There was a time when the Mahindra Commander used to run on Mahindra tractor's engine
At a recent analyst meet in Mumbai, Mahindra & Mahindra's Chairman and Managing Director Anand Mahindra was asked why the company doesn't hive off its tractor division.
It seemed like a valid question.
M&M has a commanding position in the domestic tractor market with a 44 percent share. And that reflected in the company's financial health.
In the last financial year, for every Rs 100 of profit before tax that Mahindra & Mahindra made, nearly Rs 50 came from the farm equipment segment (FES), including sale of tractors.
To be precise, the segment generated profits of Rs 3,145 crore, a growth of 23 percent during last year. This profit was higher than M&M’s automotive segment which stood at Rs 2,872 crore.
While FES revenues are slightly more than half of the revenues generated by the automotive segment for the company, the segment reported a jump of 22 percent last year, while growth in automotive revenues was 12 percent.
Since the tractor and allied business of M&M generates superior margins compared to other segments including the automotive segment (truck, bus and sports utility vehicles) there have been several calls made to Anand Mahindra to hive off the FES division for unlocking of shareholder value.
A separation of tractor business from M&M and subsequent listing of the entity would offer investors greater option and flexibility for their investment moves. Presently, M&M is a federation of entities where it sells two-wheelers, 49-tonne trucks and excavators. Many unlisted companies are its subsidiaries, too. The hiving-off of FES division can also help M&M unlock value for raising of funds.
This is what the entrepreneur replied to the question at the analyst meet.
Quoting Michael Porter, one of world’s most influential thinkers on management and competitiveness, the 63 year-old industrialist said, “The more interlocking things you do it becomes (that much more) difficult for competitors to imitate. If you spin off tractors, you make somebody happy in the short term but then you are like everybody else. You are a standalone tractor company. We are not the PE (private equity) guys, we are looking at what we have built overtime.”
Mahindra went on to explain what interlocking meant in M&M’s operations giving the instance when one of its people carriers Commander came fitted with an engine that was not different than a Mahindra tractor engine.“I will never forget that when our DI (direct injection) engines had taken off and when we put our tractor engines into our Commanders what we realized is that our engines can be repaired anywhere in the country. Even a service centre which repaired tractors can repair our Commanders because the (engine) block was the same and fundamental engine was the same. Think of M&M as an engine with many pistons. Trucks, tractors, powerol business and auto and you look at the commonality between them. We are building an unassailable position”, added Mahindra.