M&M would list 8 of 10 growth champs in next three years: Dr. Anish Shah, Deputy MD and Group CFO

Dr. Anish Shah, Deputy Managing Director (MD) and Group CFO, Mahindra & Mahindra, talks about the challenges of COVID, the outlook for FY22, rural demand, growth drivers, 10 growth champs that would be listed in coming years, M&A opportunities, Tesla's plan to be in India, CapEx, Mahindra & Ford JV and why it was called off and budget expectations among others during an exclusive interview with Swati Khandelwal, Zee Business. Edited Excerpts:

Q: Last year was full of challenges and it had an overhang of COVID. What is your outlook for FY22 or the calendar year 2021?

A: If I go to look at the last year, while there were lots of challenges with COVID. I think, there were lots of silver lining that we have seen. We have seen the rural sector doing extremely well and as a result of that, the tractor business was a big beneficiary. We have seen very strong cash flow being generated across all our businesses. And, we have also seen, the ability to have much greater cost control as a result of COVID. Those are the factors that will help us as we get into the current year. So, we are entering the current year with a lot of optimism.

Q: Rural demand is looking strong but what is your view on the challenges that are existing at present and how are you preparing yourself to deal with them? What is going to be the growth drivers for the group?

A: Our biggest challenge was capital allocation and that is something that we have addressed through all of the last nine months and, we are almost complete with that. In the next three months or so, we should be complete with all our activities and that will set M&M up for a very good path to 18% ROE. Now, we have to drive growth and on the growth side, there are a lot of rivers. So, if we will start with the farm business, farm implements are the space which has tremendous growth potential, facing a lot of growth in the tractor, as well right now. On the auto side, we are seeing great success with 'The Thar' and we have two more launches coming up in our core segment, which we feel very good about. As we look at both Mahindra Finance and Tech Mahindra, they both are positioned very well. Tech Mahindra has been doing extremely well even though in the last three months. Based on the strong demand for digital as well as the demand for cost cut actions at various global companies want to take. Mahindra Finance has bounced back very well from the problems, we saw across the industry in the April to June time frame. We have identified 10 growth companies for us. Collectively, the 10 companies have revenue of Rs 10,000 crores and many of them are profit-making, generate good cash and these are the companies that are very well positioned in their industries. If we let, we can scale them very significantly, some of them, maybe 2x or 3x in the next three years, some may be 5x and that is a very big driver for us. Also, our other listed entities, logistics, lifestyle spaces, real estate or holidays are positioned well and are looking at good growth. So, these are the factors that cause us to be a lot of optimistic in terms of being able to drive growth now.

See Zee Business Live TV Streaming Below:

Q: You have talked about the 10 growth companies having a potential of Rs 10,000 crore and some of them are profit-making and you have created a three-year vision which also includes the talk of value unlocking in which some of the companies will be listed. Please provide details related to it and what is your strategy on it?

A: Let me give some examples there.

(i) Accelo: It is a company in auto recycling and speciality steel. We are waiting for the scrappage policy, hopefully, the budget comes up with that this time and that will create a lot of potential for Accelo. We are ready to build 25 plants across the country. We have three plants today in three of the large states and that would be a significant growth driver for Accelo.

(ii) Rural housing: We have a very unique business on the rural housing finance and this is one, which is positioned very well, it is a different model, it requires feet on the street and business, which has a good scale now but can grow much further, beyond that.

(iii) Agriculture: It is a business with agri-inputs and looking at the export of roots from India. This is a business also with strength in the rural segment. It is positioned well.

(iv) Used Cars: In used cars, we have got a number of different activities that are physical and required for the used car sales. What we have been over the near past is also the front end for the customers. So, on the used car platform, we again see a lot of potentials. A used car is, is a bigger market then buying new cars every year and our company is positioned very well.

(v) Bristlecone: It is in the supply chain, consulting and is seeing a lot of demand. Bristlecone has 50 of the Fortune 500 as customers and is seeing a lot more need for the services as the company is looking at rejigging, the supply chains.

So, these are some examples and, we see a lot of growth potential for these companies.

Q: Company always had a strategy to look out for good assets, acquisitions and during the COVID, you can get some good assets as good valuations and you have also made a good acquisition in the agriculture sector, like Sampo Rosenlew and so on. Tell us the businesses where inorganic growth opportunities are visible and action may happen there?

A: Here it will be with all of our core businesses. On the farm side, we will look for further acquisition, where we need technology for farm implements. That is one key growth area. On the auto side, we will look for partnerships on the EV space in particular and we are looking at how to take leadership in the EV space as we look at the longer run. As we think about logistics, life spaces, holiday and the 10 growth champs, wherever required, we will make acquisitions, we will be careful of how we make the acquisitions and make sure that there is a return that is real and we will get as a result of it and as long as it is lucrative that are the things will be opted for doing.

Q: Lot of waves are coming in and a lot of discussions is happening that Tesla is coming to India. Now, let us know that will you be open for a partnership with Tesla at least when you are saying that you will be open for partnership?

