Mahindra & Mahindra Earnings Call Q3FY20 – Full Edited Transcript

Management Present

Pawan Kumar Goenka

Mahindra & Mahindra Limited

MD, Member of Executive Board & Whole Time Director

Sriram Ramachandran

Senior VP of Corporate Finance, IR & Special Projects and IR Team

Vankipuram S. Parthasarathy

Group CFO, Group Chief Information Officer & Member of Group Executive Board

Call Participants

Binay Singh

Morgan Stanley, Research Division - Executive Director

Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

Hitesh Bhargava

Batlivala & Karani Securities India Pvt. Ltd., Research Division - Research Analyst

Hitesh Goel

Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst

Kapil R. Singh

Nomura Securities Co. Ltd., Research Division - Executive Director

Kumar Rakesh

BNP Paribas, Research Division - Analyst

Pramod Amthe

CIMB Research - Head of India Research

Pramod Kumar

Goldman Sachs Group Inc., Research Division - Executive Director

Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst
Operator

Ladies and gentlemen, welcome to the Mahindra & Mahindra Q3 FY20 Results
Conference Call hosted by B&K Securities. Please note that this conference is being
recorded. Certain statements on this conference call with regard to our future growth
prospects are forward-looking statements, which involve a number of risks and
uncertainties that could cause actual results to differ materially from those in such forward-
looking statements.

I now hand the conference over to Mr. Hitesh Bhargava from B&K Securities. Thank you,
and over to you.

Hitesh Bhargava

Thank you, Vikram. Good afternoon, everyone. I would like to welcome the management
of Mahindra & Mahindra and thank them for taking out the time for this call. We have with
us today, Dr. Pawan Goenka, Managing Director, Mr. V.S. Parthasarathy, Group CFO and
Group CIO as well as other senior managemen, including the IR team.

I now hand over the call to Mr. V.S. Parthasarathy for opening remarks. Over to you, sir.

Vankipuram S. Parthasarathy

Thank you. Good afternoon, and welcome one and all to the Q3 FY20 press meet of M&M
Limited and the analyst call. Generally, in these meetings, I start with economic update,
both global and local. Today I'll keep that part very brief but spend more time on the
financials. After my comments as usual, Pawan will talk about the overall business
performance in more detail.

A small respite is expected in global growth - if I'm estimating, the group goes to pick up
to 3.3% in 2020 from 2.9% in 2019. However, it remains to be seen how the coronavirus
will impact this, both for the Chinese economy and the global economy at large. Currently,
there are some signals that things are starting to pick up at least on the manufacturing
front in China. Let's hope this smoothens out very quickly.

Closer on, we have seen some green shoots in the rural economy. The rabi acreage have
been increasing, auguring well for the farm output. And there are some soft signals around
the urban sector, which augurs well for that portion of India.

Overall there is more positive news to look forward to, although a full recovery may be still
couple of quarters away. The first budget of the decade lays out a detailed blueprint and
provides strategic direction for both Bharat and India and lays a strong foundation,
hopefully for economic recovery.

Overall it was a budget that will bring in the 3 Rs - revive, reignite and rise to the full.

Now let me share financials for Q3 FY20 for M&M plus MVML. The operating performance
of the company has been very robust for this quarter. Our OPM in the last 1 year has
shown a continuous upward trajectory in spite of pressures on top line due to subdued
industry. Our OPM has moved from 13.2% in Q3 FY19 to 13.5% in Q4 FY19 to 14% in Q1
'20, 14.1% in Q2 FY20 to 14.8% this quarter of Q3 FY20. The company's operational
performance has also broadly met the expectation of the analysts, and especially on
EBITDA and OPM, we have exceeded analyst expectations. The company also continues
to deliver best-in-class operating margins amongst other peers in the industry. This
improvement in trajectory has been achieved in spite of pressures on revenue due to a
difficult external environment. This quarter, Q3 FY20, we showed a minus 6% revenue
growth or a revenue degrowth of 6%. However, we could deliver a robust 5% growth in
EBITDA and 160 basis point improvement in OPM on a YoY basis. This has been
achieved through robust cost management, improved model mix and softening commodity
prices. Good fiscal prudence and discipline has helped us to contain overall working
capital and achieve good cash flows. Dr. Goenka will talk about this in more detail.

So overall, while our market performance has been better, are in line with the industry, we
have significantly outperformed the industry when it comes to financial performance.
However, our reported stand-alone financial performance is impacted by one-off and
exceptional items, both in the current quarter and the comparative quarter of quarter 3
FY19. In the previous quarter of Q3 FY19, there were 2 one-off gains, totaling to RS. 599
crores at PAT level.

There is a onetime dividend received from a subsidiary of RS. 204 crores and a onetime
tax credit of RS. 431 crores to the company. In EI, there is a hit of RS. 80 crores on account
of impairment of certain investment. As against this for the , in the current year's quarter,
which is Q3 FY20, for a major listed subsidiary of M&M, there has been a fall in market
price, on consequent testing of impairment as per accounting standards, based on a
conservative approach by the company and as agreed by the auditors, we have
recognized an impairment charge in the current quarter for that subsidiary. Some
additional aspect that needs to be noted. This is a noncash charge. The subsidiary is
currently facing headwinds, both in domestic market and the international market. But
eventually, the cycle will even out. The management is taking several initiatives and action
to address this, and that includes leveraging partnerships. The business case remains
robust, and the company's board strongly believes it can create value and ensure returns,
not only to future investment, but also the past investment. I'm looking at Dr. Goenka, and
I think that he's going to cover this in greater detail in his comments. So we see an EI hit
of RS. 601 crores due to impairment this year and a RS. 47 crores one-off gain this quarter
versus an EI of RS. 80 crores and a onetime gain of RS. 599 crores in the previous quarter,
as explained earlier. This has led to a swing of 1,073 quarters , RS. 1,073 crores in the
relative YoY performance, which explains the huge variance that you see in the reported
results. If I were to take these one-off and EIs out, then the PBT will show RS. 1,323
crores, which is a growth of 1.7% versus previous year, and PAT at RS. 934 crores will
show a 6.5% growth.

