How Mahindra got SML Isuzu for peanuts?

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In this week’s newsletter, we’ll learn:

1. Mahindra & Mahindra’s deal with SML Isuzu for a majority stake.

2. Using the Calmar Ratio in picking mutual funds.

Mahindra & Mahindra (M&M) has made headlines as it acquired a 58% stake in SML Isuzu from its promoter at a surprising 60% discount!

But why did SML Isuzu’s promoters agree to sell at such a low price, and what’s Mahindra planning to achieve with this purchase?

Let’s unpack the deal, the hidden value, and how both players got what they wanted.

SML Isuzu specialises mainly in buses. It has a market share of around 17% in India’s 5-12 tonne bus segment, and it is particularly strong in school & company buses.

Historically, 75-80% of their bus sales came from school buses. In the latest financial year, it held an overall 9% share in India’s domestic bus market.

Despite making record profits of over ₹100 crore, SML Isuzu’s Japanese parent, Sumitomo, wanted to exit the business. For Sumitomo, SML Isuzu was a small, non-essential part of its global business, which earned a profit of ₹3.3 lakh crore in FY2024. ₹100 crore was barely a decimal point for them.

Their new strategy, the Medium-Term Plan 2026, involves focusing only on high-growth areas like energy, digital, and healthcare.

So, even though SML was profitable, it was considered too small and less strategic for Sumitomo’s future. To quickly move on, Sumitomo chose Mahindra, a reliable Indian player, for a quick and easy sale, even if it meant selling at a lower price.

Mahindra & Mahindra was eyeing SML Isuzu for a while, and now, finally, it is buying a ~59% stake for ₹555 crore i.e. at a ~60% discount. In compliance with SEBI takeover regulations, M&M is doing an open offer to other shareholders to acquire another 26% at ₹1,554.6 per share.

The open offer was priced at a 13% discount to the market because Mahindra believed the stock’s market price didn’t reflect its fair value, citing its thin trading volume.

This structured deal allows Mahindra to effectively control SML Isuzu while providing an exit to existing stakeholders. M&M currently has no plans to delist or merge with SML Isuzu.

Mahindra is a market leader in SUVs, tractors, light commercial vehicles (LCVs), and electric three-wheelers.

But, for Mahindra, trucks and buses haven’t been their strongest point. The heavy trucks and buses segment has struggled, holding only a 2.5% share in the medium and heavy commercial vehicles (MHCV) segment.

During the COVID-19 pandemic and subsequent challenges like stricter emission norms (BS6) and semiconductor shortages, Mahindra had to rethink its business priorities. So, in peak COVID, they divided their businesses into three categories:

• Category A: Clear and high profitability.

• Category B: Strategic value but uncertain profits.

• Category C: Uncertain profitability and strategic value.

Their truck and bus business fell into Category C. This segment also took a ₹630 Cr impairment in Q3 FY2023.

However, recent improvements, including simplifying operations from 12 business units to 6, led to noticeable growth. Even with these improvements, Mahindra needed more strength to compete & grow effectively.

Mahindra had two choices to grow its business: organically, i.e., by expanding its existing operations, or inorganically, i.e., by acquiring another company.

Organic growth is difficult and slow, so Mahindra seems to have chosen to grow inorganically through this acquisition.

Here’s how Mahindra immediately benefits from this acquisition:

1. Increased Market Share: By acquiring SML’s 16% in light buses, Mahindra’s market share rises to 21%. In heavy commercial vehicles (more than 3.5T), its market share doubles to 6%. The deal also doubles its service network.

2. Advanced Technology: SML’s expertise in CNG and electric buses complements Mahindra’s business, helping them quickly develop electric buses with their strong supply network.

3. Financial Impact: This deal slightly improves Mahindra’s earnings per share based on SML Isuzu’s contribution.

The future looks promising, especially for buses. The government plans to replace old buses, leading to a possible 8-10% yearly growth in FY2026 after an 11-14% increase in FY2025.

For trucks, growth is slower, but Mahindra sees potential by improving dealer relations and leveraging its defence vehicle manufacturing capabilities.

That being said, Mahindra intends to remain cautious, focusing primarily on smaller commercial vehicles rather than aggressively expanding into heavier truck segments.

They’ve made it clear their focus isn’t on new bus segments like intercity luxury buses.

Instead, they want to strengthen their position in light and medium vehicles, where they’re already performing well. For Mahindra, continued focus on what works is the name of the game.

For their trucks & buses segment, they plan to slowly increase their market share in heavy commercial vehicles from 6% post-acquisition to 10-12% till FY2031.

Both Mahindra and Sumitomo clearly saw different values in this deal. For Sumitomo, it was about quickly exiting non-core businesses. For Mahindra, it was a strategic opportunity to enhance their commercial vehicle business at a good price.

Ultimately, Mahindra got a well-positioned company at a fair valuation, allowing them to strengthen their weaker segments without losing focus on their main businesses.

Imagine you’re the captain of a cricket team. You need to send in the next batsman to face the opponent team’s bowler.
The goal is not just to score runs but also to avoid getting out quickly.

Now, think of two batsmen:

Who would you trust in an important match? Investors have a similar choice when choosing mutual funds to trust their investment with.

Now, let’s imagine two funds that might both give 15% yearly returns. But Fund A once lost 60% in a market crash, while Fund B never lost more than 15%. Which one to choose?

The Calmar Ratio is useful here. It shows the average return an investor earns for bearing risk in the worst-case scenario, such as a market crash.

Here’s the formula:

• The numerator shows the actual returns earned by the investor on average.

• The denominator shows ‘maximum drawdown’. It is the biggest actual drop in the value of an investment that has happened.

For example, a fund’s value went from ₹100 to ₹200 (peak), then fell to ₹120 (lowest point before it recovered). The drawdown is ₹200 – ₹120 = ₹80.

But, how is this useful in markets?

The Calmar Ratio helps investors compare how much return a fund is giving relative to the worst loss it has suffered.

It’s useful because two funds may have the same return, but one might have taken much bigger risks to get there.

So, it helps investors choose not just high-return funds but those that achieve returns without taking too much risk.

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This week, I recommend watching an interview with legendary investor Vijay Kedia! He shares his journey and strategies, from building his portfolio to navigating market corrections and exploring case studies.

This is a must-watch for anyone serious about mastering long-term investing.

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