Not Tata, Reliance, or Adani; The Next 10 Years Could Belong to this Business Group

Nauru, Kiribati, Andorra, or Moldova. Ever hear these names?

Probably not. In fact, most people haven't.

Surprisingly, these are the names of some of the least known countries.

But imagine this. If any of these countries disappeared off the face of the Earth, would you notice or even care?

On the other hand, imagine waking up to news that the Tata Group is no more...

Or perhaps, Pidilite's Fevicol or Hindustan Unilever's Surf Excel disappeared overnight from your kirana store shelves?

Now, that's likely to strike a chord with a lot of people.

Corporations have indeed become the nations of the world. We live in an era in which the most powerful law is not that of sovereignty but that of supply and demand.

When India overtook the UK to become the world's fifth-largest economy in 2022, it was widely publicised with politicians and experts proclaiming that the next century belongs to India.

But there is another interesting statistic that should be noted- India's 500 most valuable companies are worth more than India's GDP.

The total value of these companies is close to US$3 trillion. The top line of these 500 companies is equivalent to 29% of India's GDP and they employ up to 1.5% of the total workforce of the country.

It is these large business houses which make up the backbone of India's economy and shall be the driving force behind India's accession to becoming the third largest economy by 2030 and a superpower.

In recent years, three prominent business houses have been the poster boys of India's economy- The Tata group, Reliance Industries, and the Adani Group.

These corporations have invested billions of dollars in the country, promising to transform the economy and change the landscape of India.

And the markets have taken notice and been kind to these companies, rewarding them with massive returns in their group stocks over the last few years.

At times, perhaps too kind. The Adani group shares have zoomed an eye popping 4,000% over the last 2 years!

The marketcap of the Tata group and Reliance group stocks have risen over 200% since 2017.

Logically, it makes sense to stay invested in these groups as they have been prudent in establishing a presence in most of the sectors which are set to grow exponentially over the coming years.

Further, there has always been a lack of alternatives. After all, how many groups in India or the world have a varied presence across multiple industries like the Tatas or Reliance?

Adani has been trying to keep up with forays in different businesses over the last couple of years. How it will pan out is left to be seen.

However, there is another group...

And unlike Adani, this is a group with a rich heritage of over 75 years.

A group that has operations in not one, not two but 22 key industries that form the foundation of every modern economy.

This renown group is transforming lives and shaping modern India through its renewed focus and formidable presence.

Most importantly, this group is at an inflection point. In a way, one could compare it to where the Tata group was at in 2017 when Chandrasekaran took over the reins to head the conglomerate.

The engine is running, it's loaded up, and this train is about to leave the station. For investors looking for the next big thing, you might consider getting on board or forever rue having missed this incredible journey that lies ahead.

Mahindra & Mahindra: Going the GE Way?

It started in 2020 when Mahindra & Mahindra Ltd (M&M) announced a reshuffle of its top management.

A transition during a difficult time for a company struggling to overcome a sales slump and mounting competition.

The company which was the market leader with a 56% share in the utility vehicle segment in 2012 had lost its leadership position being relegated to fifth place with a share under just 15% by 2020.

The company had been under mounting pressure from concerned shareholders worried about the group's capital allocation actions, particularly in its loss-making subsidiaries.

M&M, which had been the best performing stock in NIFTY between 2002-2018 with a CAGR of 31% crashed over the next two years with a CAGR of -54% by March, 2020.

But with the leadership reshuffle, there has been a marked change in the mindset of the Mahindra group as its focused on realigning the organisation with fresh thinking, and in the process consolidating the business.

The group has turned uncharacteristically aggressive in its quest to reignite value creation for its stakeholders.

Some could perhaps say that Dr Anish Shah, MD and CEO, Mahindra group finds some inspiration from the Jack Welch way of doing business.

Jack Welch, the legendary Chair and CEO of General Electric between 1981-2001 promoted the idea that GE and other companies should either be No. 1 or No. 2 in a particular industry or else leave it completely.

Under his leadership, Welch dramatically increased the market value of GE from US$14 billion to US$410 billion, in the process cementing his position as one of the top CEOs of all time.

Since 2020, the Mahindra group has rebooted its capital allocation strategy to put all business units under three categories, A, B, and C.

Category	A	B	C
Criteria	If a business has a clear path to a return on equity of 18%	Delayed path to profitability but quantifiable strategic impact	Unclear Path to Profitability
Action	Continue	Continue	Exit

And with this defined structure in place, the company has made some tough but effective decisions over the last three years.

• M&M exited SsangYong Motor, the loss-making Korean SUV maker
• Exited GippsAero, its aircraft manufacturing business in Australia
• Shutdown GenZe, its electric bicycle and scooter business
• Sold its First Choice Services business to TVS group
• Exited its conveyor systems and dairy business.
• Restructured Mahindra Automotive North America.
• Ended its joint venture with Ford Motor Co and cut more than half its North American workforce
• Exited the metal fabrication business in Turkey

These actions along with a focus on improving the performance of profitable businesses have resulted in significant reduction in losses from international auto and farm subsidiaries.