Now let me take you quickly through the Q3 segment analysis and financials. Auto
segment revenue at RS. 7,424 crores is lower by 6.2% versus Q3 FY19 revenue of RS.
7,915 crores, but EBITDA has shown an increase of 14.9%. This has been achieved
through robust cost focus, material cost management and favorable model mix. OPM of
13.7% is a jump of 250 basis point over Q19 of 11.2% and even sequentially higher by
110 basis points over Q2 FY20. Segment result at RS. 542 crores registered an increase
of 17.6% over Q3 figure of RS. 461 crores.

FES revenue at RS. 4,278 crores is lower by 7.7% against Q3 FY19 revenues. At the
segment level, the OPM for Farm Equipment Sector is at 19.9%. It is slightly lower than
the previous year of 20.7%. However, given this is a benchmark OPM and the best
amongst peers, as was stated earlier. Segment result at RS. 831 crores, lower by 6.4%
versus last year's Q3 of RS. 888 crores.
Now let me move to consolidated financials. At a consolidated revenue , level, our net
revenue was RS. 25,303 crores, with a degrowth of 4% over Q3 figures of RS. 26,352
crores. In the segment results, the consolidated PBIT was RS. 667 crores, which is 60%
lower than Q3 numbers of RS. 1,674 crores. Higher degrowth at consolidated level is
primarily due to higher loss and impairment related to SYMC. More details will be shared
by Dr. Goenka.

Few highlights from our key sectors are: Tech M posted a PAT of RS. 1,146 crores;
Mahindra Finance reported a PAT of RS. 472 crores as against RS. 399 crores last year,
delivering a growth of 18%. Overall, if I have to summarize, I would say that amidst very
tough external environment, Auto & Farm and the operating performance of M&M, we
have been able to deliver a robust operating performance. Now I request Pawan to give
his comments, please.

Pawan Kumar Goenka

Thank you, Partha. So as you have already seen that this quarter saw 2 distinct buckets
for us in terms of performance. If we look at performance in domestic core business of
auto and tractor, I believe that we have done very well, as Partha has just taken you
through, and I'll give you few more highlights. And when we look at some of our
international businesses, there have been challenges in these businesses and I'll talk
about some of those in my opening remarks.

So coming to our core business of auto and tractor especially in domestic market, in Indian
market, within the constraints of where the industry is, and both auto industry and truck
industry had a degrowth in the quarter, we have done same or marginally better than the
industry in terms of market share in auto, in all 3 segments of auto, and also in tractor,
where we have marginally improved our market share in the 9-month period. In auto, of
course, the operating margin has jumped by 2.5% compared to last year and even
compared to last quarter it has increased. In FES, there is a significant improvement in
balance sheet during the year. And in fact, between auto and tractor combined, the cash
generated from the business is the highest that we have seen at least in 5 years in any
quarter. And the inventory levels are very comfortable. In fact, for auto, it is lower than the
normal inventory that one would like to have, and in tractor, it's roughly where the inventory
should be at that point of time. So fairly okay on inventory.

I will not go into electric short sector. And if you have any questions on electric during the
Q&A, then I'll come back to it. Let me just jump straight to the international subsidiary. I
will only touch upon two. And if you have questions on any of the other ones, then we can
get into it in the Q&A. The other 2, which perhaps contributed the maximum to the losses
in the consolidated results or to reducing the profit in the consolidated results. And the one
is MUSA, Mahindra USA, tractor company. And the second one is SsangYong. Mahindra
USA, you will recall last year, we had talked about how we have significantly changed our
business model and how we are working towards bringing down inventory and reducing
financing costs.

So we are roughly about halfway through in the , sort of the changes that we are bringing
into the company. Our inventory has gone down by 20% at the dealer level, 40% at the
plant level. And billing volume last year or in the first 9 months is up by about 20%. So I
would say we are roughly half of where we want to be at the end of 9 months during this
year. And hopefully, in the next year, we would be completing the task. That when it comes
to SYMC, I won't talk too much about the performance that is in front of you. Partha has
also covered some of it. You know that we had to take an impairment in our investment
this year of RS. 500 crores plus, and SsangYong also had a write-down of asset of about
KRW 57 billion. Just for your convenience, to get million from billion, just divided by 1.1.
And if you are very good in math, divide by 1.157. So in SYMC, so as I said, I won't go too
much into the past, and I will just talk about what we are doing from here on. But if there
are questions in the past, I will be happy to cover those.

The only thing that I want to say about the past is that as of end of first quarter of 2019,
things are looking very positive. And in fact, I was hopeful that we will have a breakeven
year for SsangYong. And things started deteriorating in the market conditions in quarter 2
onwards. And because SsangYong is a company that was at the edge of breakeven, any
reduction in volume has had a much more severe impact on SsangYong than it would
have on a company that is reasonably profitable. That is pure math, nothing more than
that. And in the export market also, there were 3 or 4 markets where external environment
has not been very kind to us.

But let me now talk about what happens from here on. The SsangYong Board, on 16th
December, has approved, after several rounds and deliberation, the business plan for 3
years. In this business plan, SsangYong will become breakeven in the third year, that is
2022 calendar year. What it requires is approximately KRW 450 billion to KRW 500 billion,
that means about $400 million to $450 million of fund infusion. And we obviously will be
looking at a combination of 3 sources of funds coming from external borrowing, coming
from third-party investment and coming from Mahindra investment. We have not yet
concluded on which source will bring how much funding. But that's the total funding
required, including repayment of past loans. So out of this KRW 450 billion, KRW 500
billion, about half of it is repayment of past loans, and about half of it is fresh investment
into the company.

