Anish Shah, MD and CEO of Mahindra and Mahindra (M&M), says green shoots are visible in the tractor business helped by good monsoons, and a full recovery is possible soon.
"We do believe that we should be out of the downcycle now. The second half should be fairly good as well; Navaratri comes in at that point. So, we are in a much better place from a tractor standpoint," he said in an exclusive interview with CNBC-TV18.
Shah expects a 5% growth for the tractor business in the current financial year.
These are verbatim excerpts of the interview.
Q: You are one of the most loved CEOs, especially from an investor perspective. I was looking at returns, since you took over stock has been up four times. We can say markets have done well, but that is still astonishing for a company that size and what the stock has done. I want to start with the tractor business because volumes in the June quarter were flat, they were down earlier, they were flat, you are guiding for a 5% growth for the full year FY25. Monsoon rains are good, they have gotten better. Could we be at the end of a downcycle or the beginning of an upcycle?
A: We have done a lot of great work as a team. So, I would say all the credit goes to our teams. And we have got a very strong operating rhythm. On the tractor, in particular, we are seeing green shoots helped by the monsoons. But beyond that, government spending is up in rural areas. Therefore, we do believe that we should be out of the downcycle now. The second half should be fairly good as well; Navaratri comes in at that point. So, we are in a much better place from a tractor standpoint.
Also Read: Mahindra & Mahindra Q1 Results: Margin beats estimates; SUV, Tractor market share improves
Q: If the downcycle is ending and an upcycled is starting; someone was saying that the cycle usually lasts for three to four years. It is not one-two quarters, but once it starts it continues the momentum. Is that a fair assessment?
A: That is what we have typically seen. So that is something we would look at as a fair assessment based on history.
Q: Would you like to raise that guidance for FY25?
A: At this point we feel 5% is a fair guidance. As I said yesterday, in a press call, taking cues from the US Federal Reserve governor, the Reserve Bank of India (RBI) governor, we would say there is an arrow that pointing towards the up, but we are at 5% for now.
Q: At least we have past the worst when it comes to tractors, for the overall industry and M&M. The growth is going to sustain and continue?
A: For M&M, we have seen growth fairly substantially even in a flat market. A tractor market share in Q1 was up 180 basis points, which when you are in the 40s is a fairly tough thing to achieve. So not just tractors, light commercial vehicles (LCVs) were up 160 basis points, and sports utility vehicles (SUVs) 130 basis points. So, from an operating standpoint, we have been fairly strong.
Q. Now I want to come to your bread and butter, the SUV, your leadership continues and the market share has only increased even in the quarter gone by. I just want to quote a figure from one of the analysts on the Street Jefferies done their projections are they're expecting your auto volumes to show sustained 14 to 15% CAGR over the next two to three years, going up to FY27 with dominance. You think these are fair estimates or you could surpass them?
A. So the guidance we have given for this year is mid to high teens growth. And the first quarter was 24% growth. So you can extrapolate based on that.
Q. So, 15% CAGR next three years on the auto business.
A. It seems reasonable in a sense based on the trajectory we have right now. And the demand that we've seen for the models right now.
Q: Let's talk a bit more about SUVs. As you said, you all have been growing well, the market share as well has been moving up. What is the rough market share that you are headed to in FY25 and then in FY26 because you have been guiding that you are going to outgrow the industry?
A: It depends a lot on how the industry will move. The auto industry has been relatively benign and flat for a while. Not exactly flat, but still growing at a slow pace. With India growing the way it is right now, there is a potential for an uptick there at some point in time. When is that going to happen; your guess is as good as mine on that. So, which is what we would have to wait and watch in terms of where we go.
Q: But SUV, you were at around 15%. It has moved around 18% as of the last reckoning.
A: Yes, from a revenue standpoint, which is what we look at. We are at 22% now from a revenue market share perspective.