With this reset of its playbook for international business ventures, the losses attributed to these subsidiaries have plunged over 95%.

Simply put, the groups missteps which shrank its turnover, thereby dragging down group profits over the last few years has been almost totally rectified.

And while the company has been busy with cutting out its loss-making units, it has paid equal attention to its growth strategy.

The group has undertaken several steps to accelerate growth in their core businesses - Auto, Farm, Financial Services, and IT Services.

With the reduction in losses from its overseas subsidiaries, strong capital allocation discipline, robust cost control across all businesses and the healthy performance of its businesses, the return on equity (ROE) increased from 4.4% in F21 to 14.8% in F22.

The company has already achieved its target of 18% ROE in the current financial year through internal efficiencies and improving profitability at its overseas operations and sale of non-core assets.

In contrast, Reliance Industries has a ROE of 8.9 while the Adani flagship company, Adani Enterprises is no better with a ROE of 8.3.

The change in M&M's management and the evolution of focused capital allocation strategy has been well appreciated by investors with the stock having appreciated over 50% over the last 12 months.

But the strategy is now entering a growth acceleration phase. It means the Mahindra growth story is only getting started.

Mahindra & Mahindra: The Best is Yet to Come

When a train goes through a tunnel and it gets dark, you don't throw away the ticket and jump off. You sit still and trust the engineer.
- Corrie ten Boom

The Mahindra group has always been a force to reckon with. Even with its subdued performance over the last few years, the group has still been among the leading business groups of the country.

Today, M&M is India's fourth largest carmaker and is currently the second largest commercial vehicle maker in the country.

The company is also the largest tractor maker in the country with a 42% market share and the largest electric three-wheeler maker with a 74% share.

Mahindra Group's operations are in the key industries that form the foundation of every modern economy. The 22 industries the company operates in are outlined below.

The Group has created substantial value for shareholders over 7 decades through a judicious combination of expansion, productivity improvement, and strategic partnerships, resulting in considerable growth.

In fact, the group's market capitalisation has increased over 160 times in the past 25 years.

But can it continue to grow from here on at this blistering pace?

Possibly, yes. Maybe, even faster. Here's why...

After over a decade, the company has been able to rid itself of its self-binding shackles, disposing off its non-core businesses, and cutting its losses wherever necessary.

Simultaneously, the company has heavily invested in key businesses that are set to be high growth performers of the next decade.

On the other hand, the company's 'growth gems,' certain unlisted businesses that the group expects will reach a billion dollars of marketcap have also tasted success recently.

While their contribution to M&M's overall revenues is low, currently, their cumulative revenues are more than Rs 100 bn, which is still a significant amount.

Many of these entities are profitable and are generating cash. More importantly, the group doesn't foresee any further investments required in them for future growth.

In FY2022, the consolidated profit earned from these companies jumped 522% to Rs 2.8 bn from Rs 450 m in the previous year.

According to Anish Shah, most of these companies will go public over the next 3-5 years, hence unlocking tremendous value for its stakeholders.

The company's core businesses remain in the auto and farm sector and the financial services, and IT division. All of these have shown robust growth in revenues and improvement in profits despite a challenging environment.

For the financial year ended 31 March 2022, M&M's consolidated revenue jumped 21% to 901 bn as compared to Rs 742 bn in FY2021.

Net profit in the auto and farm segment grew 15% to Rs 36.5 bn from Rs 31.7 bn in the previous year.

Its financial services division, Mahindra & Mahindra Financial Services Ltd and its IT arm, Tech Mahindra Ltd, reported a combined net profit of Rs 21.9 bn, 39% higher as compared to Rs 15.8 bn in the year earlier.

M&M: Gearless, Yet in Top Gear

Although the Mahindra Group pioneered the development of Electric Vehicles (EVs) in India way before any other player, the company has often been criticised for not having capitalised on their first mover advantage.

But the company is making up for it now. The group has turned its attention to India's electric vehicle (EV) segment and has announced plans to set up a subsidiary to focus entirely on building Evs.

The group has committed to make investments of approximately Rs 100 bn up to 2030 for setting up the manufacturing facility, development, and production of its upcoming 'Born Electric Vehicles' at its proposed plant in Pune.

In July 2022, the company executed a binding agreement with British International Investment (BII), the UK's development finance institution, to invest in the new subsidiary.

British International Investment will invest up to Rs 19.2 bn at a valuation of Rs 700 bn. The new EV company will focus on four-wheel passenger Evs.

Further, in August 2022, M&M signed a deal with German auto giant, Volkswagen to get equipment for its upcoming electric vehicles components.

The two carmakers are targeting 1 m units over lifetime and possibilities of a broader strategic alliance to speed up the adoption of electric vehicles in India.

The company plans to launch five electric SUVs for both the domestic and international markets, with the first four expected to hit the roads between 2024 and 2026.

