Stung by steep losses arising from its international businesses, Mahindra & Mahindra (M&M) has decided to stop any further investments in Ssangyong Motors. The company is said to be aggressively looking for an investor and has not ruled out completely exiting from its South Korean subsidiary.
The company announced a 'Walk-Run-Fly' strategy to drive the automotive and tractor businesses this year. This involved taking 'tough calls' of shutting down the Genze electric scooter business in the USA and stopping further investment in the Korean carmaker.
M&M has, over a period of five years invested in numerous international subsidiaries by way of mergers and acquisitions. However, returns from these international operations have not been to the management’s satisfaction in the last couple of years. SsangYong and Genze, together constituted around 80 percent of the total Rs 2,719 crore losses from the international subsidiaries.
Revenue for M&M and MVML came at Rs 44,866 crore in FY2020, down 15 percent, while profit after tax came in at Rs 740 crore, down 86 percent (YoY).The results were impacted due to various factor including transition to BS VI norms, Ssangyong and Covid-19 impact amongst others.
Anish Shah, Group CFO, Mahindra Group said, during a media interaction, that every single international businesses within the Group will be closely scrutinised and put under three categories. First, the entities with a clear path towards profitability with 18 percent ROE will be run as normal. Similarly, those entities with unclear profitability direction but quantifiable strategic impact will also be allowed to continue. However, entities with neither a clear roadmap towards profitability nor any strategic importance will be exited.
“The new investors may choose to buy our stakes" added Shah, when asked about if there are any plans to exit SsangYong. M&M currently holds nearly 75 percent stake in SsangYong, a loss-making company in which it acquired a controlling stake about a decade back.
Interestingly, the Board of SsangYong in February had approved a three-years business plan which would lead the company towards profitability 2022. This plan required outside funding of 450-500 billion KRW (US $380 – 425 million) over a period of three years. About half of this amount was to repay the existing loan and the remaining was to augment the capex required for new product development. As per the blueprint, the funds required were expected to be generated by a combination of fresh bank loans, new investment and further equity investment by M&M. Surprisingly, the M&M Board decided against investing further USD 406 million in SsangYong in April despite giving approval earlier in February.
Offering an insight into what went wrong with SsangYong, Dr Pawan Goenka, MD at M&M, pointed out that its Korean subsidiary was actually going quite well till the first half of 2019 and was in fact expected to make an operational breakeven in CY2019. However, circumstances began to change thereon with the second quarter witnessing rapid reverse in fortunes with global economic slowdown in the backdrop. Further, around the same time, the Korean automotive market began shifting rapidly towards petrol from diesel engines.
The trend impacted the company as SsangYong, similar to M & M, had a very large portfolio of diesel vehicles. Additionally, one more reason for SsangYong's dwindling fortune was that there was significant reduction in exports to 4-5 top markets such as Iran, Chile, Egypt and Western Europe due to geo-political dynamics.
Meanwhile, M&M claims that it will continue concentrating on its ‘nine jewels' which include subsidiaries dealing in aftersales cars, Mahindra Electric and Classic Legends. Some of these companies may also get listed on the exchanges in future, the management added.
Reduction in capex by Rs 3,000 crore during FY 2022-2024
Talking about the capex, Rajesh Jejurikar, Executive Director (auto & farms) at M&M said that the Group has laid out a two-phase map in this regard. The first phase involves the current fiscal FY2021, where there will be not much of significant reduction in investments. However, during the period from FY2022-2024, M&M due to its business synergies and JVs such as with Ford, M&M may be able to reduce the capex by Rs 3000 crore.