And just to put this in context, while $450 million or $400 million may sound like a lot of
money, it is approximately 2 new product development programs that we would undertake
in an auto company even in India and represents less than 1 year of CapEx that Mahindra
would have in a normal year. But that's what we need to turn around the company. What
we obviously have to do, and there's no rocket science in it. We have to increase volume,
we have to reduce cost, and we have to increase efficiency. We have already achieved
some of these things and working on more. For example, a very tangible thing that has
already been implemented is an agreement with the labor union, whereby they have
agreed to take a hit in their compensation for some time for the company to become
normal. And this will go a long way in terms of helping us to breakeven. The second thing
that we are doing very tangible is to look at, very aggressively, material cost reduction,
working with an outside consultant, whereby we are targeting about $90 million reduction
per year, which means approximately 3% to 4% of material cost. The third thing that we
are doing is making synergies with Mahindra in product development, almost given rather
than an option. And thereby, the new development programs, that is the C-SUV, B-SUB
will be aligned with Mahindra and significantly will reduce the CapEx and even material
cost by doing that. And then the fourth thing is to look at how do we look at new export
markets. The domestic market growth will be more or less in line with what happens in the
domestic industry. And therefore we don't expect domestic markets to jump too much over
the years. But export, where we have declined sharply in the last 3-4 years, is where we
see an opportunity to get back some good volumes. And the 2 markets we are focusing
on are Russia and Vietnam. Russia is unlikely to happen during this year. If all goes well,
it should happen by middle of next year. Vietnam could happen towards the end of this
year. So basically, that's the 3-year plan. Of course, I can go on in lot more detail, but this
pretty much summarizes how we are expecting to get back to profitability for SsangYong.
If I was to look at now FY '21, coming back to India, and what is the outlook that we see,
on the passenger vehicle side or auto side, the SIAM estimate is PV growth of 2% to 4%.
Obviously, given that we have had a very bad year, this may look like a small number. But
the reason we have been cautious in saying 2% to 4% is because of BS VI coming in and
prices going up. And therefore, for a while, consumer sentiment will remain negative, and
therefore, 2% to 4% is the growth that we're expecting right now. On commercial vehicle,
maybe somewhat low , somewhat higher, 4% to 6%, including for MHCV. And therefore,
overall auto growth of about 3% to 5%. This obviously is being helped by focus on rural
economy that the Government of India has. And that should unless something negative
happens in terms of agriculture output, which right now we don't expect, that should do
well for us.

On the tractor side in the current quarter, we expect to see a growth of about 5% to 7% in
the industry, leading to an overall degrowth for the year of about 7%, which currently
stands at about 9%. And for the next year, it's bit too early, but our best estimate right now
is about a 5% growth plus/minus 2%. And the reason we are saying 5% growth is because
of many sort of positive signs that we see today. Rabi sowing has been good, 8% above
normal. The reservoir levels are very good. And that means that even if the monsoon is
somewhat deficient, then because of good reservoir level, we will not see a major negative
impact on agriculture. And as of now, there is no negative on the monsoon. The El Niño
impact appears to be neutral as of now. So therefore, 5% right now with plus/minus 2%
range appears to be a fair and realistic growth for us to talk about for next year.

Transition to BS VI more or less on track, not just for Mahindra, but as much as I can
determine, for all the companies. We are in the process of petering down our BS IV
production and ramping up BS VI production. And before March 31, all the vehicles we
should be producing BS VI for all the vehicles. Cost increase I have already talked about
in the past, cost-wise about RS. 15,000 for petrol, and diesel between RS. 50,000 and
RS. 70,000. Price increase will depend from manufacturer to manufacturer. Some may
decide to pass on everything, some may decide to pass on in phases, and some may
decide to absorb some. So that we don't know how everyone will play it out.

New launches. Very quickly are on track. We have talked about most of these, so I won't
repeat W501 that is Thar, W601, Z101. On electric vehicles, e-KUV, the Atom, the e-
XUV300. On commercial vehicle side, the FURIO ICV range, the LCV range and the
Cruzio minibus. And also, I can just point out that we are working on a fairly major program
for developing a new tractor platform called K2. I don't think we have talked about that in
the past. And the K2 platform will have 4 different tractor ranges or horsepower ranges
and designed for both domestic as well as international markets. The work is primarily or
majorly being done in Japan right now in cooperation with Mitsubishi Agricultural
Machinery. So this is a very ambitious major program of tractor development for us. And
finally, 2 more points. One on Ford. So we have a small sort of first tangible output of our
alliance with Ford, where we'll be launching a connected vehicle solution. I think Ford is
launching it this week, and we'll be launching it at the end of this financial year. This was
developed jointly after we announced the Phase 1 of our collaboration. The C-SUV
platform work is going on in full swing. And this will be saving us approximately RS. 1,000
crores in terms of overall investment compared to if Ford and Mahindra were to do this
program separately. Same thing is happening on the B-SUV with similar saving that will
happen. B-SUV program is about a year behind the C-SUV program. We also have
recently talked about using Ford's unused capacity for expanding Mahindra's engine
capacity. That will save us a CapEx about RS. 400 crores. And Mahindra G12 engine is
getting ready to go into a Ford vehicle in the first quarter of next year. So these are sort of
Ford activities. As you probably have read, that we have already received yesterday the
CCI approval. So now we just need to start completing all the processes. And we are
hoping that by end of May, we should be completing the process of the joint venture. On
the investment, we had announced RS. 18,000 crores as the investment including CapEx
as well as the equity investment. For FY '20, '21 and '22, I've just talked about RS. 1,000
crores as saving coming from Ford, which makes it RS. 17,000 crores. We are targeting
RS. 15,000 crores by looking at other areas of investment addition. And I should also point
out that in no case would we allow the investment to go above RS. 17,000 crores, including
whatever money we have to invest in SsangYong. So that kind of becomes a upper limit
of investment for FY '20, '21 and '22, hopefully, bring it down to RS. 15,000 crores. So
that's sort of the summary of what I wanted to talk about. Now we can open it up for Q&A.

Q&A

Operator

We have the first question from the line of Kumar Rakesh from BNP Paribas.

