesh. Good evening to everyone. I think I am going to quickly cover the financials before we throw it open for questions. Rajesh talked about the revenue. I think the revenue is almost more than doubled. On the EBITDA side, I think if you look at the numbers, we have seen a 3x improvement in EBITDA compared to Q1. I think this has been driven by an increase in volumes, and we'll talk about it some more. And then finally, operating PAT has gone up 23x from the Q1 levels of last year. The other significant feature here is EI has come down. I think last year, we had a lot of capital allocation actions. But I think this part of the EI has come down to INR 78 crores. So the PAT after EI is about INR 856 crores for the quarter. I think coming to the year-on-year performance, I think if you look at domestic farm, Q1 F '21, while it was muted, was still profitable. And that performance has since then improved to INR 844 crores. So we are seeing a positive contribution of INR 288 crores from the Farm business. Auto, which was in a loss position in Q1 because of the shutdowns, I think as -- despite the lockdown situation in Q1 this year, it has managed to get to profitability through a combination of cost saving and other measures. And so Auto is a big contributor when we look at year-on-year bridge on margins. The other 2 amounts are about international subsidiaries and group companies. There are some small adjustments here or there, so it's not significant. Moving to the consolidated numbers, it's a growth of about 60% in the same quarter last year. I've already talked about Auto and Farm, and Rajesh and Anish have also covered it. From a group company's perspective, I think there's been growth across the board when compared to Q1. And I think their performance while some -- many of them were impacted in April and May, I think we are seeing a rebound coming in June and July, and that is a trend we are hoping will continue. I think the operating PAT side, if I look at Q1, I think the number after for continuing operations before EI and after NCI is about INR 20 crores negative in Q1, which has moved to INR 473 crores. Now within that INR 473 crores, there is an impact of INR 826 crores for financial services because of the provisioning we took there. And the other element, which Anish also touched upon, is that since we don't have SYMC now in any of these numbers, in Q1, we had an impact of INR 562 crores after EI and after NCI and tax impact of SYMC, which is no longer there in the numbers. So that's the benefit we have come because of the SYMC actions we took. EI is a smaller number this time. I think the INR 49 crores, which you see in the current quarter is a part of the Hisarlar deal which we did where we sold a part of our business to another party. And as part of that, there was some EI we booked during the course of the quarter. Moving to the next slide, please. I think in terms of Q1 to Q1, across the board, we have seen a substantial increase in profitability and profits. The one thing I want to highlight here is the international subsidiaries. In Q1 F '21, they were in a loss position of about INR 248 crores which has now become a breakeven overall. So I think we have made substantial progress on both cost optimization and also kind of repositioning the business for the right kind of product set and the right kind of market approach. I think those are paying dividends, and that's something which we are hoping will continue. On the group companies, as I mentioned, there is an improved performance across the board. And the major ones here are -- is Tech M, which has been a strong performer Q1 to Q1. And finally, Mahindra Finance, I think if you look at it, and Anish covered it, that this is a provisioning which we have taken based on the current situation, and that's something we will look to recover and we'll cover more as we go along. I think -- Anish, back to you.

