In its 60th year in the financial year 2005 (FY 2005), the Mahindra Group posted consolidated sales of $2.5billion through its flagship Mahindra & Mahindra (M&M), subsidiaries of M&M and 10 associate companies. The group’s wide interests include automobiles, IT, real estate, consultancy, retail and financial services. Deepesh Rathore and Tilak Swarup report.
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The Mahindra Group’s sales have grown sharply and interests have diversified into ‘sunrise’ sectors under the leadership of Anand Mahindra, its young and dynamic Managing Director. Since 2001, when the company was in poor financial shape, Anand Mahindra and his team aggressively set about pulling the company out of financial difficultly with a strategy to become globally competitive. He believes that once a company can compete globally, only then can it survive locally. No wonder. Anand Mahindra has high ambitions and wants to make M&M number one in farm tractors and utility vehicles the world over.
The group’s flagship and contributor of 70% of group sales, Mahindra & Mahindra (M&M) posted FY 2005 total sales of $1.76billion with total vehicle sales including MUV (Multi-Utility vehicle), LCV (Light Commercial Vehicle and three wheelers) and tractor sales amounting to more than 200,000 units.
The company is a diversified conglomerate divided into six business sectors including three automotive industry related – Automotive sector, Farm Equipment and Mahindra Systems, Automotive Technologies, Infrastructure Development, Telecom & Software and Trade & Financial Services.
In the FY 2005, M&M total sales grew 34% year-on-year based on a strong 25% increase in sales volumes comprising 32% growth in tractors and three wheelers, 22% rise in MUV and a 13% increase in LCVs.
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By GlobalDataExports were a major thrust in the year climbing nearly 90% to 3,046 units marked with entry into markets in South America, Africa, Australia and the middle East.
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Mahindra Scorpio |
Net profits in FY 2005 were driven up 56% to US$113.4million with operating margins improving 70 basis points over the previous year to 11.6%. This was despite the higher raw material costs but aided by intense cost cutting measures and growth in sales volumes. The operating margins in the automotive segment and farm equipment segment improved by 140 and 50 basis points year on year to 10.4% and 9.4% respectively. The improved margins boosted the operating profit by 43% to US$175.2million in 2005.
MUV business
The Indian MUV market has six manufacturers competing in the 226,872 unit market with M&M holding a 45.1% market share with its twenty-strong model range. In the FY 2005, M&M sold 148,025 units of MUVs, growing 24% over 2004. Sales generated were to the tune of US$1.26bn compared to US$1bn worth sales in FY 2004.
Its product range encompasses three sub-segments, soft tops, hard tops and pick-ups. In the hard top segment, M&M has enjoyed considerable success with the Scorpio model, developed in-house by its 150-member team. More than 60,000 units have been shifted since its launch four years ago helped by its rugged SUV look, competitive price, modern interior and performance oriented powerplant. The Scorpio received a new lease of life in 2005 when its direct injection diesel engine was upgraded to CRDI. The short development time and marketing success of the Scorpio has landed it a case study role at the Harvard Business School.
Gaining confidence (and quality) in India, M&M began exports of MUVs to Italy and Uruguay in 2004. M&M introduced the Scorpio as ‘Goa’ in the middle of last year in Italy, its European HQ, and will next enter the European markets of Spain and France. Having sold 500 units of Bolero, rebadged as ‘Simeron’ in its first year in Uruguay, M&M is studying entry into the Argentinian and Brazilian markets. There are plans for Russia too and its use as a hub for CIS markets. Through its wholly owned assembly unit, M&M South Africa Pty Ltd, M&M entered South Africa last year with encouraging sales of 2,000 vehicles. South Africa will spearhead the company’s African foray once it starts local assembly operations.
Tractor business
Mahindra’s farm equipment business generated sales of US$574.7million in the financial year 2005 governing a 26.4% share of the 226,114 market. Buoyed by its dominant position in the domestic market the company has been globalizing this business rapidly in recent years, exporting 5,385 units in FY 2005. In the past year, M&M forayed into the Chinese and Australian markets and increased its presence in the USA and SAARC regions. Exports to USA were particularly strong, growing by 38%. New launches in the USA market included an Indian-designed ‘World Tractor’ series in 75hp with 4- or 2-wheel drive option and a 65hp model on the same platform. In Australia, its current positioning is in the ‘hobby farming’ segment, akin to its strategy when it entered USA a decade ago.