Q: If I had to focus on your margin picture, there was a price cut that you took in the XUV700 segment, but you have been changing your mix, some part of that mix will be margin accretive as well. So, from hereon will margins improve as a consolidated entity?
A: We have seen a significant jump in margins in this quarter. And yes, that is a question we have been getting from a lot of our analysts as well. We are putting a lot of effort into enhancing margins, there will be positive and negative pressures to that. So, for now, we will continue to maintain where we are, we will continue to see some improvements over time, but we also use that in a way to manage both growth and margins. This is where we decided to have a price cut because we had increased prices significantly over the last three years as a function of commodity price increase, as a function of concerns and issues with semiconductors.
As that has eased, it was important for us to pass that benefit back to consumers as well and drive growth. So that is a combination that we will continue to look at, and which is where it's a management of both margins and growth.
Q: To continue with the SUV side, for the last couple of years, we all focused and fixated on the bookings. But the booking number has come off a bit. But that is also because waiting periods are now lower, is that the way to look at it?
A: The main thing is capacity. We have gone from 19,000 SUVs a month to 49,000 today, and at the end of this year, we will be even higher than that. We, at this point, got almost a 3x increase in the last four years. Capacity was difficult for us to put in two years ago because of the semiconductor issue. We did not like having a long booking pipeline, it is not good for the consumer, and the cost of putting capacity is not that high in the overall scheme of things.
So, for us, our goal is to try and keep that booking number down as much as possible, not new bookings, but the backlog, and therefore be able to give consumers a car as quickly as possible. So that is the reason why yesterday we stated that this is the last time we will talk about the backlog because we have started to get to a point where with increased capacity, we can start meeting the backlog very well.
Q: This capacity is going to be good for, of course, it depends on growth and underlying market dynamics, but your sense?
A: We still plan to increase from here. We have talked about going to 64,000 from here. So that is something that we will continue to do because with the 5-door Thar coming in, we will need more capacity as well. And that is part of what will come in.
Q: In terms of the powertrain or just the vehicle itself, there is an internal combustion engine (ICE), there is electric and a lot of electric launches happening. I know you have been quoted in the media on hybrids. But what is the thought process? And from the company standpoint, both volume and profitability, how do you think this will play out let's face it, even electric vehicles are more expensive than ICE. So as those launches kick in, do you think that there could be a bit of a dent in volumes just because of the pricing element there? And I don't know if hybrids even make sense, there are some states offering incentives on it. So just in terms of technology, what are we looking at over the next two years in terms of the product mix, how do you forecast the market?
A: Let's look at why electric vehicles (EVs) are important. If you think of it from a government or a policy standpoint, EVs solve two major problems. One is pollution in our cities and the second is a fuel import bill. So, both of these are not addressed by hybrids as much which is why governments around the world have found it very difficult to provide incentives for hybrids for the last 20 years. Hybrid again is a powertrain. It is more expensive than ICE.
The question is, are incentives required there forever if you have to move there? For EVs that is the other advantage, you may not need incentives forever. And if you take the example of electric three-wheelers, the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME II) program was very well designed and that created a stimulus for electric three-wheelers that has gotten to 20% penetration as an industry and that will go to 100% in the next five or six years. So, that is essentially a very successful use of incentives because in that timeframe, by 2030, we will not need any more incentives for electric three-wheelers.
Q: What about four-wheelers? What would you like the policy to be as we get more and more EV four-wheelers in the market, your portfolio included?
A: Four wheelers, we feel the government has provided all the incentives required with the production linked incentive (PLI) scheme that is in place, with the goods and services tax (GST) programme that is in place, there is nothing further required from an incentive standpoint. And over time that will come down as well as four-wheelers expand.
What is essential for four-wheelers is a charging ecosystem. And that is one area where, we know that the government is very focused on it, they are looking at various ways to enhance the charging ecosystem. As that happens, we will see four-wheelers start taking off because it starts with the product, you got to see the product and say I love this product and then you start thinking of charging. And if you have the charging infrastructure behind it, then it's much easier to transition to four-wheelers.