Thank you, Manoj. Going back to our key focus areas. As we've talked about earlier, we are looking at taking a leadership role in ESG globally and have outlined a road map for it. We'll talk a little about that today. Maintaining financial discipline, accelerating core growth with leadership in Auto and Farm, a turnaround in Mahindra Finance that goes beyond taking care of the short-term issues, new trajectory at Tech M with strong momentum there, scaling growth gems and seeding digital platforms. Beyond that, enhancing customer experience. So let's talk about a few of these today. First is 10 commitments that we're making for ESG. You've seen some of these before, but now we have targets around this and the teams are geared up to deliver them. Starting with maintaining a gold standard in governance, being water positive across the group, carbon pricing, RE-100, EP-100, planting 5 million trees a year, educating 1 million girls a year, supporting 1 million women a year to get jobs from a woman empowerment standpoint, 0 waste to landfill and carbon neutrality by 2040 with science-based targets along the way. So a significant set of commitments that we're making to really be able to make this real to really live our purpose. I do want to come back to this slide because you've seen various versions of this over the last year. And the promise we had made was by March 31, we would categorize all the companies into A, B, C, which we did. We have promised that we would take actions on the C companies, which we did as well. And what we had also promised was milestones for everyone in A and B and continuing to maintain the discipline for companies that don't make the cut, that may come into the C category. So what we show here first is a report card in the sense. Under category A, PMTC has had some COVID impact in terms of various challenges on supply chain, but it has still performed quite well based on the challenges. Fundamentals are strong. And on the Farm side, as we look at the farm subsidiaries in category A, we've seen a very significant turnaround from INR 103 crore loss to a INR 37 crore profit. Similarly in category B, APF has launched -- will be launching the Battista soon. And even in this category, the farm subsidiaries have shown a very strong performance from a INR 17 crore loss last year to a INR 22 crore profit last -- in the fourth quarter of fiscal '21 and a INR 31 crore profit in the last quarter that we are reporting right now. Beyond that, we have put 2 businesses in category C, and we have taken action and they have been sold already. One is the metal fabrication unit of Hisarlar, which was one of our Turkish entities. And second is the dairy business that we had as part of our agribusiness. So we will continue maintaining this fiscal discipline, continue monitoring categories A and B closely and where they don't make the cut, they would fall into category C. For leadership in Auto, there is a series of actions that have been played out with 23 new products by 2026, 9 of them are in the core SUV segment. This is obviously in addition to what we've launched already with Thar, the XUV300. But we see great traction on things that we have launched. The Bolero Neo is taking off quite well. And we're very optimistic around all of the excitement that has been created for the XUV700. So stay tuned for that. On the EV side, it's not only about 4-wheelers. On the 3-wheelers, we sold 30,000 plus 3-wheelers, with a 50% market share in its category. Collectively, we have over 300 million kilometers for EVs. So a lot of experience that has gone into a battery management systems. The Battista, as I talked about it earlier, is launching soon, an EV Hyper car, arguably one of the best EV cars in the world. And that's really starting to position us to maintain the EV leadership that we've had in the past and continue that for 4-wheelers going forward as well. On the LCV side, as you're aware, we've always had a very strong market share leadership in the Pickup segment for 2 to 3.5 tonnes. The Supro Profit Truck launch in the 0 to 2 tonne segment also is doing extremely well and giving some of the others there a run for their money. And Compact Pickup is coming up soon. So a number of activities outlined for us to maintain or rather, in some cases, regain leadership in Auto. Let's talk a little about the turnaround for Mahindra Finance. While we feel that some of the issues for the past quarter are short term, as we explained earlier, we do have to ensure execution as the team has done before. They are confident they can do it again, put a sharp focus on collections and really move towards reversing 80% to 90% of the INR 2,124 crores ECL provision that was made last quarter. But beyond that, as we take a step back, let's look at the strengths of the model and what we need to augment. Mahindra Finance, in many ways, is a very unique model. It has a wide distribution in rural and semi-urban areas with a strong local connect and trust, 1,400 branches, local talent pool and a brand that really epitomizes trust for all our consumers. It is a leader today in rural asset-based lending, but it has gone beyond rural as well. Rural today is 42% of its asset base, semi-urban is 35%, 23% is urban. The business has shown a strong expertise in financing cyclical products over decades and has managed stress periods well despite having volatility in GNPAs, where they go up to 14%, 15% and they come down after that. It has diversified into a non-captive with multiple products, strong OEM relationships and as I mentioned earlier, very well capitalized, managed from a very prudent standpoint with an industry-leading provision of 53.7% covered and a CRAR of close to 24%. But that said, we do need to augment certain things here. We are looking at how do we reduce some of the volatility in GNPAs, should we rationalize a few micro segments and customer types, enhance early warning signals with data and a link to collections, leverage data and digital a lot more than we've done so far, sharpen origination and credit underwriting. We've got a lot of proprietary data sets for Bharat, for rural India, 7.5 million customers. And how can we unlock value in that? How do we drive growth with cross-sell? Now this is one area where we have been much worse than our peer group. And there's a huge opportunity for cross-sell and to carefully target attractive product and market segments. And strengthen organization with specialized talent in AI, in digital and data sciences, we already have built a good team there, but we're looking at expanding that significantly, empowering our field agents. So as you see across this, it's really looking at data and AI to drive a lot of actions, a lot of decisions and be at the center of what Mahindra Finance does going forward. And finally, I do want to leave everyone with a view to our path to 18% ROE. We are not going to put numbers because we don't want to, in a sense, give forward guidance. But directionally, you have seen a few businesses being negative in ROE in F '20. In F '21, that has largely improved, but COVID-hit businesses, auto, hospitality and real estate stayed negative. What we are seeing all of them do is to track to positive territory this year. And by F'26, we see good position for all our businesses to be able to get us to 18% ROE with the growth rates that we're looking for. With that, Sriram, I'll hand it back to you and open it up for questions.