Mahindra forecasts an EV penetration of between 20% to 30% in its portfolio by 2027.

With the new family of electric SUVs, Mahindra aims to take on Tata Motors, the current leader in the EV space in India.

The company was initially focused on only developing electric cars. But the company changed tack due to lack of infrastructure and high prices which kept customers away from such vehicles in the domestic market.

Since 2020 the company decided to focus on three-wheelers which are more commercially viable.

The company has already established itself the leader in electric 3-wheelers with 73.4% market share in FY22.

The company has also tied up with start-ups and large cab aggregators as it expects that the adoption of Evs in the country will be led by fleet operators who offer mass mobility solutions.

Mahindra has partnered with major e-commerce players such as Flipkart and Amazon for expansion of their carbon-free fleet delivery vehicles.

Amazon India already deploys close to 100 Mahindra three wheelers in seven cities and is expected to add significantly to this fleet.

M&M is also working with other stakeholders and the government to develop and connect charging stations, traffic management systems, vehicles, and drivers.

Mahindra: FUTURise

The group has grown phenomenally for the past few years, largely because of some of the alliances put together in the past.

Going forward, the group plans to accelerate core growth in the auto and farm sectors along with margin improvement in all its businesses.

M&M aims to become the No.1 core SUV player by leveraging its house of brands - XUV, Thar, Bolero, and Scorpio, and by launching 13 new products, including 8 launches in EVs by 2027.

The XUV700 got the biggest ever launch in the Indian automotive industry in 2022 with over 100,000 bookings in 4 months making it the fastest SUV to cross the milestone.

Aided by this strong booking momentum of the XUV700, its other core auto brands, Bolero and Thar are expected to continue to remain in strong momentum along with the heightened anticipation for the Scorpio-N and Born Electric SUVs.

In FY2022, the company retained its No.1 position in light commercial vehicle (LCV) <3.5T segment with 40.3% market share. Building on this, the group is set to revamp the entire pick-up range to provide a significant upgrade.

In the farm equipment sector, the company has retained its leadership position for the 39th consecutive year. The group has set an aggressive growth strategy for the next decade.

Demand for mechanisation is growing as shortage of agricultural labour will lead to increase in labour cost.

Its core brands, Mahindra and Swaraj are well-positioned to strengthen their leadership in the domestic market.

Yuvo Tech+ range of tractors was launched successfully in FY2022 and the company has planned a series of new launches to augment its product portfolio.

In FY22, the group recorded the highest ever volume and revenue by exporting 17,646 tractors - a growth of 65.5% over the previous year.

Riding on such robust demand, Mahindra group is setting up a tractor manufacturing facility in Mohali with an investment of Rs 4 bn. The expansion is the first in a decade by the world's largest tractor maker in Punjab.

Mahindra plans to produce 30,000 tractors per annum at the unit initially, which may be expanded further. The new unit is likely to be fully operational this year.

The group also intends to leverage technology on agri advisory and ecosystem services (offered through Krish-e: Farming-as-a-Service) to transform farming in India.

Going forward, M&M will continue to launch new farm machinery products with help from its centres of excellence in Turkey, Finland, and Japan.

The group is also setting up a dedicated new plant at Pithampur to produce rice transplanters, potato planters and harvesters.

And while the group is focused on its core sectors, it has not lost sight of its other business verticals.

Last year, the group's real estate division, Mahindra Lifespace Developers, crossed US$1 bn in market capitalisation for the first time.

Its Information Technology arm, Tech Mahindra is among the top 5 IT companies in India by revenue with a market capitalisation of over US$11 bn.

Mahindra Logistics manages over 17 m square feet of warehousing space at multiple locations across the country, making it one of India's largest integrated logistics companies.

Its hospitality business, Mahindra Holidays and Resorts India Ltd is the world's largest vacation ownership brand outside the United States.

Then there is Mahindra Financial Services which serves customers in more than 380,000 villages - that's one in every two villages in the country with assets under management (AUM) of over Rs 810 bn.

And lest you forget, there are the growth gems we referred to earlier on. One of the key objectives of the new leadership is to nurture these growth gems in to billion-dollar businesses of the future and prime them for public listing, unlocking tremendous value for its stakeholders.

The group as a whole seems to be in a much better position than ever before. The four core businesses of auto, farm, financial services, and IT are growing and generating cash.

Hence, the company is generating a lot more cash now. For the most recent quarter, the group generated over Rs 120 bn of cash.

Majority of the bleeding businesses have been finally disposed of. Hence the clean-up part is over leaving the company to focus on growth and scaling up of business.

Ed Catmull, the former president of Walt Disney once said, "Driving the train doesn't set its course. The real job is laying the track."

It seems like the Mahindra's have been busy laying out a perfect track and the group's growth journey is only getting started.

You can choose to stand at the station and watch this train depart or hurry and get on for the ride of your life.

You can also check out the video version of this editorial on Equitymaster's YouTube channel.

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