After growing at a record 31% CAGR between 2002 and 2018, Mahindra & Mahindra has taken a fresh guard to chart new aspirations and scale a new growth trajectory

In the year 2002, the M&M stock was dropped from the Sensex -- the stock market index comprising 30 bellwether stocks -- after a bad year. The share price had touched a low of INR 51, from a high of INR 696 three years earlier. The months leading to this all-time low and the months that followed, marked the most tumultuous period for the 57-year-old company that had solid business fundamentals but still faced an existential crisis. It was also the beginning of a fight back that has made it one of the best stocks in bull as well as bear markets since then.

Alarmed by the setback, Anand Mahindra called an emergency 'Blue Chip Conference', in December 2002, of the Group’s top 150 managers to take stock and analyse the business strategy. The reason for the challenges was not hard to find. Despite being leaders in its market segments, having global ambitions and introducing many innovations – the company lacked financial focus. “We announced that all the companies in the Group would have to conform to the financial goals we had set. If a company didn’t meet the financial targets, we had drawn up for the next 12 months, it would have to fold. In just a years’ time, there was a near-total turnaround, with almost every company’s profits and cash flow shooting up. That marked a turning point, and we haven’t looked back,” says Anand.

That was the beginning of a 17-year bull run. The M&M stock soared to INR 983.85 in August 2018 (with a stock split in 2010 and bonus issue of 1:1 in 2017). The NIFTY was set-up in that same year, and for a 17-year period, M&M emerged as the best performing stock in NIFTY - returning a phenomenal 31% CAGR year-on-year and creating unprecedented value for the stakeholders. This was highlighted in the August 2018 analyst report by Motilal Oswal. Former Executive Director and Group CFO, Bharat Doshi said, “This story of M&M's sustained and consistent performance would be incomplete without underlining the Business Mantras recited at the Blue Chip conferences year after year:

• ROCE > cost of capital - target return on capital employed set at 18%
• Auto and tractor businesses to bring down the breakeven level to 50% and create a margin of safety of 50%
• Enhance free cashflow, identify idle assets and dispose them off
• Focus on cost leadership and converting ‘fat into muscle’
• Preparing the organisation to tread in uncertain times with Awareness, Anticipation and Agility

Implementation of these mantras helped the company to steadily perform in both good and tough times and just as an example, M&M was the only automotive company which posted profit in the quarter (October to December 2008) immediately following the Lehman crisis.”

Building businesses, creating value

Back in 2002, Mahindra was at its lowest point in history and was in fact a target for takeover.

The 17-year journey of sustained value creation from 2002-2018 was driven by three key factors – fiscal discipline, solid entrepreneurship, and strong execution of the core. The management allocated capital, created synergies, sustained value systems, implemented good governance practices, and demanded performance, even as professional managers ran the companies. Remembering the days of financial and cultural turnaround, former President Finance, Legal & Financial Services Sector and Member of the Group Executive Board, Uday Phadke said, “Having set out the stretched targets and detailed the initiatives, a mechanism had to be in place to monitor the progress achieved. Thus, came into existence the Corporate Turnaround Program Office (CTPO). I had the opportunity to be a member and convener of CTPO. We would regularly review the progress made by each business sector on the implementation of Blue Chip initiatives, duly classified as green, amber, or red, depending on the status of progress. The CTPO also conceptualised and coordinated two other major initiatives. One was cost reduction, and the other was exploiting synergies between the sectors. Both were imperative in achieving stretch targets on profits and cash flows. To provide full focus on cost reduction initiatives and plans, which included realisation of synergies, CTPO organised brainstorming meetings. At these meetings, in addition to senior business leaders, workmen's representatives would be invited to give their suggestions. The most interesting feature of these meetings was that they commenced late in the evening and progressed well after midnight. They were called Midnight Meetings. The presence of Anand in these Midnight Meetings gave out a loud and clear message about the criticality of the improvements sought for.”

While senior leaders like Bharat Doshi and Uday Phadke instilled a culture of financial discipline, stalwarts like Arun Nanda, Vineet Nayyar, C P Gurnani and Ramesh Iyer led new forays with breakthrough entrepreneurship to build world-class profitable businesses through the growing years. Building on the solid foundation laid by his predecessors in the auto and farm businesses, Pawan Goenka led the strong execution of the core and contributed significantly to the value creation.

Transformational cost leadership, coupled with solid compliance and good governance, enabled accelerated growth even as the Group maintained a healthy cash balance and zero-debt status. Not content with an AA+ rating, which was normal even for the best companies in the automotive business because of the cyclical nature of the industry, Mahindra went back to the rating agencies to prove that it deserved the AAA rating – the highest credit rating on par with sovereign ratings – and got it.

