Mumbai: The auto components and design engineering arm of Mahindra and Mahindra Ltd (M&M), Mahindra Systech, is in advanced talks with two Australian aerospace companies—one to acquire an aircraft components maker and the other to forge a joint venture for building eight- and 14-seater planes.
The deals, once sewn up, have the potential to deliver for M&M the same value that the Scorpio, its multi-utility vehicle, did some five years ago for the group’s auto business, said Hemant Luthra, president, systems and technologies, M&M.
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“If we get it right, aerospace can do for Mahindra what Scorpio did,” Luthra said. “Anand (Mahindra) believes Mahindra Scorpio became a success because it was designed and manufactured at one-tenth the cost of manufacturing a new vehicle, and the market capitalization of M&M went up by 25 times in five years.” Anand Mahindra is M&M’s vice-chairman and managing director.
Luthra declined to name the companies with which it is in talks or reveal valuations, but said the Australian aircraft components maker has been supplying components to Airbus SAS and Boeing Co., the world’s top two aircraft makers, for the past decade.
“If this deal goes through we will actually have something in hand that we can show the Boeings and Airbus of the world that this is our off-set capability. This fits in well with being able to fabricate those aircraft,” said Luthra. Under India’s off-set policy, foreign firms are required to source locally at least 30% of the value of defence equipment contracts exceeding Rs300 crore.
The talks for the purchase of the Australian firm, Luthra said, started on a golf course. “I was playing golf with one of their investors. He is a cricketer, retired, former chairman of Australian cricket selection board.”
The promoters, he said, are passionate about aircraft and have been in the Australian navy, air force, civil aviation, and have seen the latter half of World War II.
The acquisition would be finalized in the first half of 2009 and the joint venture in a few weeks, he added.
Mahindra and Mahindra already has a small presence in aircraft manufacturing.
Three years ago, the group acquired an 88.41% stake in Bangalore-based Plexion Technologies, which makes 2- and 5-seater aircraft. Plexion was then merged with Mahindra Engineering Services, a firm that is growing at 25% a year.
The firm has a running contract with Bangalore-based National Aeronautics Laboratories (NAL) to jointly develop and own 5-seater aircraft.
NAL is the country’s aerospace design lab, which is developing a 14-seater passenger plane called Saras.
The Australian aircraft maker Mahindra Systech is in talks with for a joint venture has 150 2- and 8-seater aircraft, Luthra said. “If they tweak or modify the aerodynamics in India at Australian costs, it’s very expensive. We are now trying to convince them for a joint venture. They will throw in their 2- and 8-seater and we throw in our 5-seaters and co-develop a 14-seater.”
He added: “If you get a Rolls Royce or a Pratt and Whitney engine and fabricate and design it in India, you can take the aircraft off the ground in less than $200,000.”
Mahantesh Sabarad, an analyst at Centrum Broking Ltd said, “If M&M is looking at making it big in the aerospace sector, they cannot afford to overlook the defence sector as its more lucrative than the civil aviation.”
Apart from state-run Hindustan Aeronautic Ltd (HAL) which has announced aircraft and component manufacturing projects with foreign firms, the Tata Group, Larsen and Toubro Ltd, Bharat Forge Ltd and Godrej and Boyce Ltd are already engaged or are eyeing opportunities in aerospace components manufacturing.
Mahindra Systech is also doing due diligence for the possible acquisition of a US maker of automatic transmission systems that counts Ford Motor Company among its customers.
Luthra said Mahindra Systech already makes auto gears and if the deal is agreed, it could be a sub-assembly supplier for automatic transmission.
As a sub-assembly supplier, Mahindra Systech would be able to offer the automatic transmission technology rather than just the parts for it.
Mahindra Systech is keen to graduate from a parts supplier to the ranks of sub-assembly suppliers.