auto shares Mahindra & Mahindra M&M

Mahindra & Mahindra (M&M) (updated - 20 April 2010)
Mahindra & Mahindra (M&M) has decided to purchase its French partner Renault’s 49 per cent stake in their joint venture (JV), Mahindra Renault Pvt Ltd, for an undisclosed amount. The JV manufactures Logan, an entry-level no-frills sedan.

Both partners, off late, have had differences over the future of the venture, especially as the Logan has seen its sales dip over 60 per cent to 5,532 units in 2009-10.

M&M may rebrand the Logan with its name in 18 months and come out with a new version of the car, which will be four metres in length, thus attracting a lower excise duty of 10 per cent (currently 22 per cent). According to the agreement, Renault will continue to support the Logan through a licence agreement and supply of key components, including engine and transmission.

Reports say Renault will also pay its share of the debt pegged at around Rs 160 crore. “While the company will face challenges in re-positioning the product, we believe that with a minimal acquisition cost, the risk return is favourable. In the near term, we see little impact on M&M,” states an Edelweiss Research report.

On the operational front, analysts expect M&M’s margins to decline across segments in 2010-11 due to higher material costs. “Overall, I expect 100-150 basis points impact on margins in the fourth quarter of 2009-10 due to rising input costs,” said Vaishali Jajoo, analyst, Angel Securities. Steel prices are also likely to stay firm due to strong domestic demand, higher input costs and the expected revival in global demand.

The stock ended flat on April 19 at Rs 503.65 and trades at a PE multiple of 13.7x FY11 standalone earnings, according to analysts’ estimates.
source - business standard

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Mahindra & Mahindra (M&M) (updated - 27 May 2010)
The stake purchase in Reva by Mahindra & Mahindra (M&M) enhances the latter’s scope of operations, as it gets set for the future of the automotive market. Industry experts reckon the electric vehicle (EV) market is slated to reach 5,00,000 units by 2012 and 1.5-2 million units by 2020. According to news reports, Nissan’s Leaf electric car is asell-out, with around 19,000 pre-orders in the US and Japan for 2010.

The Indian market, too, is slated to touch 80,000 units by 2020, from almost nothing at the moment. No wonder, Reva got global auto major General Motors interested in it for collaboration.

The additional stake in Reva will also enable M&M make further innovations in its threewheeler segment (‘Bijlee’) and other areas. Moreover, with Rs 2,200 crore in cash, M&M is not exactly a company with any funding issue that will disturb its balance sheet.

In addition, while the company goes green with this acquisition, its core businesses are strengthening. M&M has maintained its leadership position in the utility vehicle (UV) segment. Sales in FY10 grew 41 per cent over the previous year, while market share grew 55 per cent, an 807-basis-point gain. On the other hand, Tata Motors had ashare of 13 per cent, down from 18 per cent.

Mahindra will soon target the premium segment with a new model. It is also eating into Tata Motor’s market share in light commercial vehicles (LCVs). Thanks to Maxximo, M&M has captured 32 per cent market share within 12-14 months of launch.

Sales of tractors, which contribute around 35 per cent to its volumes, have been robust. Its tie-up with Navistar will see it penetrating the heavy commercial vehicles market. Its presence in China will also allow it to enter the global tractor market. However, as the company expands in all directions, especially through its subsidiaries — which are into IT services, timeshare, financial services and real estate —the corporate complexity may increase.

Analysts at Goldman Sachs believe this increasing complexity of the corporate structure may potentially attract a higher conglomerate discount, leading to a compression in valuation multiples.
source - business standard

Mahindra & Mahindra (M&M) (updated - 17 June 2010)
As its overseas operations get wider, Mahindra & Mahindra (M&M) has started feeling the heat of the global dynamics. Global Vehicles, its exclusive distribution partner for pick-up trucks and sports utility vehicles (SUV) in the US, filed a suit on Monday, alleging a delay in product launches. The management at M&M holds that the suit is without merit and will be contested.

It will soon get into another contest, when the bidding process to acquire the Korean SUV company Ssangyong starts. On the face of it, the Ssangyong acquisition will not yield much, as the company has a minuscule market share of 1.5-2 per cent. The Korean market is also shrinking from 4.05 million vehicles in CY07 to around 3.5 million vehicles in CY09. Moreover, the $375-million Ssangyong has accumulated losses of around Rs 4,000 crore.

Funding for the acquisition will not be difficult, as the company has cash balances worth Rs 1,700 crore, and a debt-to-equity ratio of around 0.4:1. If the acquisition is funded through debt, with the first cut valuation estimates of around Rs 2,000 to Rs 2,500 crore, the debt-to-equity may rise to around 0.7:1, which is considered stable. The Korean company has liabilities of around Rs 2,800 crore, so cash infusion will be required at that front as well.

However, M&M can derive advantage from the fact that SSangyong has two strong brands - Rexton and Kyron - which are positioned in the premium segment. Moreover, its research and development facilities are supposed to be strong. This is something that M&M, with a market share of 55 per cent in India, will gain from. The Korean company also has presence in several key countries. Replicating these facilities afresh, say analysts, will take more than twice the valuation numbers doing the rounds. Gearing up with the bid of other players like Ruias from India, Renault and Nissan will surely heat up things.

The deftness of the management to get the right price, as it always has done in its acquisitions, will be the deciding factor.
source - business standard