New Delhi: Ssangyong Motor Co. Ltd, the beleaguered South Korean firm that was acquired by Indian auto maker Mahindra and Mahindra Ltd (M&M) in 2010, will invest at least Rs.4,500 crore in a turnaround plan, said Pawan Goenka, chairman of the unit.
Goenka is also president and chief executive of M&M’s automotive division.
“We have significantly improved our financial performance during these six months compared to the last six months,” Goenka told analysts in a conference call on Thursday evening. “We are not at all in any kind of a concern mode for Ssangyong either in terms of current performance or in terms of future investment requirement.”
Despite losses in the 18 months since the takeover, the company has been able to generate enough internal funds for capital expenditure requirements, thanks to “a good cash flow situation”, Goenka said.
“We have already approved 450 billion won, which is say approximately $410 million (Rs.2,200 crore) of capex for Ssangyong,” he said. “We have another 800 billion won to 900 billion won (at least Rs.4,500 crore) in the pipeline for approval. And, we have a reasonably good sort of idea of how we will generate funds for this capex.”
The turnaround of Ssangyong, which is expected to declare its September quarter earnings next week, will depend upon its performance in India.
Ssangyong launched its first sports utility vehicle in India, the Rexton, on 17 October. The vehicle will be assembled by M&M at its Chakan unit with parts sourced from the South Korean firm, which is limping back to normalcy. In the first nine months ended September, Ssangyong sold 86,240 units globally, registering a growth of 0.6% from a year ago. The management still expects to grow at 5% this calendar year to 120,000 units. Ssangyong’s market share in South Korea has increased by 2 percentage points in a declining domestic market this year.
Mahindra bought a 70% stake in Ssangyong in 2010 for $378 million amid initial resistance from the South Korean company’s labour union that perceived M&M as a manufacturer of low-cost vehicles that wanted to squeeze out technology benefits from the transaction. The acquisition was aimed to help fortify M&M’s position in the utility vehicles market globally.
Goenka said on Thursday that the money will be spent on at least two vehicle platforms, with one development project being led by Mahindra with Ssangyong as the partner. The other one will be led by Ssangyong and will have Mahindra as the partner.
“We have always said that unless we have a strong product pipeline, there cannot be any sort of turnaround of any auto company, Ssangyong included, and therefore, our focus on product development cannot be diluted,” Goenka said. “All the products that we are talking about are going to have a sort of joint development effort between Ssangyong and Mahindra and a situation where there will be in most cases a Mahindra version of the product and a Ssangyong version.”
Ssangyong’s volumes are stagnant because of the overall economic situation, he said. “But if you were to compare that to other companies, we are certainly not in a situation which is any more bad than anybody else.”
Goenka said the turnaround of Ssangyong will take some time. “Every large acquisition (in) the auto industry where a company in poor financial position has been taken over by a new company, every time it takes two to three years before you see a financial turnaround,” he said.
The focus of Ssangyong is on improving financial performance before posting good numbers on a monthly basis, said V.S. Parthasarathy, Mahindra’s chief information officer and executive vice-president, mergers and acquisition, finance and accounts. “We will first look at Ebitda (earnings before interest, taxes, depreciation and amortization) positive and then PAT (profit after tax) positive and...already the last two or three quarters, we have been ebitda positive,” Parthasarathy said.
A sector analyst who tracks Mahindra’s stock said a turnaround was not possible before 2013-14 as a great deal of work needed to be done in order to make Ssangyong profitable.
“The Ebitda swing has come because they have managed to reduce overheads in terms of staff cost and other unnecessary costs,” said Bhaumik Bhatia, sector analyst, IDBI Capital Market Services Ltd.
“The turnaround is not possible before FY14 as the new products will only come that year and the South Korean market has been declining and above all, they are yet to start operations in China,” he said.
Besides India, the company is also banking on the Chinese market to boost sales.
“India is the key market. We would be happy to see a volume averaging about 500 a month and if that happens, that’s 6,000 vehicles sales in India,” Goenka said. “Six thousand is a very significant volume for Ssangyong in terms of export. The second market where there is a little bit of struggle right now, and we hope that this market will pick up for us, is China.”