Thank you, Anish, Rajesh, and Manoj. [Operator Instructions] We have the first question from the line of [ Gunjan Prithyani ] of Bank of America.

I have two questions. Firstly, on the listed subs. Now, clearly it's good to see that you have covered the MF in detail in this quarter. And there is -- you also captured the MTM gains there. But when you put out this 18% ROE target, the listed subs have clearly been a drag. So how should we think about the strategy on some of these listed subs? I mean is there [indiscernible] strategy execution with these listed subs so that we can get to that 18% road map? If you can talk a bit about the strategy around that?

So Gunjan, as I shared, some of the progress done in the 3 listed entities, logistics, lifespaces and real estate, I think what will become apparent as the execution continues is we're going to start seeing much better returns there. And that's really what's contributing to the overall portfolio. What I have also shared in the past is every entity will not be at 18%. Some we will be happy at 15%, if they've got a very strong growth rate. And what I would expect in real estate, for example, is a much stronger growth rate, but a 15% ROE. And we are on track to getting that done. So each business has a road map to ROE that is being tracked closely. And each business knows that in order to get capital from the group, they have to be able to maintain that and exceed that.

So Anish, just a follow-up. Is it -- how do we really monitor the performance? I mean is there engagement from M&M to improve the performance? So is this something which has not been done in past. Clearly, a lot of work has been done on Ssangyong and some of the Farm subs and all. But these are things which have been dragged for a while barring Tech M. So are we extensively involved on this piece now in terms of turning around the businesses?

Yes, the M&M representatives on the boards of these companies have been very vocal and very active in outlining the expectations from a returns perspective that all the investors of that entity have, not just M&M. And each of the entities has a part that has been outlined with specific milestones for every year in terms of how are they going to get to those return metrics. So the answer to that is yes, there is a significant change in terms of the discussions at the board rooms of those entities.

The second -- can I just take the second question?

Yes, go ahead, Gunjan.

The second question is on Auto business. If you can give us some color on how we should think about the margin incrementally given all the commodity headwinds? So if you can talk about the price increases taken and the trajectory going forward.

Gunjan, clearly, there has been an unprecedented level of inflation of commodity prices across the last 15 to 18 months. It's something we haven't seen before. We've taken a series of price increases, both on the auto side and the tractor side to cover up as much as possible. So there are 2 effects. One is if there's any lag effect or any uncovered material cost that's not passed on. And the second effect you see is we certainly haven't passed on the margin on the material cost, which deflates the overall percentage margin when you -- as seen in percentage margin terms. So you see some effect on margins coming out of that because with such a high commodity inflation, it's not possible to add the margin on the commodity price increase itself. We have, like I said, taken price increases, but also seriously looked at all options on management of cost. And which is why when you look at the impact at a PBIT percentage level, it is not as significant. So we are focusing right now on managing our PBIT percentages, our OPMs. And it is not completely possible to manage the variable margins right after variable expenses and material cost because of the huge increases in commodity prices that have happened. We have been leading the path in both auto and tractors, going ahead of competition and taking the price increases. We do hope that the commodity increase curve will flatten off starting quarter 3.

Sir, just can you quantify the price increases taken [indiscernible] and how much [indiscernible]?

Yes. I mean I can -- sorry? Gunjan?

If you can just quantify the price increases and the under recovery, it will just help us keep the operating leverage aspect side. What the under recovery, if you could just help us [ map out ] the margin.

Yes. Well, there's very little under recovery fundamentally by the way on the tractor side. We passed on everything, and we've taken 3 price increases this year, in January, April and July. The latest one that we have taken in July was approximately of the order of magnitude of 18,000. Of course, it varies depending on model to model. On the Auto side as well, I think we've taken 3 price increases this year. We can give you the specific numbers separately, if you like, Gunjan. So Sriram can connect with you and share that.

The next question is from Kapil Singh of Nomura.

My question is for Rajesh. I wanted to know in terms of the demand environment, both for UVs and tractors, where are we in terms of booking inflow? Related to that, if you could also talk about chip shortages because in July, we have seen probably one of the highest volume numbers for UVs in the last 2 years. And maybe even that doesn't represent the underlying demand. So on chip shortages, what are the actions you have taken? And some of the OEMs have talked about the fact that it has gotten worse for them than expected. So from your perspective, are things getting better or we don't know at this point of time? So that is the first question on autos.