The momentous meeting

In the early 1990s when the country’s economy was being liberalised and the Bombay Club was lobbying for protection of Indian businesses, Mahindra stalwart Arun Nanda received a call one morning to join Keshub and Anand Mahindra for a meeting. “Anand shared a vision in that meeting; if you look around the world, the services sector is dominated by local companies,” reminisces Nanda the then Executive Director and Company Secretary, adding that at the time Mahindra was exclusively an automobile and tractor manufacturing company – additionally making everything from hydraulic pumps and elevators, to chemicals and diesel engines, in collaboration with international partners. “Anand saw that lot of those companies had us as partners because the law at that time did not allow a foreign company to own more than 40% of capital. Even as they would like to have a majority stake in the post-liberalisation era, there was an opportunity for us to consolidate our existing business and get into services business, which will always be controlled by the local company,” says Nanda.

There was a churn in the portfolio – wherever Mahindra was a passive investor, it unlocked the value and exited the business. “That is how Mahindras got out of many businesses; we sold those businesses at a profit, realigned the portfolio and took a conscious – and I dare say, a very successful – turn towards the services business,” says Nanda, adding that today the services business accounts for more than 40% of the Group’s turnover and nearly two-third of its profits. Be it Tech Mahindra and the Satyam acquisition, or the Mahindra Holidays success story, small early investments translated into huge value creation over the years, contributing significantly to the Mahindra Group’s market cap.

Commenting on the business value and ethos of governance and ethics, which was reflecting in the growth of Mahindra Group, S Durgashankar, President - Group Controller of Finance & Accounts and Member of the Group Executive Board, said, “We now live in a world plagued by scams where we are constantly bombarded with news regarding lack of morality of those in public life. This has led to the unfortunate situation where the public at large views corporate morality with a lot of skepticism. Now, more than ever, it is critical to demonstrate that the words ‘ethics' and ‘profits' are not mutually exclusive. This, to me, is where the Mahindra message to the world is inspirational. The Mahindra Group, which has grown multifold from its humble beginnings into a very large multinational federation of companies, focuses on socially relevant businesses, in a responsible manner, with complete adherence to the highest principles of governance and still has been able to provide outstanding long term returns to all our stakeholders, consistently, over several decades. At the Mahindra Group pursuing high standards of Corporate Governance is a way of life. While the world is focused on just the three Ps — Planet, People and Profit — our Group believes that there is an equally important fourth P - namely the ‘Process’ of pursuing high governance standards. For us, at the Mahindra Group, Planet and People provide our Purpose or the reason 'why’ we do business, and Profits and Process (high governance) demonstrate ‘how’ we do business.”

Solid foundation, bright future

If one were to question – what's important for Mahindra Group now? The answer would not dwell much on things done in the past, but on how the company is preparing for the future. As is said often that, crisis is a terrible thing to waste, and Mahindra Group has taken that very seriously. The Group has used this time to take from reorientation in many ways and taken many tough calls in capital allocation.

Its conservative approach in terms of taking debt on its books and historically being a zero-net debt organisation continues to safeguard the Group. The focus on generating shareholder value is and will remain consistent yet conservative to prevent unnecessary risks – be it cyclical or external. This philosophy coupled with its commitment to never default on its obligations has served the Group very well through various shocks, whether it was the emerging markets crisis in early 2000, the GFC (great financial collapse) in 2008, or the pandemic this year. This constitutes the solid foundation of one of the most trusted federation of companies in the country over the last 75 years and for several decades ahead. Mahindra has a strong aspect of controllership that ensures close monitoring of businesses, looking at warnings and addressing them. “Mahindra, today, is very well positioned to be the gateway to the largest and fastest growing themes in India. Bankers today look at us differently; the goodwill created has a significant advantage in terms of our rating and rates. They are even willing to lend to us in certain businesses that are not able to stand on their own. This coupled with the capital allocation and fiscal discipline approach, will reignite the next wave of growth for the Group,” says Anish Shah, Deputy Managing Director and CFO, Mahindra Group (MD and CEO designate from April 2021), as he draws up plans to unlock new value propositions for the stakeholders.

From a shareholder value and valuation perspective, Mahindra is sharply focused on value creation through entrepreneurship, setting up multiple companies, empowering its people, encouraging growth from a financial standpoint, and ensuring high returns on investment (ROI) over the years. The Group encourages its leadership team to set up and run businesses as owners. Bharat Doshi recalled, “As a professional, the greatest reward for me was empowerment. The environment at Mahindra encouraged entrepreneurship, and when I mooted the idea of Mahindra Finance during a very difficult period of the company 28 years ago, the top leadership consisting of Mr Keshub Mahindra, Mr Pitambar and Mr Anand Mahindra encouraged me to plant the seed, nurture and grow the financing business far beyond the captive status it had in its formative years”.

Few years after Mahindra Finance was set up, Ramesh Iyer led it to grow from a captive finance company for Mahindra vehicles and tractor buyers and today – 25 years on – it is the country’s largest non-banking finance company in rural and semi-rural areas. Similarly, Tech Mahindra, Club Mahindra, Lifespaces and Logistics are fine businesses that emerged from the capital allocation that began in 2002 and continued for years after that. The impact of these efforts are for the world to see as Mahindra & Mahindra Ltd. in January 2021 regained the market-capitalisation (market-cap) of INR 1-trillion (after 2018) after the firm's stock hit an over two-year high of INR 817, surging 5 per cent on the BSE. The Group is on a path to Rise!

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