Kumar Rakesh

My first question is to Dr. Goenka. You have quoted in the media articles suggesting that
BS VI transition could be hit because of the coronavirus impact with the supply chain
getting hit. Can you help us understand which specific BS VI component supply is getting
hit? And you have a fair representation at SIAM. Do you see other OEMs also struggling
with the same challenge?

Pawan Kumar Goenka

So the concern that I had talked about was not so much in BS VI, because BS VI we're
just ramping up, and a week or 2 weeks of components not coming in, it's not going to
make a major difference to BS VI. In any case, the BS VI volume offtake will be very slow.
And therefore, BS VI is not the concern. What I had talked about is BS IV, where we have
1 component coming from China, and that affects approximately 3,000 to 3,500 vehicles
of BS IV, total effect. We are hoping that it will open up in a week to 10 days. If that
happens, then we'll be able to still manage, time-wise. If it goes beyond, let's say, February
end, it will become very difficult. And then we will have to request the Supreme Court to
give us little extra time to sell these vehicles. So that's the total risk that we have, the
3,000, 3,500 vehicles of BS IV. As you also know that China has started opening up and
supplies have started trickling in. So we are hoping that we will not get to a situation where
these 3,000, 3,500 vehicles become a risk for us.

Kumar Rakesh

My next question is around the new tractor platform, which you talked about is under
development. Can you help us understand which specific category you are looking at
getting that?

Pawan Kumar Goenka

No. So this is the first time we have talked about it. So this is the first teaser. With time,
we'll give you more and more information. For now, all that I can say this is the most
ambitious tractor development program that we have undertaken. We'll have 4
horsepower ranges that will come on this tractor platform. And it will be for both India as
well as international markets shared with Mitsubishi Agricultural Machinery, which as you
know, is our joint venture with Mitsubishi.

Vankipuram S. Parthasarathy

Come to 2,400.

Pawan Kumar Goenka

Okay. So I've just been informed that the number 3,500 of risk has just come down to
2,400. If the call is long enough, then maybe it will keep reducing and becomes 0 before
the call gets over.

Operator

We have next question from the line of Pramod Kumar from Goldman Sachs.

Pramod Kumar

Pawan, sorry for this, but I'm going to ignore for the time being, the India performance and
go to SsangYong first. We had earlier targeted a breakeven in 2017, now the breakeven
has shifted to '23, right? So what has gone wrong? And what is the confidence in terms of
achieving this breakeven at SsangYong in the next 3 years? Because we probably have
invested over $1 billion since we acquired this company, and we haven't had much of a
return as such. So just wanted to appreciate the fact that you put upper limit on the CapEx
plus investment for the next year. But on the longer term, what is the thinking here? Or if
any of the fundamental premises have changed since you acquired the company? If you
can share that as well, that will be really great.

Pawan Kumar Goenka

So I think only premise that has changed since we acquired the company was a slowdown
in the overall global auto industry that we have seen in the last 12 months, okay?

And as I had mentioned in my opening remarks, that as of first quarter, it was looking like
that SsangYong will be breakeven. And therefore, with a normal year of automotive
volume, SsangYong would have been fine. Okay? So that's really the only thing that has
changed. And the reason it looks to be a very big impact on SsangYong compared to, let's
say, Mahindra or any other large OEM is because SsangYong was at the sort of
breakeven level, plus/minus 1%. And when you are at the breakeven level, as math will
tell you, any drop in volume can have a fairly big or major sounding impact. So that's the
only thing that has changed. Let me first correct that we have not invested $1 billion in
SsangYong. In fact, after first investment, which was, Partha help me, how much was the
first investment?

Vankipuram S. Parthasarathy

RS. 2,450 crores.

Pawan Kumar Goenka

RS. 2,450 crores was the first investment. And after that?
Vankipuram S. Parthasarathy

Total investment.

Pawan Kumar Goenka, Mahindra & Mahindra Limited - MD, Member of Executive Board
& Whole Time Director

Total so far is RS. 2,450 crores. Yes. Okay. Total investment so far is Rs. 2,450 crores.
Most of the investment that SsangYong has made in product development has come out
of its own generation or out of outside loan, not from Mahindra. And I should also point
out that every year, up until this year, 2019, SsangYong had been cash positive in terms
of operations, and the investment that has been made or the funds that have been
required have been required for future product development and not for running the
company.

And as we look at the future, as I've mentioned to you, that KRW 450 billion to KRW 500
billion is what we expect to be the fund requirement that once again is not going into, what
I would call, EBITDA loss funding. EBITDA is positive this year, in 2020, 2021 and 2022,
of course, and has always been positive, except for the 2019 when we were minus KRW
4 billion, that means about $4 million minus, the net has always been positive. So now
KRW 450 billion to KRW 500 billion that I just mentioned will go into the total product
pipeline. And as I've mentioned that out of KRW 450 billion, actually about KRW 250 billion
are repayment of loan. So the fresh fund requirement or net fresh fund requirement is only
about KRW 250 billion to KRW 300 billion. And KRW 250 billion to KRW 300 billion is
approximately 1.5 vehicle programs. I just want to put that in the context that for an auto
company that kind of investment is not something that becomes a major investment.

Now from the viewpoint of what it does to our P&L and what it does to our investment, of
course, that's something that you have already seen, that this time this year, the
consolidated level , SsangYong did pull down our profit significantly at the consolidated
level. But that's again mostly coming because of D&A, depreciation and not because of
EBITDA loss. Now I think the most important question that you would have is what is the
confidence that we have in this plan that we've talked about, and will we be sitting here 3
years from now having a similar conversation, okay?

Clearly, no one can give you black and white sure-shot answer to that. There are no sure-
shot such things. All we can talk about is that this time around, everyone is looking at the
business plan very carefully, the Board of SsangYong. In fact, we have engaged an
outside consultant to review the business plan of SsangYong and independently tell us,
not coming just from SsangYong management, but independently tell us whether this
program or this business plan is something that we can take as realistic plan and invest
based on that plan.

