Mahindra’s strategic SML Isuzu deal: Why the automaker is doubling down on commercial vehicles

In March 2023, the top-management of utility vehicle-maker Mahindra & Mahindra conducted a strategic review of its loss-making trucks and buses division, which was failing to meet its internal target of 15-17% return on equity. In a post-earnings call that happened post the strategic review, Anish Shah, the managing director of M&M divulged that the struggling business is of strategic importance in the long-term for the company, and he expects the business to start giving returns in the next five years.

“For the trucks and business division, we did a lot of detailed evaluation and we finally came to the conclusion that it is a strong business. It has a strong product set, which we can run and it can deliver return on capital. As we completed that assessment, we also realised that the carrying value of assets reflects what the reality was and hence we have adjusted as a onetime impairment,” said Shah, referring to a ₹630 crore impairment charge that the company recorded in the quarter.

Rajesh Jejurikar, executive director and CEO of the auto and farm sectors, reflected upon the state of the company’s business in the post-pandemic years at a press conference on Monday. “Because of the transition to BS-VI was happening, we did not have the parts to aid that transition, so we had to de-prioritise sales, and we ended up losing market share in the two-year period. Although, all those issues have ben sorted out,” he said.

Jejurikar’s comments from the dais come two years after the strategic review—when in a move that echoed the growth mindset, M&M announced the acquisition of SML Isuzu for ₹555 crore. “The more-than 3.5 tonne CV segment is something that we were looking at for the past five years, and we have also been looking at SML Isuzu for a while now. We have a structured and disciplined approach. We had not moved forward until the time was right. We feel it is an appealing and a fair deal,” said Shah.

However, the price at which the acquisition was agreed upon raised eyebrows, for ₹650 per share, a steep discount, when compared to the ₹1,400-₹1,500 per share which was previously reported. “We don’t want too much speculation to be going on what happened behind-the-scenes, but for a thinly-traded stock like SML Isuzu, the valuation of the company does not reflect its value,” said Amarjyoti Barua, CFO, M&M, adding to Shah’s comments that M&M wanted to “ensure it’s fair, overall, it made sense to us to invest in. It meets the thresholds we had in mind.”

While M&M is upbeat about the synergies that this transaction will bring, it has also reined in its expectations. “The MHCV segment is an extremely competitive one, and therefore, our expectations are realistic. MHCV buses isn’t what we are looking at currently. More realistically, it will help growing our LCV segment,” Jejurikar said, referring to the company’s plans to increase the market share of the MHCV segment to more than 20% by FY36.

According to Jejurikar, the transaction is also expected to generate a lot of synergies with the Swaraj tractors ecosystem. On the employee front, Jejurikar said that no employee from SML Isuzu will be retrenched, although some reshuffling might be possible. "On the management front, it's a bit too premature to define management roles," he said.

M&M also does not have any immediate plans to merge the SML-Isuzu with its trucks and buses division. “We will have to work through all of that. Of course, there are benefits of a listed company. We made this acquisition from a growth mindset, and we don’t necessarily need entity rationalisation to achieve that. Our intent is for it to stay a listed entity,” said Barua.

The SML portfolio will also retain its badging. “SML does not have the right to use the brand ‘Swaraj’, we acquired it when we took over Punjab Tractors. We don’t intend to use the Swaraj brand here, SML-Isuzu is in itself a strong brand,” clarified Jejurikar, before adding that Mahindra does not expect technical assistance from Isuzu. “We’re not looking for support from Isuzu. The IPs and R&D are integrated into the SML’s facility.”

“Last three years has been stable, with the construction activity and the replacement demand. Our strategy was product differentiation, which was fuel-efficiency, which we were able to do before the pandemic. During the pandemic, we heavily invested in a new platform for buses. However, we are not getting into intercity luxury buses segment. LCV and ICV (Integrated Commercial Vehicles) remains our priority,” said Vinod Sahay, president, aerospace and defence; president trucks, buses and construction equipment.

Going ahead, another acquisition is not on the anvil for Mahindra. “We’re not looking at another acquisition. Our focus is now towards execution,” said Shah. Neither there is any thought on merging the different segments in its commercial vehicle division. “The buyers are drastically different for our different brands. It sits best where it is. There is a reason why we don’t use the term CV loosely,” said Jejurikar.