Stock Review: Mahindra & Mahindra (M&M)

THE immediate challenges for the Mahindra & Mahindra (M&M) management post the acquisition of Ssangyong Motor Company would be to stabilise and ramp up production and to deal effectively with local trade unions in Korea. On the positive side, given Ssangyong's overseas dealership network, the deal would take M&M a step closer to its ambition of becoming a global player in the sports utility vehicles segment.
Ssangyong's latest financial data is available for the six months ended June 2009 wherein it clocked revenue of $354.5 million. The deal size of over $463 million (approximately . 2,100 crore), works out to be just over half of its annualised topline. Though this looks cheap, it needs to be noted that Ssangyong had reported a huge net loss of $344.6 million during the first half of 2009 and its revenue during the period had skidded by more than half. The Korean company was adversely impacted by the global financial crisis of 2008, coupled with labour strikes at its facilities.

   Analysts feel it would be a daunting task for M&M to get the Korean company back to normalcy. It needs to be seen if M&M can emulate the success of its bigger peer, Tata Motors, in turning around JLR. When Tata Motors had purchased JLR in early 2008 for $2.3 billion (approximately . 11,000 crore), the deal value was much lower than JLR's revenue of nearly £5 billion (around . 41,500 crore). But the UK-based luxury car-maker was going through difficult times. Over the past four quarters, however, Tata Motors has made JLR's operations profitable. In the September 2010 quarter, JLR accounted for over two-third of Tata Motor's consolidated profit before interest and taxes.

   For M&M, it is crucial to identify synergies in the acquired operations, and media reports suggest that the company has already initiated the process. M&M has chalked out plans to source components for Korean and Indian operations. M&M would also benefit from the R&D facilities of Ssangyong and its vast dealership network across Russia, China, Middle East, and Western Europe. M&M has also highlighted an agreement with the Korean union, which is viewed positively by the Street. Also, according to a report by a domestic brokerage house, Ssangyong has reported a revival in demand. This, together with streamlining of costs, should see Ssangyong return to profits. However, it remains to be seen how quickly this turnaround would be achieved, and in the short-term the deal is not expected to be EPS accretive for M&M, say analysts.

   On a standalone basis, M&M had cash and balance of 1,743 crore at the end of March 2010. Its debt-equity ratio has been quite low for the past few years.