So that's an extra layer of confidence that we're trying to build in into the business plan.
The part about cost reduction based on the experience that we have had in the past in
India, we are fairly confident on. The part about CapEx, we are fairly confident on, because
that's something that we have done time and again. The part that, of course, remains an
unknown, that nobody can give any guarantees on, is the volume growth. And therefore,
volume growth is what the total performance will depend on. And clearly, if Mahindra is
going to invest more money in SsangYong, Mahindra will be reasonably certain that the
3-year plan that we have put in place will work out, and we will have a situation of
breakeven in 2022.
Pramod Kumar

Okay. Now I'll address my question to Partha on the stand-alone performance.

Pawan Kumar Goenka

Why does Partha get the easier question and I get the more difficult one?

Pramod Kumar

You're The Man.

Pawan Kumar Goenka

No, he's the one.

Pramod Kumar

So Partha, on the India business, I think, good performance. I think Operation Kuber
clearly reflecting in your margin performance. But how should one look at how much of
more of the benefits are still to accrue on the cost side going to BS VI? And how should
one look at margins in the BS VI era for you? For the automotive business, tractor doesn't
get impacted. But if you just talk a bit more about the cost and the benefit kind of jostle in
the BS VI era, sir?

Vankipuram S. Parthasarathy

Okay. So you're asking me to do a crystal ball, and you know that's the toughest one for
me because we don't give forward-looking statements. But having said that, let me dissect
the cost element and look at each of these elements.

One of the biggest beneficiaries from an external point, before I start talking about
internal, is about the tailwinds and material cost, okay? And that is the material cost
tailwinds, you all are, in fact, more research , you do more research and how the trends
are occurring. You can take it as a philosophy that we do pass on whatever material cost
increases happen. But, however, currently, we are at a cycle where it is giving us benefit,
and we hope that it continues, but there are always cycles here. So that's how we should
look at that line item.

The second is project Horizon and project Kuber done by auto and farm respectively.
These are costs which are , in terms of the benefits, are permanent in nature. And we
hope so it's certainly permanent in nature. And this is giving us very good, not just on the
material cost line, but also up to EBITDA, all the lines. Yes. So , and this is something
which can continue.

The third portion, this time what auto got a huge good benefit is on model mix. They've
got a very good model mix. It is always our endeavor that our power brands do well. And
as the power lines do well, our margins do well. So this is an attempt and how it pans out,
for future, you can do it, but we hope it will continue. But projections, we cannot make.
The next , last one out of the material cost is in terms of the stock. At this time, we have
no net-net benefit at the M&M level, we don't have a hit because of stock increase or
decrease or vice versa. We don't have a positive impact. So these are the elements,
Pramod, I would like you to kind of look and factor them in.
BS VI, you asked and I will not dug that question. There is a cost increase, and there will
be a price increase taken. Yes? And if you take a little bit of measured price increase, we
hope other elements will come and kind of manage margin. All I can show you is the 5
quarters trend, 13.2%, 13.5%, 14%, 14.1% and 14.8% this year , this quarter. So this is
the trend, but future , the past is not, as they say, only indication for future.

Pawan Kumar Goenka

Pramod, let me be a little bit bolder in answering your question. So if I look at the petrol
vehicle, and we have right now only 2 petrol vehicles in our portfolio, XUV300 and
KUV100. In both of these, we have taken a RS. 20,000 price increase already announced.
And both of these pass on the cost increase and also make some margin on that, in line
with the margin that we have in our products.

For diesel, as you know, cost increase is much higher. And every automaker will take a
call on how much of it to pass on and whether to pass on everything in one shot or do it
in 2 or 3 tranches, and how much margin can one potentially make on this cost increase.
It will depend, to a large extent, on the competitive scenario, who does what, and also
depends on where the positioning of our product is.

So we will start announcing these price increases. Mahindra, as you know, has always
kept the financial performance in consideration as we take such calls, and we'll do the
same thing again. And there will be products where we'll take the full cost increase, and
there will be products where we'll do partial increase in phase 1 and another increase in
phase 2. But eventually, we will try and recover all the cost.

Pramod Kumar

And Pawan, with time line on the launches, there's so many launches coming up, including
the XUV500, the new Scorpio, everything. If you can just say, quarterly, what is the kind
of expectation on major automotive brand launches, sir?

Pawan Kumar Goenka

Okay. Are you allowed third question, I'll be happy to answer.

Pramod Kumar

This is a follow-up.

Pawan Kumar Goenka

Okay. This is not a follow-up. All right. Okay, okay. I think I others will have the same
questions, I'll answer it. So the question is sort of timeline of launches, right?

Pramod Kumar

Yes.

Pawan Kumar Goenka

Okay. So we have several launches coming up in the next 18 months to 24 months. The
most imminent one is the launch of e-KUV100, which in terms of volume, obviously will
not be very large, but very important launch for us because of the very, very aggressive
pricing that we're able to do in this one. And this should be happening in the first quarter
of the coming financial year.

The next one is the new Thar which should also happen in the first quarter of next financial
year.

And we're very excited about that launch. We decided not to showcase in the Auto Expo
because we didn't want it to get lost in the crowd, and we'll do a separate event for that.
Following from that would be the launch of the Atom, which is the mass mobility electric
vehicle that we showcased in Auto Expo. We are very sort of positive on this launch
because we think this will be a perfect last mile connectivity electric vehicle, very
affordable, very comfortable. And therefore, we expect this to become a major volume
driver for electric vehicle. And we expect this launch to happen in the second quarter of
next financial year, FY '21. Followed with that will be the launch of W601, which is a brand
new platform, SUV, crossover SUV.

That will happen in the fourth quarter of the next financial year. That means first quarter
of 2021 calendar year. Followed with that will be Z101, which will be happening in the first
quarter of FY '22 or second quarter of 2021 calendar year. Followed by that will be the e-
XUV300, which we showcased in Auto Expo. That should happen in the middle of calendar
year 2021. That's on the passenger vehicle side. I'm not talking about the refreshes that
will happen. There are several refreshes that are happening on many products. I've only
talked about the new launches, the new platforms.