Its entry into the Chinese market was a milestone for the company when it acquired an 80% stake in Jiangling Tractor Company for US$8.0 million. Jiangling has a 15,000-a-year tractor production capacity in the 18- to 33hp range, holding 18% share of the segment. Mahindra sees huge opportunity in the Chinese tractor market, which currently trails India’s. Last year, 100,000 tractors were sold in China but sales of belt driven vehicles crossed a million while 700,000 power tillers were bought. This is the market M&M is addressing supplemented with a 35% subsidy on new tractors announced by the government. Mahindra is in a good position in China with its expertise in low to medium power tractors. China gives it the additional advantage with the yuan pegged to the dollar as M&M claimed to have cut 20% cost by currency arbitrage alone, highlighting also the further potential to use China as an export base.
M&M’s recent market entry into Serbia serves as an entry point into the sizeable agricultural market in Eastern Europe. Plans are afoot to expand into Bulgaria and Romania next.
Automotive components business
Recently, M&M has shown proactive interest in the automotive component industry which is spearheaded by Mahindra Systems and Automotive Technologies (MSAT). The initiative involves a full range of services for global customers from manufacturing to engineering & design services and supply chain management for sourcing of parts. This strategy has two advantages for the group. First is to enhance its in-house capability and quality of components and to ride India’s component offshoring potential which is becoming a big business. MSAT CEO Hemant Luthra targets business worth US$1billion by 2010 for this division through organic and inorganic growth.
Mahindra has actively been scouting for buy-outs to accelerate growth at MSAT.
Its first acquisition involved buying a majority stake in Rajkot, Gujarat based SAR Transmission Pvt Ltd for about US$2.5million. SAR is a manufacturer of gears, transmission shafts, couplings and power takeoff clutches, whose largest customer happens to be M&M, buying 60% of its approximate €3.6m in annual sales.
In 2005, it bought Chakan, Pune based unit of Amforge which manufactures crankshafts and machined components. MSAT’s other subsidiaries include alloy steel manufacturer Mahindra Ugine Steel Company, engineered plastic composites maker Siro Plast (a JV with Menzolit GmbH, Germany) and Pranay Sheetmetal and Stamping. In the FY 2005, MSAT generated sales of US$25million.
Joint Ventures
M&M has signed two joint venture agreements to foray into passenger cars and commercial vehicles segments in India. Renault and International Truck gain from partnering a firm like M&M with strong presence in the country and an ability to localise their products within a short time frame. M&M gains from learning production methods which can be incorporated into its own manufacturing and increase its product portfolio. M&M encountered a huge learning curve in its joint venture with Ford which was applied to its Scorpio program to make it possible.
Another point the Ford partnership drove home at M&M was to have a controlling stake in a joint venture to make the most of it. Based on this, M&M has kept 51% in the two new alliances.
Passenger car plans
M&M will enter the passenger car business through the Mahindra Renault Ltd (MRL) joint venture in early 2007. The first offering will be the Renault Logan model which will be imported in CKD kits initially, with a large imported content with localisation gradually scaled up over the next two years – reaching 55% to 60%. The value for money mid-sized Logan will be produced alongside the Scorpio at M&M’s Nashik facility.
Logan will be engineered for right hand drive markets before it is finally launched. M&M has retained the distribution and car manufacturing contracts from MRL. The partners have set off with an initial investment of US$160million. Later, MRL will be made an export hub for Logan kits and CBUs to South Africa and SAARC (South Asian Association for Regional Cooperation) countries.
Truck plans
M&M has a 51:49 joint venture with International Truck (ITEC) for heavy commercial vehicles developed specifically for India. Approximately US$92million will be invested in the project which will commence production in 2007. The R&D work intended to tune the vehicles to domestic needs will be engineered by the 300 people at MSAT. This will also help in taking the localization levels up to 90% from the beginning. M&M’s current dealership network and newly appointed dealers will handle the sales of the trucks. Additionally, ITEC is expected to source components from the JV amounting to US$100m by the third year in operation.
Outlook
Currently M&M is undergoing an upswing in all its major business sectors. But at the same time, the company has padded itself for future cyclical troughs. It has relentlessly vertically integrated its business by venturing into the automotive supplier business and hedged the cyclic nature of some sectors by diversifying from tractors and MUVs to passenger cars and commercial vehicles while also entering various global markets. It has subsequently strengthened its competitiveness by forging joint-ventures with global major OEMs and enhanced its component production capabilities while also riding the Indian outsourcing boom. The 16th May 2005 edition of Automotive News adjudged M&M the third fastest growing automotive company in the world. On the basis of the steel will and achievements of the company under Anand Mahindra, the industry shouldn’t be too surprised if it climbs a notch on the Automotive News’ rankings over the next few years.
Deepesh Rathore / Tilak Swarup
