Indian conglomerate Mahindra Group may be buttering up the Trump administration with plans announced Monday to invest $1 billion in the United States over the next five years, though it doesn't need U.S. capital markets for expansion.
The investment will double Mahindra's U.S. workforce to 5,000 people. But Chairman Anand Mahindra, in New York Monday to meet reporters, told Barron's there are no present plans to list the operating company in the United States because India's financial markets are thriving and have "grown so quickly you can access the capital markets right there. It is just easier to do."
The parent enterprise, based in Mumbai, operates in more than 100 countries. Only a handful of its more than 150 businesses are publicly traded. Chairman Mahindra likens them to a banyan tree: some roots will rot, while others can outgrow the parent. Flagship Mahindra & Mahindra (500520.IN) is one of the world's largest tractor manufacturers, but trails be hind Maruti Suzuki India (532500.IN) and Hyundai Motor (005380.KS) in auto sales. M&M shares are up 23% this year. On the other hand, Tech Mahindra (532755.IN), the information technology services business, has fallen victim to protectionism in the United States, an important end market for India's tech workforce using H1-B visas. Tech Mahindra shares are down 15% this year.
If the U.S. government makes immigration rules too restrictive, jobs could leave head to Canada or other countries, Mahindra & Mahindra managing director and CEO Pawan Goenka told Barron's Monday.
In a wide-ranging interview, Goenka, who spent 14 years as a research engineer at General Motors (GM) in Detroit and has been at Mahindra for near 24 years, pointed to the massive growth opportunity in Indian automobiles, and the challenges posed by controlling emissions and sourcing fuel. India's car fleet could double to 6 million within the next seven years. And with the Indian government promoting electric cars, Mahindra could benefit as the dominant electric car maker. Here is more from our interview.
Barrons: How do you measure financial health in the sprawling Mahindra empire?
Goenka : Under the M&M Limited umbrella, two of the largest companies are Mahindra Finance and Tech Mahindra. The investment Mahindra has made in those subsidiaries, compared to the market cap today, it will be a factor 10 or more. That is how we have added value. We keep listing companies as the time is right. One, Mahindra Logistics will be listed probably before the end of this calendar year. It is in the freight logistics business – mostly the movement of automotive and tractor parts. We also get out of businesses where we find we are not doing well. We have a very strong balance sheet. Our debt to equity ratio is below 0.1 and therefore our ability to raise funds if we need to invest or do equity raising is quite high. And we generate enough cash that we don't need to borrow.
Q: Could you boost the dividend? Return more money to shareholders? A: The question does get asked. We look at the face value of the share, not the market value. The face value is 5 rupees, and we give 12 rupees – so we pay a 240% dividend. That is quite okay. We can give a little more. We have a formula of how much of profit is given out dividend. We keep it about 30%, plus/minus 2% to 4% in a given year. Thirty percent is a fairly good number in India.
Q: Mahindra is opening a maiden plant in Detroit. Tell us more. A: Mahindra has seven businesses in the United States. The oldest is the tractor business, and the largest is Tech Mahindra. The auto business in Detroit started off with engineering services, a technical center for global development. We have 170 engineers working there, local hires including 5 or 10 Indians. That's less than you would see at Ford (F) or General Motors and no H1-B visas.
Q: So what will you manufacture in the United States first? A: We are launching an off-road utility vehicle. They are used for hunting, farm work, and some of the vehicles are fairly refined. It is being designed now in Detroit, branded Mahindra. It is a rough plan, and is some time away.
Q: How do you sell a foreign brand to Americans with cabins in the woods? A: Mahindra, through its tractor business, has a reasonably well-known brand among farmers and people who work in the backwoods. We have 540 dealers. It is not a household name, but not an unknown names. Our business, going back many years, was International Harvester, the predecessor of Navistar International (NAV).
Q: What will India's car usage be down the road? A: India is a 3 million-car market today. In six to seven years, we should double that.