Then on the commercial vehicle, we have launched the Cruzio minibus in the Auto Expo,
12-seater and 42-seater. On FURIO ICV, we have launched several variants, 5 have
already been launched and 5 will be launched during the next financial year. That will be
from , covering from 5.4 to 7.2 tonne. And that will complete the range of commercial
vehicle for us from 0.5 tonne to 49 tonne. And then on the tractor I've mentioned, the K2
platform is the main one where the launch will start from middle of 2021 and carry on for
almost 2 years as we launch different horsepower segments in the tractor.

Operator

We have next question from the line of Raghunandhan from Emkay Global.

Raghunandhan N. L

It's only one question on JAWA. Last quarter you had provided an update. If you can
provide an update on how the production and volumes are going? There was also some
news relating to doubling of production to 10,000 per month by January. And if you can
also indicate the breakeven point for JAWA.

Pawan Kumar Goenka

I think on JAWA, last year we had especially requested Anupam Thareja to come in to this
conference. Today, he is not on the conference. But I can basically say that there is
nothing significantly new to report. Things are going as per the plan, and whatever was
mentioned in last conference is happening. We are constantly increasing our volume and
looking at new products to be launched. Perak was launched also, I think, November '19,
and booking started in January '20, and more products will be coming up.

Raghunandhan N. L
Can you share the volume number, sir, for the December quarter?

Pawan Kumar Goenka

We are not sharing volume numbers.

Vankipuram S. Parthasarathy

Yes. So just to give you a perspective, last time when Anupam came in, what we had
made a request is, you were very keen so we will give you some numbers. Give us a little
bit of space. In May, we will come and share. And by the time the annual numbers will
also be due. And it will be a good time for a company which is just doing its early bit to
give it enough time. But I must share you that we're looking at it very, very positively on a
10,000-feet level, and you'll have more details in May.

Pawan Kumar Goenka

I think the one sentence summary would be, this is where we said that we started in two-
wheeler.

Operator

We have next question from the line of Binay Singh from Morgan Stanley.

Binay Singh

Congratulations for good performance on the India business amidst very challenging
times, but it was dragged by the consol business. And in fact, even when we look at
between FY , sort of FY '14 to FY '19, we see that the consolidated profits have lagged
the standalone profits. By standalone, I mean M&M plus MVML. So in light of this, is there
a rethink on the federation structure or a rethink on incremental investments that you're
planning to do in , on M&M plus MVML business?

Pawan Kumar Goenka

You want to go?

Vankipuram S. Parthasarathy

Yes. So first and foremost is that you are right, this is a fact that our consolidated profits
are lower than standalone profit and therefore, that point is well taken. We are having
basically 2 big ticket items where we are seeing that last 2 kind of coming. One is in
SsangYong and one is in MUSA. SsangYong, you already have had an update from
Pawan. And in some sense, we also covered , you didn't cover Mahindra USA specifically,
Pawan. You did cover.

Pawan Kumar Goenka

But it's very...

Vankipuram S. Parthasarathy

Yes, it's very short. But to say that also on year-on-year, you will see a greater
improvement every quarter. And next year, we should be on the breakeven to positive
mode. So this is the broad coverage on MUSA. This is how we will handle it. Just , sorry,
go ahead.

Binay Singh

Yes. Actually, the point I was trying to make is that even when you look at FY '14 to FY
'19, the consolidated profit for Mahindra has grown by around 3% whereas M&M plus
MVML profit has grown by around 7%. So for last few years, we've seen that the consol
business ends up being a bit of a drag on the stand-alone business. So in that context,
when you look at incremental investments outside the automotive business, is there a sort
of a rethink on that? Something on more on those lines?

Vankipuram S. Parthasarathy

Yes. So just one more point, and Pawan, then you can come in. There is one technical
thing that you need to look at because the good companies are paying us dividend, which
goes into the bad growth in M&M plus MVML. And when you compare that with the
consolidated, yes, so if you remove the dividend and see it, it must give a much closer
figure, but that's more technical, yes? But what your point is that we are in a cycle where
the investments that we have made is not yielding as that kind of a positive momentum
from a profit growth point of view, yes?

Binay Singh

Correct.

Vankipuram S. Parthasarathy

And we hope that the cycle reverses. From a capital allocation point of view, you are
aware, how we have said that we look at each investment on its merit, we look at the IRR
that it gives from a financial perspective, we look at what it does to us strategically, and
I've explained that all to you in terms of our investment philosophy. We will continue with
that philosophy, but building more checks and balances because of the external
environment, which has also changed dramatically over the last 4 or 5 years, yes? And
more about this maybe after the year-end, when you have the analyst conference, we will
take this as one of the subject matter and could have longer discussions around in terms
of thought process and how we address various loss-making subsidiaries.

Pawan Kumar Goenka

And then I just want to add 2 things. See, first of all, in terms of total investment that M&M
Limited makes, bulk of it goes into M&M and not into outside investment.

Binay Singh

Bulk of it goes to AFS.

Pawan Kumar Goenka

Yes. That's what I mean. I mean, M&M plus MVML. Bulk of it is going to M&M plus MVML.
I don't have the number in front of me, but it certainly will be more than 50% going into
M&M plus MVML. And only about the remaining is going into the various investments.
That is one point. So it may look like that we are investing lot of money outside the M&M
Limited, but the number in terms of investment may not be as large. The consolidated
profit loss is a different thing, I'm talking about investment. And the second point that I
want to make is that in automotive and tractor business, as we look at growing beyond
India, the gestation period are long. And one cannot take that away.

And no matter which company you look at, when it goes into a new market, with the MNCs
coming into India in automotive business or anyone going anywhere else, there are long
gestation periods. And if we were to take a call that we will not invest in the long gestation
period investments, then we would be constraining ourselves to the India domestic
business.