Thanks, Kapil. So on the demand side, on Auto, we -- as I covered in my presentation, we see strong demand for our brands. And overall, I would say, a reasonable level of buoyancy even for the auto industry overall. But in particular, our brands are in very good demand and rightly pointed out, we did have a very good month of July. On the tractor side, the demand did start picking up from June. There is a regional skew. The southern markets have done better than markets like UP and the Eastern markets. That's also because the rain dispersion was better in the South and West markets and it's moved towards UP and Eastern markets later July. So there has been some dampening of the sentiment that happened though that -- the rainfall has caught up there as well. So the tractor demand did get very strong through June and July. The reason we still maintain a conservative outlook for this year is because, as you know, last year was on a very, very high base. And last year base started building up from July, August onwards. So to compare the first 3 months of last year -- growth over the first 3 months of last year, we don't think it's representative or the right representative way to look at the full year because the, so to say, nonsupply that happened in quarter 1 due to large COVID shutdowns, manufacturing and sales last year, did get compensated through July, August, September on the tractor side. So we don't think that's the right way to compare, and that's the reason we still stay with the low to mid-single-digit kind of forecast on the tractor side for demand. Of course, we all know in the tractor industry, these things change and there could be an upside. But right now, we won't count on that. On the chip shortage, yes, there is a tightening of chip availability. It's something that we need to work around. A lot of that is happening because Malaysia, which is a key source of semiconductors, has got into COVID lockdowns in August or latter part of July and in August at the moment. And that's the reason there is a tightening of that. We really have to wait and watch, but we believe that we should be able to navigate that through and are hence going ahead with our launch plans for XUV700. But clearly, there is a tightening, as you rightly said, Kapil, and that's coming out of the situation in Malaysia.

Okay. And secondly, on capital -- yes, can I go ahead?

Yes, go ahead, Kapil. Yes.

Yes. Just on capital allocation, if you could explain Slide 41, what does the green pluses and stars and 2-plus and 3-plus, what do they mean? And last quarter, we had talked about investment of INR 35 billion. So what -- how much CapEx and investment we have done in first quarter? And whether those investments are firmed up or they are dependent on some of the events which may take place?

So Kapil, we debated a lot around whether we should show the ROE slide or not because the one thing that we do want to stay with is not give forward guidance. So which is where we finally went with a terminology around pluses and stars. The star essentially means that it is well out of the ballpark. It is just so strong that we can't even compare it with any other business. So that's what the star means. But that's something that you and your colleagues are all aware of from a tractor business standpoint. The pluses essentially show a range, okay? And all I would say there is a single plus is not acceptable for us. 2 and 3 pluses are better. And I would stay at that right now because if I start giving numbers, it will start really becoming forward guidance for many of those businesses. Some of them are public entities as well. So at this point, the basic message there is, we have a clear track for ROE for every entity, and that track meets what we're looking at from an overall portfolio perspective. Second, with regard to your question on the INR 3,500 crores. At this point in time, it is not firmed up, right? This was given more as it could be that much over the next 3 years just in the spirit of being completely transparent, saying, if we do need that to create more growth -- to have a growth just get to $1 billion market cap, that is the max we would do. It is very likely that we may use only half of that or maybe even less, right? At this point, we have visibility for 10% of that. So 90%, we don't have visibility. We will maintain a very strong lens with regard to, is it giving us the returns we want or not. And if it is not going to give us returns, we won't use it. In many cases, for our growth gems as well as our digital platforms, we will seek outside capital also and where we get -- where we feel outside capital will help grow that business faster, that will reduce the need for us to put in more capital. In the first quarter, I would say that we've put in a small amount. At this point, I don't want to deviate from our practice of not disclosing that quarter-by-quarter, but that's something we can possibly do as we go forward. But it's a very small amount at this point in time. And as I said before, most of the INR 3,500 crores is not something that we are looking specifically at here's where we need to put it. Only if we do need to put it to create value, we will.

The next question is from Hitesh Goel of Kotak.

