Mahindra and Mahindra (M&M) is planning to take over the trucks business of its subsidiary Mahindra Trucks & Buses. The business will be transferred to M&M through a scheme of arrangement, after being approved by M&M’s board .
Financially speaking, the move does not have a direct impact on its consolidated financials, since Mahindra Trucks & Buses is already a 100% subsidiary. It will reflect in its standalone financials. But there would be some other reasons for M&M to have taken this step.
One could be that the trucks business is not doing well. In 2012-13, Mahindra Buses & Trucks’ sales declined by 5.9% to Rs 1152 crore. It also incurred a loss of Rs 365 crore compared to a loss of Rs 310 crore in the previous year. Its working capital situation is not good either, with net cash generated from its operations at a negative Rs 256 crore, compared to a negatve figure of Rs 152.5 crore in the previous year.
That means it needs funding to sustain its operations. It already has debt on its books and borrowing more will only add to its financing costs. In 2012-13, its cash flow statement shows it got Rs 347 crore by way of equity funds, and in 2011-12 it had got Rs 306 crore. Given the current economic environment, M&M would probably need to invest in the company in 2013-14 too.
By merging the business with itself, M&M can fund the trucks business using its own internal resources, without having to show additional investments from its balance-sheet. That will also allow it cross-subsidise the business till it can stand on its own feet.
Now, the reason why the business is in a separate company is that Mahindra Trucks & Buses was originally Mahindra Navistar Automotives. This was a joint venture between M&M and the US-based commercial vehicle-maker Navistar Inc. M&M bought out Navistar’s stake in 2012-13 as Navistar wanted to exit the market.
It has renamed the company since then. The demerger also means that M&M intends to actively manage the commercial vehicle portfolio. Its priority will be to scale it up, become a key player in the domestic market and quickly turn the business profitable. It can do this by using the collective strength and scale of its automotive organisation to reduce procurement costs, eliminate overlapping functions and probably make use of the group’s sales function to improve its distribution and service reach.
In 2012-13, it had sold 9,134 light commercial vehicles, a decline of 12.9% over the previous year, and it sold 2,978 heavy commercial vehicles, which is a decline of 14.7%.
M&M is choosing a difficult time for the merger as slowing GDP growth and rising interest rates are a combination that is harmful for the commercial vehicle industry.
Since M&M has been issuing only standalone results on a quarterly basis, and consolidated results on an annual basis, the merger of the trucks business will have a negative impact on M&M’s standalone financials, especially on profits. The merger is not likely to lead to any equity dilution since it is a 100% subsidiary.
There may be one silver lining though. M&M may get access to the unabsorbed losses of the trucks business, depending on the terms of the scheme of arrangement. Mahindra Trucks and Buses had accumulated losses of Rs 920 crore. It can choose to set it off against its taxable profits of the year and not pay tax to that extent. That can translate to significant cash savings to M&M. It had got a similar benefit when it demerged the automotive business of Mahindra Automotive Distributors and transferred it to itself.