And that's not how we can grow in the long term. So there may be some discomfort in
terms of the time it's taking for us to turn some of these investments to become profit
making. And it has not been helped by the last 2 or 3 years of slowdown that we have
seen in the auto industry globally. But we still believe that while as Partha said, we'll be
obviously looking at each investment a lot more critically as we'll be doing that. But even
so, I would like to think that we have to take these bets. And if we didn't take these bets,
then we will not have the growth engine for the future.

Binay Singh

Right, right now the point well taken. Just one suggestion. Maybe the company can
explore to sort of give a longer-term return on capital employed target. Like when you
meet us in May, maybe have like a 2025 target. Because that will just make it easier to
sort of put some number as to where things finally reach to.

Vankipuram S. Parthasarathy

I got that input, and I've taken onboard. We will kind of think through. And in May we will
come back with a response. We may come back to with a response. We will come back
with a response: I don't know which is correct.

We have next question from the line of Kapil Singh from Nomura.

Kapil Singh

My question is on the electric side. We are seeing a significant number of new launches.
Could you talk about where are you seeing initial signs of success? In which segments
you see electric could gain significant market share in next 2, 3 years? And are these
products going to be profitable right from the start for you?

Pawan Kumar Goenka

Okay. So the segment that is clearly taking a lead right now is a 3-wheeler segment. And
in fact, if I was to include the lead-acid battery 3-wheelers that are being sold, which are
not , which I don't think will be the long-term future. But even so, if we include those that
are being sold right now, we are now selling in Mahindra close to 1,500 a month of these
3-wheelers. 500 of these are lithium-ion Treo and 1,000 of these are the e-Alfa lead acid.
In lithium-ion Treo, right now, we are the major player, in fact, almost the only player.

And the e-Alfa, there are many, many players in that segment. So that will be the first
segment that I believe, will take off. And the reason it will take off is two. One, already with
the current level of fame benefit and current level of GST, the Treo kind of 3-wheeler is
commercially viable for the owner-operator. That means owner-operator makes little bit
more money per month after paying for all the expenses on the Treo than he obviously
will make on the petrol, diesel or CNG 3-wheeler. And therefore, commercial viability is
established. It's just a matter of the operators getting used to it.

And for Mahindra, the Treo is at the variable cost level profitable from the word go. And
as the volumes go up, I'm sure that it will become profitable at the EBITDA level also and
then at the PBT level. So I don't think that the time is very far. I don't have a calculation
right now as to how much volume we require per month to get to that level. But it's not
very far for getting a PBT breakeven on Treo. We already are, like said , as I said, variable
cost profitable.

On the second segment that is emerging, but slowly, is the fleet operation. E-Verito and a
Tata vehicle are the primary vehicles being used in the fleet operation. We have now
launched the e-KUV100, which I hope will be more desirable because of low ticket price
that we have, RS. 8.25 lakhs.

And once that vehicle gets accepted in the fleet segment, the fleet segment can grow
very rapidly. Now our calculations are that e-KUV100 at the RS. 8.25 lakhs price is
commercially breakeven for an operator compared to an IC engine vehicle that they may
be operating. And therefore, commercial viability at RS. 8.25 lakhs is established. RS.
8.25 lakhs is not a probable price. This is introductory price. But if we get to a volume of,
I would like to say, 500 or so per month, then it will become variable cost profitable. The
e-Verito is already profitable for us, and is selling about 100 a month. But again for it to
become meaningful, the volume has to be minimum 500. The bus segment is not
something we have presented, but bus segment also is growing very, very rapidly. I do
not know the profitability of the bus segment and I don't know whether current OEMs are
making money in the bus segment. I would just like to add, though, even though we don't
make forward-looking statement that Mahindra Electric, we are expecting to be EBITDA
positive in FY '21.

Operator

We have next question from the line of Gunjan Prithyani from JPMorgan.

Gunjan Prithyani

I had a few follow-ups on SsangYong. You mentioned that the infusion could come through
external third-party or M&M. Now by third party you mean are you open to some strategic
stake sale there because those were the kind of news reports also circulating in
December. If you can share your thoughts there?

And on the write-off that you've taken in this quarter, now if I look at the investment here,
it is about RS. 2,400 crores, right? After taking RS. 600 crores, I mean, it's not really mark-
to-market to the current stock price. So what has been the thought process around RS. 6
billion write-off?

Pawan Kumar Goenka

Yes. The answer to the first question is very simple, yes. Second question, Partha?

Gunjan Prithyani
Okay. Are there any conversations which are , as part of this 3-year plan, are there
conversations underway where you're looking at strategic sale?

Pawan Kumar Goenka

Yes.

Gunjan Prithyani

Okay. Got you.

Vankipuram S. Parthasarathy

Okay. So this is a very involved question, when we look at prices. So on one hand, I told
you in my opening remarks that we think the business case not only covers the new
investment, but also all the past investment and good could give return. So the business
case is positive on one hand. And then the market price is showing stress, right?

So we have to take both of these into account in order to arrive at a conservative basis.
On one hand, you can say, no impairment required because the business case is positive.
On the other end, you say market price is what it is. So you put all this into the boiling pot
and then you kind of appear, what is that, conservative provision that I should take, and
then you have auditor also agrees with you, and that's the figure you take. But your
assessment is right at RS. 2,450 crores when we knock off, it still is about 25% to 30%
higher than the current market price. Okay?

Gunjan Prithyani

Correct. So I mean, we should not be worried that this write-off is coming. I mean, there's
going to be another MTM here because the way the operations have panned out, I mean,
if there was a write-off being taken, I thought it should have been MTM, which is why I
thought how you're looking at it.

Vankipuram S. Parthasarathy

It's a good point. Actually, all I can say is that whenever we take any write-off or any
provision, for the year it is a one-time assessment, and that's what will be for the year, is
our way of looking at financials, yes? So what you think is what it is for this year. And in a
sense, it is our best estimate, on a very conservative basis, of what we should have in our
books.

