M&M’s acquisition: a bargain?

M&M’s acquisition: a bargain?
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First Published: Mon, Aug 18 2008. 10 47 PM IST

Updated: Mon, Aug 18 2008. 10 47 PM IST
Mahindra and Mahindra Ltd’s (M&M) latest venture in China may have made it the world’s largest tractor maker, but stock markets were not impressed.
The stock lost 3% on a day the market fell by less than 1%, which one auto analyst said could be due to risks associated with the buyout.
At first look, the deal looks good from M&M’s point of view. It will get a 51% stake in China’s third largest tractor manufacturer, Jiangsu Yueda Yancheng Tractor Manufacturing Co. Ltd, for a relatively small investment of $26 million (about Rs112 crore).
Yancheng Tractor has a manufacturing capacity of 26,000 tractors a year and a market share of about 13%. The firm’s revenues were $120 million in the last fiscal year. Its valuation of $50 million, therefore, works out to a mere 0.4 times annual revenues.
What’s more, M&M has said Yancheng is profitable at the Ebitda (earnings before interest, taxes, depreciation and amortization) level.
Analysts are surprised at the low valuation and concerned that the acquisition may involve some undisclosed risks. That’s another way of saying that $26 million is only an initial investment and more funds may have to be infused later. M&M’s increased presence in the Chinese market is a positive move, since it is one of the fastest growing.
M&M’s Indian operations have been strained with rising input costs eroding profitability. Although net sales grew 26% in the June quarter, net profit adjusted for notional foreign exchange losses rose just 12%. Brokerage IDFC-SSKI Securities Ltd had said in a recent note that it “remains concerned about M&M’s core business due to the uncertainty regarding a sustained revival in the company’s tractor business”.
Meanwhile, M&M’s stock has risen smartly by about 33% from its lows in early July and now trades at Rs568. At its low of about Rs425, markets were giving it a value close to nil for its core operations since analysts value the company’s subsidiaries between Rs400 and Rs500 per share. Even at current levels, the core business is valued at a low single-digit earnings multiple, which means the downside may be limited.
Mutual fund and insurance investors stay put
The correction in the equity markets has lasted more than seven months, the longest since the bull run began in 2003. But not long enough to deter investors in mutual funds (MFs) and insurance schemes.
Net inflows into growth schemes and equity-linked tax plans of MFs have been Rs3,315 crore so far this year, a little different from last year’s net inflow of Rs3,740 crore.
Similar figures for insurance companies aren’t available, but ICICI Prudential Life Insurance Co. Ltd, the country’s largest private sector insurer, points out that net inflows for its unit-linked plans continue to be strong. Between April and June, ICICI Pru’s premium collections grew by about 50% and investors continued to earmark 90% of this to unit-linked insurance plans (Ulips). Within Ulips, investors requested that 90% of the funds be deployed into equities.
While renewal premium collected by existing investors has added to the buoyancy in total collections, the majority of the collections are from new sales. New premium collections of all private insurers rose by more than 70% to Rs6,796 crore in the April-June period, but it’s not known how much of this was directed to the equity market. Also, this figure doesn’t reflect collections through renewal premiums.
In the case of MFs, too, steady inflows through systematic investments plans have propped up collections.
The fact that redemption pressure hasn’t been witnessed yet either by MFs, or insurance firms despite the crash in the markets since January points to a change in the mindset of this set of investors. Historically, these investors hit the exit button soon after a crash in the markets.
Fund managers point out that this time around, inflows pick up on days when themarket drops significantly, in order to gain from lower prices. The trend, of course, may not last if the correction sustains for a few more months.
Write to us at marktomarket@livemint.com
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First Published: Mon, Aug 18 2008. 10 47 PM IST