A: We are open to all partnerships and we feel that in the auto space that is going to be an important going forward. We welcome Tesla coming to India, it is going to help develop EV space more in India and we feel that we can compete well, as we have the abilities to create good, affordable as well as high-quality products for our customers. The more important thing in the EV is to really build that space in India and that will take its time. We need the infrastructure, ability to have that cost parity. So, as all of those things happen, and battery price comes down as a result of investment in the battery technology, it will create for a much bigger EV market in India.

Q: You have talked about capital allocation and it is almost done. Can you give us an idea about the kind of investments will be made on these companies in the next 3-4 years and what is available and how much of the fund will be raised? What is an overall CapEx for the purpose?

A: CapEx in the auto business, we are looking at Rs 9,000 crores over a three-year period, which is lower than Rs 15,000 crore over the past three-year period that we had. So, we are looking at a lot more benefits in auto because the platforms are in place now and we can do a lot more with those same platforms. Beyond that for investments, we are looking to generate cash from our current investments and we will be able to fund that. So, we are not looking to borrow anything, as we are well-positioned from a cash point right now. We feel that what we have and as far as cash generation from our businesses is concerned, we are well placed for the investments in it.

Q: Certain things that did not work out for the company may it be a two-wheelers business, of course, JAWA being a different story. Recently, we saw that you called off the JV with Ford. What is your view on this?

A: One thing I have shared with many of our investors and analysts and the media in the past is Mahindra has seen very strong run between 2002 and 2018. For 17 years, it was the best performing stock in Nifty and that was driven by high Earnings per share (EPS) growth, high Return on equity (ROE) and very good cash flow. In doing that there may be something that does not work out, so, it will happen sometimes. There is a risk we take; something works something doesn't. And what we are doing now is very quick to address the things that haven't worked and that is Ssangyong, which for a variety of reasons didn't work. There are other businesses that we had internationally that did not work out well GippsAero is one example. We have bought this aircraft manufacturing business in Australia and it had a lot of promise at one point of time, but given where the aircraft market went over the last few years, it really didn't work out, as we wanted it to. So, we had to shut it down. And we have done that action in some other businesses we have announced as well. With the Ford JV, given the pandemic, given the change in demand for the automotive, globally, it would require a lot more capital than what we have planned for. And, as we think about our overall capital allocation construct, we didn't felt that it made sense and we will continue to partner with them on various other initiatives. But it didn't make sense to put in lot more capital into a JV. So, we are looking at the future, we are looking at that how we will take Mahindra to the new world of electric vehicles, how to grow the company in various areas, where it has strength. But at the same time, what I would call as pronging-out things that don't work. And in any business, where a lot of things work, yes there will be few things that don't work. If everything works, we are not taking enough risk.

Q: Budget is round the corner, so, what are your expectations from the government and what are the top three things that the government should do?

A: This is a difficult quant for the government this time, especially, given the fact that there will be a lot of pressure on the fiscal deficit, given the spending that it has to do and it will need to do going forward as well. There will continue to be pressure on the fiscal deficit. The key things, we would say is the outcome has to be driven by growth, not driven by more taxes and not driven by cutting back because there are two spirals. If we take the upward spiral of growth, it can solve a lot of problems. So, in that regard, activities, like the scrappage policy, which can give a boost to the industry overall. Other actions can be taken around the auto industry to generate more demand in the auto industry. There is a lot more supply in the industry today than the demand, which has been stagnant for some time. Driven by a number of different factors that include the fact that the autos have become more expensive for the consumers, due to a variety of factors. So, how do we address those aspects and make it little easier for the consumers to buy autos? And, as we look, just not around autos, but across other industries, industries that have high employment should be one that is targeted. Those are the ones to whom if the government gives a stimulus, it will generate further employment and further demand.

Q: You have talked about 18% ROE, which means you are moving with a targeted approach. So, let us know that when the ROE of 18% will be achieved? Also, you have talked about the 10 companies, so, talk about the three unlisted companies that have matured and would be listed first?

A: On that, we have promised everyone is by end of this fiscal year by March 31, 2021, we will give a clear view as to the path to 18% ROE and the timeline for that. I need to complete the last part around the capital allocation and once we do that, we will have a clear timeline for everyone. And with regard to listed entities, of the 10 growth champs, I would say that at least 8 of the 10 has the chance to be an IPO in the next three years. It will depend on a variety of factors, in some cases, we will partner with private equity firms to help prepare the businesses for an IPO and as we do that, we will look at which can scale faster. Difficult for me to say right now, which of those eight will come in but I think many of them do have a chance to get into an IPO in three years and if not then at least in five years.

Q: What is the billion-dollar number you are talking and sitting on. Total at the group level what is the target over the next three years with all the things you are doing including the 10 companies?

A: On that, what I can tell you is that we are hoping to get back to the 17 years that we had. The 17 year-run was the best performing stock on Nifty with EPS growth of 31% and ROE of 22%. Those are the numbers that seem very good at the same time, very difficult to achieve but if we get to those numbers, we would be in a very good place.