Tuesday, August 17, 2010

Mahindra set to drive into global SUV market

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The estimated $400-450 million (about Rs 2,000-crore) acquisition of the Korean auto maker Ssangyong could turn Mahindra and Mahindra (M&M) into a global sports utility vehicle (SUV) player, giving it access to the European market, some technical knowhow and help in filling the SUV gap in its product portfolio.
Mahindra set to drive into global SUV market
While the deal is positive for M&M and will not be a major drag on its finances, given its $600-million cash chest, the Indian auto maker may have to invest substantial amounts to boost the R&D efforts of the Korean company. Ssangyong has not launched a new product in eight years and has been refreshing its product line over the years.
To boost sales, the company is planning to launch a compact SUV - Korando C200 - later this year. The good news is that Ssangyong, after suffering cumulative losses of Rs 4,000 crore over the last three years, is inching back to profitability on the back of a 37 per cent cut in fixed cost and downsizing efforts.
Mahindra set to drive into global SUV market
Turnaround story
Ssangyong has seen an improvement in its performance, both on sales as well as operational fronts. The company's earnings before interest, taxes, depreciation and amortisation (Ebitda) turned positive in the June quarter, after a gap of nearly two years, and it is likely to more than double its calendar year 2009 (CY09) sales volume (affected by a strike and slowdown) in CY10 to about 80,000 units.
According to Edelweiss, Ssangyong's losses in 2011-12 are estimated at about $20 million (Rs 100 crore) and will amount to about three per cent of the consolidated earnings for M&M. The cash infusion by M&M should help it to bring down its current debt ($320 million) and expand its product portfolio. The gains from the deal will give M&M access to the 1,300 dealers outside Korea, but the domestic show will have to be spruced up too, where it is fighting both high raw material costs as well as competition.
Mahindra set to drive into global SUV market
Near-term woes
While M&M gained market share in all its categories in 2009-10, the current calendar year has seen competition eating into its share due to supply constraints. Its utility vehicle (UV) share has dropped steeply from 56 per cent in January to 49 per cent in July. With M&M working to resolve supply issues, expect constraints to ease in the next few quarters. The Korean acquisition will help M&M bring in such high-end SUVs as Rexton from Ssangyong stable with a price tag of around Rs 20 lakh.
The company has also lost market share from 33 per cent to 26 per cent since January in the light commercial vehicle segment, which accounts for 28 per cent of M&M's automotive sales volumes. Edelweiss believes the launch of sub-1 tonne variants of Maximmo and Gio should help recoup some of these losses. On a broader level, M&M continues to expand its product offerings through acquisitions and new category launches.
Mahindra set to drive into global SUV market
Growth strategy, valuations
M&M has been adding new product categories through a series of acquisitions and alliances (Navistar, Punjab Tractors, Kinetic Motors and Reva Electric) over the last five years, with a few of them being distressed assets.
Even in the non-auto segment, M&M (through Tech Mahindra) acquired Satyam Computers and is in the process of turning it around. It had recently acquired Kinetic Motor's two-wheeler business and is now looking at the sick PSU Scooters India to strengthen its portfolio.
Mahindra set to drive into global SUV market
The company has also set its sights on the motorcycles market and is likely to launch a product by the end of the year. In the tractor segment, the second-largest revenue contributor, initiatives like the Mahatma Gandhi National Rural Employment Guarantee Act and normal monsoons augur well for the company. Expect growth rates and profitability to remain healthy.
The challenge for M&M, however, will be to ensure relevant focus on its vast product portfolio, spanning from two wheelers to heavy commercial vehicles. Given the strong growth rates estimated over the next two years in its key segments (UVs 15 per cent, tractors 15-20 per cent and LCVs 25-30 per cent), most analysts are bullish on M&M and value its stock at Rs 740-750, implying a 20 per cent return from the current levels.
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