Q: More cars mean more consumption of imported oil. What about emissions and oil importation? A: Two things: the auto industry contributes about 6% to 7% of India's GDP. Emissions are a negative that come with the auto industry anywhere in the world. We are targeting a contribution of more tha n 10% of GDP by 2026 as an industry. European emission norms will come to India by 2020, less than three years from now, making vehicles much cleaner than they are now. And, the emission problem is concentrated in big cities. India is a vast country and more and more vehicles are being purchased in non-metro areas. So if you take a combination of cleaner vehicles, rural penetration, and the economic positives of employment and investment … I don't think one should be concerned about the auto industry growing at a pace of 10% to 20% per year.
Q: Why would an American automaker, General Motors, leave the Indian market as it gets easier to do business? A: GM's announcement happened before the new goods-and services tax was implemented. India is a very strange automotive market. The top three companies have 72 percent market share: Maruti Suzuki, Hyundai and Mahindra. That leaves 28% for 12 players. That is not enough for everybody to make money in a 3 million-car market . Many of the smaller players in India are likely losing money. I don't know if that means others exit in the future, likes GM.
Q: The Indian government vowed recently that by 2030, it to limit sales to electric vehicles. Is that extreme? A: (Laughs) From where we are, it is a far cry. But it is a good [goal]. Even if you have 10 to 20% of the electric vehicles, it will have a huge impact on the environment. A huge impact on oil imports. For Mahindra, we are the only electric four-wheeler manufacturer in India. We like it.
Q: Looking to India: the new goods and services tax (GST) is a massive economic change. What are your thoughts? A: It is the biggest indirect tax reform in India's history since independence, and it was 10 years in the making. I personally and Mahindra are pleased that it happened. In most cases, it reduces the taxes on products, and less so but also on services. Automotive prices have come down by 7 or 8%.
Q: How? A: India had m any different kinds of indirect taxes - state, federal, city -- that added up to as much as 55% on automobiles. If I am selling a vehicle out of the factory gate at $100, the customer would pay $155.
Q: So the new tax scheme is good for you. Is it bad for the tax collector? A: It is not. India is infamous for tax leakage and unorganized businesses, which finds creative ways of not paying taxes. With GST, it becomes extremely difficult not to pay taxes. Therefore the tax base goes up rapidly. The government has been extra cautious so there is no loss of taxes at the state and federal level. Secondly, there is a general belief that with GST, economic activity -- GDP in India -- may go up as much as 1 to 1.5 percentage points, which is huge. If that happens, that gets us into a virtual cycle of growth for the tax base. The perhaps bigger benefit: India is a single market for the first time since independence from Britain in 1947.There were a lot of restrictions on the movemen t of goods from one state to another, and every state had the right to tax. We had 29 prices in 29 states. Now we have one price.
Q: What is the biggest challenge in the businesses you oversee in the next 12 months? A: The GST is a very major change and we are a few weeks into it. These days have been surprisingly smooth. One would have expected, on a tight timeline, all kinds of business interruption. The consumer is very unlikely to be affected because in most cases, car prices are coming down. What is affected is the supply chain – starting with the raw material to getting the final good to the customer. If anything in the chain is broken, if for some reason, one supplier is not able to transact business because he is not ready for GST, then everything breaks. Small businesses that are not as computer savvy, documentation savvy – these people found ways to not pay taxes.
Q: Have you been surprised by the resurgence in Detroit? A: I am very happy that I am bringing back jobs to the U.S., having worked there for 14 years. I remember 5-7 years ago, it was a ghost town. It is much better. I can make out from the pitch of the voice of my friends, things are much better.
Subscribers can read Barron's September 2016 profile of Chairman Anand Mahindra, including more on the history of the company founded by his grandfather. See Anand Mahindra Makes His Mark in India and Abroad.
Source: Q&A: Mahindra's Goenka On U.S. Jobs, India Electric Cars, IPOs & Dividends
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