Mahindra Group likely to split auto business into 3 units

The Mahindra Group has initiated a restructuring to trifurcate its flagship automobiles business that contributes 55% to the group revenue.

The exercise, which is understood to be in the early stages, will involve separating the electric vehicle, tractor and passenger vehicle (PV) businesses into three independent companies via a demerger process, said people in the know of the plan. Currently, these are housed under Mahindra & Mahindra as separate divisions.

The EV business, along with its manufacturing plant in Pune, will be clubbed with Italian design house Automobili Pininfarina to form a company, the people said. The group is also exploring raising funds for the EV entity.

The farm equipment and tractor division is likely to become another standalone entity. After Mahindra acquired Punjab Tractors in 2007, this division is the largest tractor maker in India with a 43% market share. It is also the most profitable within Mahindra’s automobiles business. The PV business, with brands like Scorpio, the XUV range and Thar, is likely to become the third standalone firm.

The rationale for this demerger, said people close to the group, is unlocking value in each of the businesses.

An M&M spokesperson said the company “would not like to comment on market speculation”.

People in the know said at least two global consulting and investment banking firms were engaged with the strategy plans.

Generating Better Value for Shareholders

“The group will take a decision after receiving the external consultant’s report,” said a person close to the group. “Value unlocking via trifurcating the businesses, especially for the EV unit, would be the key. They are exploring the one in the similar lines of that of the Tata Group, which raised $1 billion from a clutch of investors including TPG Capital,” the person added.

Last year, the Mahindra Group explored the listing of Pininfarina – the Italian firm it acquired in 2015 – in the US through a special purpose acquisition company. However, as per the current plans, Pininfarina is likely to be part of the EV project. “A final call will be taken post the external consultant’s report,” said another person in the know.

Instead of burdening existing investors, Mahindra can create a new set of investors and generate better value for the shareholders, said the head of a Mumbai-based brokerage. “Mahindra clearly wants to ride the upcoming EV wave and is taking that path,” he said.

Rajeev Misra, chief executive of SoftBank Vision Fund for India, said at the ET Global Business Summit in March that the Japanese firm was in talks to invest in the subsidiaries of the Tatas and Mahindra.

In early 2020, Mahindra Vehicle Manufacturers Ltd (MVML) was merged with its parent, Mahindra & Mahindra, as part of a plan to rationalise the group holding structure by way of a reduction in the number of entities. MVML, the company’s manufacturing unit, was previously operating as a wholly owned subsidiary of M&M.

Wider Presence

M&M has a presence in more than 100 countries in 20 industries. While it has lost the market leadership in the UV space that it held for years, the company has been strengthening its global presence and product portfolio through strategic partnerships with Mitsubishi Agricultural Machinery (Japan) and Sampo Rosenlew (Finland).

“Market share losses in the UV segment have been offset by the strong gains in the tractor segment for MM,” May Bank Securities said in a February 14 note on the company.

“Going forward, we believe M&M will lead in manufacturing of EVs in India when the trend increases and charging infrastructure improves. Currently, it is the biggest seller of EVs in the shared mobility sector and three-wheelers,” the brokerage house said, adding that there could be a potential listing of Mahindra Electric in the next few years.

Financials

In FY21, out of the combined operating profit of Rs 5,025 crore, Rs 4,192 crore, or about 83%, came from the farm equipment division. In the first nine months of FY22, the farm business contributed more than 80% to the operating profit.

“The company’s farm equipment division is most profitable with an EBIT margin of around 20%. With a 40% market share in tractors, it has well capitalised its leadership position in the segment over the years,” said Mitul Shah, head of research at Reliance Securities. “The auto division is gradually improving with new launches, but competitive pressure is relatively high in the segment,” Shah said.