Explaining the rationale behind the surprise move, Shah said the company will make targeted investments to drive returns and focus on execution to “show outperformance”, unlike in the past where the execution of its capital allocation actions wasn’t “strong enough”.

He, however, added that M&M doesn’t have any plan to enter the banking business or raise its stake unless there is a “compelling strategic reason in the future”. It also won’t invest in any other bank, he said on the sidelines of the June quarter results press meet.

M&M nearly doubled its standalone net profit to ₹2,773.73 crore in the three months ended June, from ₹1,403.61 crore a year ago. This included a one-time gain of ₹405 crore from the KG Mobility, formerly Ssangyong, after it was bought out of bankruptcy by Korea’s KG Group.

Revenue from operations rose 22% from a year earlier to ₹24,056 crore.

Two weeks ago, M&M shareholders raised questions on the rationale behind investing in a bank as an industrial house and the prudence of its capital allocation decisions, with JP Morgan in a 26 July report, indicating that “free capital allocation worries can cap stock re-rating even as earning trends remain robust”.

“The strategic rationale for this particular investment is it’s a core business in financial services. We have a very large entity in that space (Mahindra Financial Services) and therefore, we need to find ways to enhance the value of that entity. The second question is, can we execute in that? In this case, it is more for understanding the banking business, not for a business we run, but if we want to go out and acquire, let’s say, a tractor business somewhere in the world, the question will be, can it be something that we can run? And can it give us results; can it help us grow much faster? And if the answer to that is yes, then we will go and acquire it,” Shah said. “We have enough cash. The main thing we want to do is not fall into that trap of ‘we have enough cash and therefore we should invest’; we do not want to fall into that trap. There is a very high bar on whatever we get into (18% return on capital employed). The execution narrative because very important, it is the results that finally matter. If we can show great results from an investment, that is when our investors will be happy with us,” he added.

Shah stressed that M&M’s capital allocation discipline hasn’t changed. “This (RBL Bank) is an investment of ₹417 crore today, in a sector that’s core to us and we want to grow a lot more in. We have an almost ₹40,000 crore market cap business in it already, with Mahindra Financial Services. This investment is for us to understand banking in a lot more detail, with a very long-term view of 7-10 years. There is no assumption on our part today whether we want to get into a bank or not, and at this point, there is no intention to raise our stake further. But it helps us to enhance the value of our business a lot,” he said.

Shah explained that RBL Bank “was very well-run with a strong management team and a strong foundation at a price-to-book (P/B) ratio of 1, and that’s the reason we’ve taken a 3.5% stake in this bank.” “At this stage, we don’t expect to go higher; at some point in time, if there is a very compelling strategic reason, we will evaluate it at that point in time. We will, in fact, enhance our capital allocation discipline,” he said.

Investors, however, are unsure about M&M’s move to invest in RBL Bank. “ The rationale is not adequately explained. They’ve currently picked up 3.5% stake and said at a point in the future, they may pick up more. We still don’t know when they’ll choose to increase their stake in the bank. It’s (the investment) is not core to M&M in any way,” said an analyst on condition of anonymity.

Updated: 04 Aug 2023, 11:03 PM IST