Just a follow-up on the tractor piece, Rajesh. Based -- like you said, it's too early to give a direction on the growth outlook for this year. But we have not seen this kind of 3 years of monsoon being good. The reservoir levels are at 10-year high levels, right, if you compare with the 10-year average levels. There was a issue in sowing, but sowing has also picked up. So I fail to understand why the industry should grow at only single digit this year? I mean already first 4 months, you have seen a 40% growth. So are we indicating a decline in the rest of 8 months? So what are the things you're seeing on the ground? Because to really make that call or you think it's more of a conservative guidance and the overall outlook should increase -- improve because second quarter should also be a growth quarter, right?

So Hitesh, like I said, quarter 1 growth is not representative because last year, quarter 1 was -- though it was better than Auto, It was depressed. Most of the markets were shut from 27th March -- or 23rd March actually all the way through May. And everything, including dealerships, factories were all shut. So I don't think it's right to judge this year based on the quarter 1 growth. Like I said earlier, July, August onwards, we started seeing phenomenal growth. So let's keep in mind that last year saw 25% plus growth for the industry in spite of 1.5 months being washed out. Now that is unprecedented as well. So that's the reason we believe we are on a high base. As you all know, tractors sell in 2 seasons of the year. And if we see a very good festival season, which hopefully we will, obviously, the year will end up better than what we've seen. But we think it's a little early to reach that conclusion, that on such a high base year we will see anything more than a single digit.

Sure. Just a follow-up question on the tractor implement space. Can you give us the market size of the tractor implements, say, in FY'21? And what do you expect in FY'22? And what is Mahindra's revenues as a group in tractor implements? So if you can give that number.

Only domestic, we're talking.

Yes, domestic.

Yes. So it's not always easy to get these numbers because many are not published. But our guess is that the tractors -- the farm machines, not only tractor implements. So I'm including harvesters and all the self-propelled products, would be in the region of about INR 5,000 crores. We are at about 10% share of it. It is in the region of about INR 500 crores.

And I will also add that today, it's an industry that's highly unorganized and we see a huge potential in that. So if you look at that industry as a percent of the tractor industry in India, it's a small fraction. And we've talked earlier about globally that is 2x the value of tractors sold. So we see huge potential in India, and we are looking at a significant growth in farm machinery over the next few years.

Yes, Hitesh, just to clarify, the INR 5,000 crores is organized.

Sorry? INR 5,000 crores is...

INR 5,000 crores is organized. This has been huge unorganized on top of that.

So who would be the bigger player then -- sorry to just follow up, then because you're only 10% in the organized, so...

So that's the thing, right? There are many, many players, even within the organized sector. So there is no like 1 player who is a very large quantum of it. You have multiple sets of people, you have Shaktiman, so on and so forth. So -- but they're all in the region. So we're not very far off, but there's no 1 player who is dominating this.

The next question is from Binay Singh from Morgan Stanley.

The first question is on the Auto sector gross margin. Like Rajesh pointed out, there is some bit of under recovery on the auto side. Could you quantify that? And linked to that, given your order book and given the new launch, it seems that in the coming quarters, your share of new models on the auto side will rise. So will that have an adverse impact on gross margin because new models are typically launched at introductory pricing? Or you think you'll be able to offset that? So that's the first question. Secondly, on electric 3-wheelers. In the 2-wheeler space, we are already seeing an inflection, but not so in the 3-wheeler space. So what do you think is sort of missing over there?

Binay, it's going to be hard for me to answer the question because it will lead to giving a guidance. So I'm not going to be able to give you a specific response on quarter 3 margins. We haven't been able to fully recover our material cost on the auto side because the increases have been significant and we also want to right now, not go too much ahead of what others are doing because we do also want to get our volume to come back, and we believe that's very crucial for setting up our future. So we -- but we have -- we're taking very good price increases. We'll share those details. In the second quarter, again, there is a cost of commodity increase. So it's not stopping yet. We hope it will in quarter 3. And I mean you are right about the fact that new products are on lower margins, but we do still have a very strong momentum on our current products. So Pickup's is very strong, Bolero is very strong, Scorpio is very strong. And so we are not expecting that at the moment new products is going to be overwhelming majority of it.

Okay. And on the electric 3-wheeler side?

