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M&M Ltd: Going full throttle in all directions - Outside View

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M&M Ltd: Going full throttle in all directions
Aug 13, 2010

Diversify and expand is the mantra

The over-riding philosophy of the company appears to be that if there is money in it, then we are in it. Though primarily in the business of automotives, farm equipment and related ancillary equipment, it has cast its net wide even in these product lines, and, not including finance, logistics, hotels, real estate development and, assorted other sundry investments. The management can of course well argue that all these businesses are related in some way or the other. But, still, in a manner of speaking, the company's motto may well be summed up as, diversify and expand till we lose focus. That is only one aspect of the situation, given the humungous size of its operations. The bigger issue is that there are many laggards within the group, and their financial succor will have to be made good by the parent. Loans and advances given to subsidiaries at year end added up to Rs 5.6 bn. It also has to provide for the depreciation in the value of its long term investments. Besides, the parent has its own task cut out for it, having to handle its own expansive operational assets. These assets helped the company tote up a turnover of close to Rs 200 bn in FY10, from its myriad automotive, and, farm equipment operations.

Firm grip on its finances

This is not to suggest that it does not have a firm grip on what it is doing. But the point is also that the continued furious expansion of its gross block, along with its growing investments in associated ventures, has led to a drop in the family holding in the parent to a dangerous 26%. This development is due in part to the spate of share issues of various hues to keep a delicate balance on the debt equity ratio. Consequently, its debt management has been most admirable. More importantly, the interest paid on borrowings (including the interest paid which was capitalized) averaged a very low 6% during the year. The interest payout was more than well absorbed by its operational profits.

Subsidiary overhang

The company has more liquid investments in the form of equity in its subsidiaries, than it has gross fixed assets under its hood. As a matter of fact its investments at book value added up to Rs 64 bn, against a gross block (excluding capital work in progress) of Rs 53 bn. (The consolidated statements show a book value for the investments at only Rs 48 bn). There is also a stumbling block in the investment portfolio. These investments do not yield a dime's worth as revenue per se - and, adds to its financing difficulties. Dividend incomes from subsidiaries, other holdings, and from purchase/sale of units worth Rs 370 bn added up to barely recognizable Rs 1.4 bn. Not exactly the type of returns that your investment advisor will prescribe. For the matter of record M&M has 37 subsidiaries which are unlisted, and another 5 subsidiaries which are listed. Adding to the muddle is its investments in 16 'other' unlisted companies and in 7 'other' listed companies. But that is not the whole story. As the consolidated accounts reveal, the parent has some 90 direct and indirect subsidiaries of which 41 are located across the 7 seas, along with 5 JVs and 10 associates.

Need for more effective use of its investments

Many of the acquisitions in the auto space were apparently for a strategic purpose-access to raw materials, parts supply, and probably capital goods. But if that was the intention there is little evidence that the parent has fully capitalized on these acquisitions as yet. Perusing the schedule of related party transactions, the purchase of revenue goods from subsidiaries and associate companies at Rs 13.6 bn accounted for less than 12% of all such purchases charged to the manufacturing P&L account. It has also purchased services worth Rs 6.3 bn, which could have emanated from Mahindra Logistics or some such. Its own sale of goods to its siblings came to Rs 5.4 bn and sale of services amounted to Rs 1 bn - again hardly of any significance. It would of course help if the parent could inform the shareholders on how it benefitted from these inter se transactions.

Many of these siblings are mere 'letter head' companies for the present, apparently with some operational purpose in mind. The wonder is that the management is able to cobble together the accounts of all the companies simultaneously and consolidate it with that of the parent. This alone will merit a 'medal of honor' for the parent.

Pile up of fixed assets

There is however a flip side to these investments - it is well represented by fixed assets. The consolidated accounts reveal a gross block of Rs 162 bn. Juxtapose this with the gross block of Rs 62 bn for the parent on a standalone basis. But then the consolidated debt too is sharply higher at Rs 135 bn against 29 bn for the parent. And herein lies the rub. The fixed asset to turnover ratio of the consolidated accounts is much lower than the standalone accounts. This is inspite of 'income from operations' of Rs 84 bn, accruing to sales in the consolidated accounts. Such sales related income also accounted for 26% of gross income in the consolidated accounts. The contribution of this income in the standalone accounts is negligible.

Excellent funds management

Remarkably enough, the company has been able to contain its interest payouts in the consolidated accounts during the year. The interest paid averaged a mere 8% (excluding any interest paid and which may have been capitalized). The management should consider setting up a school on debt management, and boy will it do well. The company will however have to continue recreating this feat till its wobbly offsprings are able to get off the mark. That will take some doing.

The ups and downs of the subsidiaries

Mahindra and Mahindra Financial Services is the top gun among the subsidiaries with a turnover of Rs 15.5 bn and profit before tax of Rs 5.2 bn. Among the other profitable companies which have some turnover of sorts is Mahindra Holidays and Resorts, Mahindra Life Space Developers, and Mahindra Intertrade (though what it transacts in is not known). But the list of subsidiaries which float in red ink is quite formidable. Leading the pack is Mahindra Renault which retuned a loss of Rs 5 bn on a turnover of Rs 7.4 bn. Other companies of significance in the doghouse include, Mahindra Logistics, Mahindra Navistar Automotives, Mahindra Ugine Steel, Mahindra Two Wheelers, its tractor unit in China, as also a number of its other 'firangi' subsidiaries.

Need for more effective laws

The government should seriously think of enacting a law which makes it compulsory for Indian companies to give in lucid detail each year the efficacy or otherwise of making investments like the one M&M has made. Some hard data should be made available on when these affiliates will add to the wealth factor of the parent. Otherwise where, and what is the goal? At the moment they are free to do what they want and then get away with what looks like murder. For example: What exactly is the deliverables of companies such as Mahindra Middleeast Electrical Steel Service Centre or for that matter the objective of Mahindra Metal One Steel Service Centre please?Disclosure: Please note that I am a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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