To unlock full potential of Finance & IT Arms, Mahindra & Mahindra to rev up services business

The auto to tractor major is closely watching its services contribution, which now accounts for 30-40 percent of the group’s profitability. With a five-fold growth in the services portfolio and unlocking the full potential in Mahindra Finance and Tech Mahindra, the share of the profits from non-auto and farm businesses would go up over the next 5-7 years, said company officials. Analysts say the share of services could go up significantly, to more than 50 percent.

“The contribution of ‘services businesses’ to M&M’s net cash generation is almost ₹7,000 crore over the FY22-24 period,” Anand Mahindra said at its recent AGM .

Mahindra has highlighted that with 18% RoE target attained, it will now focus on aggressive growth, especially across its growth gems-real estate, hospitality and logistics businesses.

The Mahindra group started on a journey of disciplined capital allocation in FY20-21, for businesses which had a clear path to value creation. Hard calls were taken to either turnaround or exit loss-making businesses. This led to a portfolio of 4 large core businesses and 10 growth gems in FY22-23.

The two large manufacturing businesses of auto and farm had clear manufacturing, sourcing and engineering synergies. The remaining businesses has services as a common thread, which basically houses financial services, IT services and majority of the growth gems.

“Mahindra is looking at unlocking full potential in Tech Mahindra and Mahindra Finance. Both have had some struggles in the recent past and have underperformed their peers. But the lessons from there have put significant plans for growth over the next few years. Mahindra Finance is well on the path to turnaround, Tech Mahindra with Mohit Joshi coming in has just commenced its turnaround. And both the businesses I think are going to be very good for the investor and obviously for the group,” Anish Shah said earlier.Tech Mahindra and Mahindra Finance are scale businesses with significant reach. For Mahindra Finance it is about improving asset quality and for Tech Mahindra it is operational execution. The focus is less on growth and more on profit-led growth, said the spokesperson.In the case of Tech Mahindra, the turnaround has just commenced. Mahindra Finance is more than half way through a similar multi-year journey and has already seen delinquency rates steady at sub-4% levels from close to double digit delinquencies. The book size [AUM] is up 23% in Q1FY25, and PAT is up 37%, added the spokesperson.

Several of these businesses, which includes unlisted entities have already grown 4X to 5X over the past four years. This portfolio valuation has grown from roughly $800 million in market cap in FY20 to $3.4 billion in FY23 and $4.2 billion in March 2024.

“Mahindra, currently is in a sweet spot in its core business with improved margins and wider product portfolio,” said Pankaj Pandey, head research in ICICI Securities.