Q: To complete this point, to come back to that question on pricing because EVs are priced above ICE models. How do you expect this to play out, consumer behaviour and in terms of your targets, in terms of growth of the EV, M&M EV portfolio, what do you forecast this year and in the near future?
A: We have got our born electric vehicles coming up starting January. I am very excited about these vehicles, and I am looking forward to driving them. Incentives have to play that role to bridge that gap in pricing because if the pricing is far higher than ICE then electric is not going to take over.
So, we feel that incentives have done their job and that the pricing will not be dramatically higher than ICE and that will help us transition to electric, over time the cost of electricity will come down and incentives will come down as well.
Q: What about the new launches? The street is looking forward to the 5-door Thar. When does that come into the market and also what are the rough estimates you are looking at there in terms of demand?
A: August 15 is the date for the 5-door Thar, and we are very excited about it, it has come out extremely well. In terms of numbers, we will have to wait and watch. We will have to see what consumers think of this.
Q: I began by saying investors and markets see you as the value creator. So, when you think about what is next in terms of value creation from an investor point of view, one thing; it's not new, you have been asked this before - demerger for autos and tractors separately because the company still gets the holding company discount. Is that on the anvil? What is the internal thinking on it?
A: This is a question we have faced for years now, and the response has always been, first we are going to focus on inherently creating value with better products, with better execution, and that is something we have done. In many ways, there should be a benefit given to companies that are together and generate synergies. Today, we have much higher margins in farms than anyone else because we have a higher market share.
But our auto margins are very well placed in the industry even when we may not be the number one in the industry. And that is because of the synergies we have. Purchase synergies or significant; technology, talent, there are a number of other synergies that we have. Therefore, we are looking at it right now as, can we showcase that as an advantage for the group, we only have certain analysts talking about a conglomerate premium, in our recent analyst reports, but that is what we think we can be able to do.
Q: So, I take that as a, at least in the immediate future?
A: In the immediate future, no.
Q: But at some scale, would you like to demerge both entities?
A: If it makes sense economically to do that, we will.
Q: Is there a scale in mind?
A: It is not a question of scale. The question is, is there more value for it together than the part? And at this point, we see more value for it together.
Q: We have spent a lot of time speaking about auto, now requesting you to wear your other hat as the head of Tech Mahindra as well. The reason we are bringing this up is, that I know it's an issue specific to a different entity and company right now, a big notice that is gone to Infosys in terms of how overseas branches need to be treated from a tax perspective. You have already laid out a roadmap for Tech Mahindra in terms of improving margins. Give us an overview. The margins this quarter were 8.5%, how do you see that trajectory play out and indeed, if such notices start going out to some of the marquee companies, is there any reason for worry from a sector standpoint, from a tech industry standpoint?
A: Two parts to that. First, we see Tech Mahindra on a good path of recovery. This is a business where we have talked about a 3-year turnaround plan. We have outlined the plan as well. Similar in many ways to the plan we had outlined for Mahindra Finance a year and a half ago. And Mahindra Finance is on a very good track now. We have seen fantastic results this quarter, better asset quality, strong growth, and a lot of work on the technology side.
Therefore, Tech Mahindra will continue well on this path. Phase one is to get back to the margins that we were at, which is a fairly short timeframe and phase two is to look at 500 basis point margin expansion. Beyond that, which again, has been outlined in the plan. So, we feel good about where Tech Mahindra is with the new team, with the delivery mechanism that we put out there.
Also Read: DGGI claims Infosys evaded GST of ₹32,403.46 crore
For the second part of your question, we feel that the government has always done the right thing in terms of making it easy to do business with. So, I am sure that is something that will end up in the right place. I do not know the details of the fact. So, I cannot say anything more at this point.
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For the entire interview, watch the accompanying video