Gunjan Prithyani

Sure. And the other thing that you mentioned, CapEx rationalization and cost is in our
control. Now, you have some assessment on what is going to be the cost saving and the
savings on the CapEx side. Do you think that with those two, keeping the volume aside
because that's something which is going to depend on how the global markets do as well
as some of the export markets where things haven't really changed in last 1 year. So I'm
just keeping the volume variable aside. Do you feel confident that with the cost and the
CapEx initiatives, you would be able to reach a cash breakeven sooner enough?

Pawan Kumar Goenka

Gunjan Prithyani

Sorry, I missed that. How big is that? Material costs I got $90 million, but...

Pawan Kumar Goenka

I didn't give a number, that's why you didn't hear the number on that one, because I cannot
reveal that number as to what it is, the confidential agreement between the labor union
and the management.

On the material cost, $90 million is looking fairly doable based on the initial analysis that
has been done by the outside consulting firm. And we should be kicking off that project,
hopefully, by the end of this month. And therefore, these 2 will amount to a fairly significant
reduction in cost. And like you said, that we need that volume increase to get the financial
performance at a comfortable level.

I just want to go back to your other question that I said very short answer, yes, to. You
mentioned the word strategic sale. Just want to clarify that what we're looking for is the
investment, not a sale. So it's not like Mahindra is going and selling their stake. It is about
getting investment into the company and not selling much stake.

Gunjan Prithyani

Okay, got you. Just last one question, very short one. On the farm business, again, the
inventory correction was taken last year, from what I recall. Then what really is the issue
still there? And how confident are we of a breakeven on the overseas farm subsidiaries
next year?

Pawan Kumar Goenka

No. So what we had said last year was that we had fairly large inventory at the dealer and
at the plant itself. And we are going to take a 2-year program to bring that inventory down
to the level where we wanted. We have reduced inventory , dealer inventory by 20% in
the last 12 months. And we have reduced the plant inventory by about 40% in the last 12
months. We still have some more ways to go, maybe not 20% reduction, maybe 10 more
percent in dealer, maybe 20 more percent in plant.

That will bring us to the right level of inventory. And right level of inventory means working
capital reduction and, therefore, interest cost reduction. So that's the one area that we are
doing. And the second area is operational efficiency, which will save us tens of millions of
dollars. And that 2 together will bring us profitability in 2021 calendar year.

Operator

We have next question from the line of Hitesh Goel from Kotak Securities.

Hitesh Goel
Sir, just wanted to doublecheck on this consolidated EBIT of automotive. What is the kind
of write-off included in this for SsangYong? It is RS. 340 crores or it's higher than that?

Vankipuram S. Parthasarathy

Yes. So just to yes, this a good question. When it comes to SsangYong, we'll consolidate
it. We are not talking stand-alone, okay? Because it's , that's a new investment
impairment. In consolidation that doesn't figure in because you are picking up every
quarter the financial losses or proportion of the losses that we have, okay? So therefore,
there is no investment. This is an impairment of assets at SsangYong level. That
impairment of assets on a gross level is RS. 340 crores, and at the PAT level after NCI is
RS. 254 crores. So RS. 340 crores and RS. 254 crores, respectively. So that's the impact
on the financials of consolidated.

Hitesh Goel

Okay.

Vankipuram S. Parthasarathy

And , yes, the segment level in our consolidated, RS. 340 crores; at a PAT level, RS. 254
crores.

Pawan Kumar Goenka

Last question.

Operator

We have the last question from the line of Pramod Amthe from CGS-CIMB.

Pramod Amthe

This is with regard to the third partner or the partner you plan to bring into SsangYong.
This is more for a value discovery or to reduce your burden? And follow-up to the same is
there are talks about you looking for a partner in the EV business in India. So you're just
structurally changing the way Mahindra is looking at investments into subsidiary to bring
in partners so that the burden on the shareholders would be reduced structurally?

Vankipuram S. Parthasarathy

Just to give you a perspective, whether it is Systec, when you saw auto components or
any of the other investments, we have always welcomed and believed that a financial
partner will actually help us in many ways, not just monetary. So this has been a
philosophy, have always been, not a new philosophy that we are having from that
perspective. Having said that, now you asked 2 questions, first about SsangYong.
SsangYong, first is that when we are looking at getting investments, it is from that
perspective that investment into SsangYong will help us with both the things that you said
and more. So therefore, we are keen in it.

When it comes to electric vehicle, I don't want to comment on any speculation that
happens. But broadly, I can say to any private equity who walks into my door that here
are my 10 sectors, we welcome investments in all of them because we believe that
together we can create more value. So this is a very general philosophy, and therefore, if
somebody did tell tomorrow that they want to invest in Mahindra Electric, I would welcome
it. But I don't want to comment specifically on the report that you may heard from market.

Pawan Kumar Goenka

But a priority preference will always be strategic partner because strategic partner will
bring value also, especially when we talk about Mahindra Electric, where I have said many
times that scale is the key. If you get a strategic partner who puts together their
requirement of electric vehicle components into Mahindra Electric, then clearly, they
create a bigger business and brings in more value. So priority will be there, but we would
welcome a financial partner also.

Vankipuram S. Parthasarathy

Yes. So sorry, I just wanted to clarify this. What Pawan said is very applicable for Mahindra
Electric, but not generally.

Pawan Kumar Goenka

Correct.

Vankipuram S. Parthasarathy

What I answered applies generally, and to that extent applies to Mahindra Electric, but not
in this order of priority for strategic and then financial.

Operator

I'd now like to hand the conference over to Mr. Sriram Ramachandran for closing
comments. Sir, over to you.

Sriram Ramachandran

Yes. Just thanks a lot for participating. And if you still have some queries, you can write
to us, and we will respond it. Thank you.

Operator

Thank you very much, sir. Ladies and gentlemen, on behalf of B&K Securities, that
concludes this conference call. Thank you for joining with us, and you may now disconnect
your lines.