Sorry, so on the electric 3-wheelers, there are two parts to it, one is the passenger and one is the load. Load has a good demand. So it does need a lot of local level approvals and so on, which takes some time to get into momentum, and I think that is not the case in the case of 2-wheelers, which is personal use and buying. So the second part of electric, which is the passenger 3-wheeler overall electric and IC has been severely impacted through last year by COVID. And that is not yet seeing a recovery, the passenger 3-wheeler segment. So that's one of the reasons why even the electric 3-wheelers is not as buoyant. But we do, as we've mentioned earlier, see the last-mile mobility segment at a very good inflection point and we'll see momentum build up very strongly in the electric 3-wheeler space. But it's not the same as the personal buying decision. It does need fleet operators or individuals to come out, replace their current product, buy a new one, figure money out. So it is very different than what's happening in the personal use 2-wheelers, where there is a high bias towards owning personal mobility solutions at the moment.

The next question is from Jinesh Gandhi of Motilal Oswal?

My first question pertains to our -- can you give an update on Ssangyong divestment, where we are? And how long do you expect that to play out? And second question pertains to the inventory. So given the chip shortage issues, we have been building up inventory on the auto side. But given the outlook or uncertainty of outlook in tractors, why have you been looking to build up inventory? So those are my two questions.

I'll take the first one on Ssangyong, and then Rajesh will take the second one. The court process is underway. Going along the lines that we had expected, with one thing that we had not expected is there are a lot more buyers for the business than we had anticipated. And that's a positive in some ways for us but we will have to wait for that court process to play out, and that will then give us a sense of how much we can recover from it. Currently, we have provisioned everything that we think is prudent and adequate. And at this point in time, we feel fairly comfortable around that. But it will take the next few months for the court process to get over and get an answer to it.

Yes. Jinesh, so on your specific question around why are we building tractor inventory? We're not building tractor inventory, which is out of whack, but this is what we normally do leading into the season. We have to realize that when we are talking about the current season at -- in an absolute context, it's going to be a very big number. Point is so was last year's season. And that's the reason we are not very sure about the quantum of growth this year because last year saw a huge increase, which, like I said, was also a build up of the last -- previous start of the year, which is quarter 1 of last year, not being operative. So there was a pent-up which moved in. As you know, we lost a lot of market share last year. And the reason we lost market share was, and we kept reiterating, that we didn't have enough supply. So what we are doing is building up our supplies, and we are sure that, that's the right level of stock build-up needed for the season given that we're severely undersupplied last year's season. It's not out of line with our previous stock build-ups. In fact, it's still a little lower than what we've done in the past. On the Auto side, there's always a bit of a challenge at the moment because there is a balancing act on what is going to be short and what is not. And there will be some mismatch inventories that are there. We believe that, say, a risk worth taking rather than have item A today and then you won't have item B, and you don't procure A because B is not there and then the situation reverses 2 months later or 1 month later. So we do believe that we have to build some inventories into our pipeline. As you can see, out of the chart that I had shown, it is still lower than what we've done in the past. So we still are not at a level where we believe we want to be and not at a level in line with the demand for our products. So we are very -- we are doing it very prudently, but we do have to take some considered risks.

Sure. Just a follow-up on tractors. So our cautious stance is just because there is a high base and not anything, which we are seeing at the ground which should make you worry right now. Is that right understanding?

That is correct. There is nothing on the ground that is worrying us at the moment. The only thing I would personally watch for is any effect that the recent price increases may have on demand. That's something to watch for, but we haven't seen any of that through July. So -- but that's the only thing to really watch for. There is nothing on the ground right now, which makes us feel that there is a slowdown.

The next question is from Hitesh Bhargava of B&K Securities.

Hello, can you hear me?

Yes, Hitesh.

Sir, 1 bookkeeping question. There is increase in employee expense. Is there any one-off and what is the run rate going forward?

Yes. Let me pick that up. So I think if you look at the employee expense during this quarter, we had a scheme for all our affected employees during COVID. And I think we came out with a scheme where if there is any death of our employee due to COVID reasons, we gave a 2-year salary as an ex gratia payment, plus we gave a monthly salary for up to 5 years is what we have committed to them. In addition to that, we said that the children education up to grade 12 will be covered. So I think it's part of a larger package, which we have came up with, which is for all employees and also some dealers. So in the employee expense piece, there's about INR 43-odd crores of expense, which is there. But I wouldn't call it a one-off because I think our salary hikes are coming in effective August. So I think -- on a steady state, I think while that might go out, we might have the impact from the salary hikes. So from a steady-state perspective, this might be a good number to go with in terms of employee cost.

And my next question is regarding the tractor inventory. How is our tractor inventory compared with the industry levels in practicing?

Hitesh, we are well within our norms and very competitive. And that is normal in the region of [ about a month ].

The next question is from Aditya Makharia, HDFC Securities.