Asset Allocation: Value Creator Or Destroyer?

In the wake of the recent instance of Mahindra and Mahindra acquiring a 3.53 per cent stake in RBL Bank Limited that led to a drop in the automobile major’s share price, Shashikant takes a look at the role of asset allocation and how a company’s CFO can drive decisions that can either benefit or harm shareholders’ interests

On July 27, 2023, the shares of Mahindra and Mahindra experienced a decline of up to 6.9 per cent during intra-day trading. This drop came following the announcement that the company had acquired a 3.53 per cent stake in a private bank – RBL Bank Ltd. – with a potential plan to increase its stake to 9.9 per cent in the future. While on the surface this treasury operation seemed unproblematic involving Mahindra and Mahindra purchasing shares using cash from its reserves, the market response, however, was unfavourable. The acquisition of this 3.5 per cent stake was met with concern from the market regarding its capital allocation strategy.

Additionally, this move has raised uncertainties about the company’s intention to further invest in the bank, which could lead to short-term unpredictability concerning its capital allocation decisions. One contributing factor to the share price decline was the belief among several analysts that this acquisition might not prove advantageous for the conglomerate This is given that Mahindra and Mahindra’ primary business lies in the automobile sector and the investment in the bank could be viewed as “non-synergetic” with its core focus on automobile manufacturing.