FSSA Regional India Fund

Monthly Manager Views - April 2022

Mahindra & Mahindra: A rejuvenation in progress

After a recent meeting in Mumbai with the top management of Mahindra & Mahindra (M&M), we came back with a clear message – M&M’s commitment to its purpose does not mean that it will continue to operate loss-making businesses. This strengthened our conviction in the changing culture and capital allocation of the group.

We have always held the Mahindra group in high regard for the benchmarks of corporate governance standards they have set in India. Over the years, we have been shareholders of many group companies, including Mahindra Lifespaces and Mahindra CIE Automotive (both still held in the portfolio today), as well as Tech Mahindra and M&M Financial Services in the past. However, we have observed a weakness in the group’s capital allocation discipline over the last decade. M&M had set up or acquired a range of businesses from Ssangyong in South Korea to two-wheelers in India, which increased the business complexity and caused the group to struggle with losses. At the same time, we found that businesses with significant potential such as Mahindra Lifespaces were not being held to account for their consistently weak performance. We have not been shareholders of M&M in recent years.

Our engagement with the senior management of M&M culminated in a letter in February 2020 to the chairman, Mr Anand Mahindra, where we highlighted our concerns:  

As we look back at M&M’s history, however, one aspect has been bothering us, which is the capital allocation of the Company. When you took over in 1997, the standalone profit of M&M was USD 58m. The 14 subsidiaries of the Company produced a further USD 5m of profit. But in 2019, whilst the standalone profit was USD 730m, the remaining c.200 subsidiaries, JVs and associates detracted about USD 50m from this sum. This is not a one-off occurrence. In fact, M&M’s subsidiaries, in aggregate have been loss-making for 5 of the last 7 years.

Source: Excerpt from FSSA’s engagement letter to Mahindra & Mahindra in February 2020

In his reply, the chairman acknowledged these issues and pointed towards the initiatives being taken to improve the group’s returns. He also introduced us to the recently appointed CEO-designate, Dr Anish Shah. In our first discussion with Dr Shah, he came with a copy of our letter. He had created a framework to categorise businesses based on their potential to achieve a return-on-equity (ROE) threshold of 18%. Those that could not achieve this goal within a stipulated time-frame would be exited. The company’s recent 2021 Annual Report admitted to the mistakes made and the poor shareholder returns, and publicly stated the intention to introduce strict controls in the capital allocation process.

We also noted that there was an ongoing generational change in M&M’s board and management team. As longstanding directors and key senior executives retired, younger board members and managers took charge. High-quality independent directors such as Nisaba Godrej (executive chairperson of Godrej Consumer Products) and Muthiah Murugappan (a senior leader at the Murugappa group) joined the board. A new Group CFO was appointed and the farm and automotive businesses were consolidated under the management of Rajesh Jejurikar, who had led a strong performance at M&M’s tractor business. Management at several subsidiaries also changed. A new CEO, Arvind Subramanian was appointed at Mahindra Lifespaces, with a mandate to accelerate the company’s growth. Following these changes closely, we gained confidence in Dr Shah’s plans to improve capital allocation and performance. We initiated a holding in M&M.

We have been encouraged by the management’s decision to “walk the talk” by stopping incremental investments and exiting several poorly performing businesses. This includes Ssangyong which had bled losses since its acquisition in 2013, an aircraft manufacturing business in Australia, an electric two-wheeler manufacturing business in the US, a metal fabrication business in Turkey and an automotive service business in India. Our discussions have indicated that there will be more exits from larger operations if they fail to meet ROE targets. The group has increased its focus on growing its core businesses – automotive, farm, financial services and IT services. These businesses have long track records of profitable operations and the opportunity to scale-up significantly in the coming years. At Mahindra Lifespaces, we have seen a marked shift in the company’s growth aspirations under its new CEO.

Scanning the radar for signs of management and ownership changes is a critical part of our investment process. Be it generational change at Eicher Motors, a transformation of the culture at ICICI Bank, the improvement in capital allocation across the Tata group companies under the new group chairman, or the change in ownership to Heineken at United Breweries, we have repeatedly observed that these events can lead to substantial shareholder returns in subsequent periods. We believe we are at the early stages of such a rejuvenation at M&M. Based on this conviction, it is now among the strategy’s largest holdings. 


*Company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As at 30 April 2022 or otherwise noted.


Important information

The information contained within this document is generic in nature and does not contain or constitute investment or investment product advice.  The information has been obtained from sources that First Sentier Investors (“FSI”) believes to be reliable and accurate at the time of issue but no representation or warranty, expressed or implied, is made as to the fairness, accuracy, completeness or correctness of the information.  Neither FSI, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from any use of this document.

This document has been prepared for general information purpose. It does not purport to be comprehensive or to render special advice. The views expressed herein are the views of the writer at the time of issue and may change over time.  This is not an offer document, and does not constitute an investment recommendation. No person should rely on the content and/or act on the basis of any matter contained in this document without obtaining specific professional advice.  The information in this document may not be reproduced in whole or in part or circulated without the prior consent of FSI.  This document shall only be used and/or received in accordance with the applicable laws in the relevant jurisdiction.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same.  All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.

First Sentier Investors and FSSA Investment Managers are business names of First Sentier Investors (Hong Kong) Limited. First Sentier Investors (registration number 53236800B) and FSSA Investment Managers (registration number 53314080C) are business divisions of First Sentier Investors (Singapore). The FSSA Investment Managers logo is a trademark of the MUFG (as defined below) or an affiliate thereof.

First Sentier Investors (Hong Kong) Limited and First Sentier Investors (Singapore) are part of the investment management business of First Sentier Investors, which is ultimately owned by Mitsubishi UFJ Financial Group, Inc. (“MUFG”), a global financial group. First Sentier Investors includes a number of entities in different jurisdictions.

MUFG and its subsidiaries are not responsible for any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested.