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A clearer outlook for Mahindra-Ssangyong

A clearer outlook for Mahindra-Ssangyong

The clouds seem to be clearing up at Mahindra’s Ssangyong Motor Co. Ltd. About nine months ago, when the $7.1 billion (around Rs31,950 crore as of today) automotive conglomerate Mahindra and Mahindra Ltd announced its bid to acquire the ailing Korean Ssangyong Motor, its shares dipped on concerns on the extent of funds required and the time needed to engineer a turnaround.

But not only did the Korean firm sell 81,000 vehicles, with profitable operations during 2010, the new Mahindra management with a 70% controlling stake is confident of lifting sales volumes this year by a huge 49%, which implies operating the plant at full capacity. This would enable the company to reduce overhead costs per vehicle and improve margins.

Of course, this comes with significantly higher investment compared with last year into brand building and product development. The task is to regain its lost glory; until 2003, the Ssangyong brand had bit off a neat one-fourth share of the domestic utility vehicle (UV) segment, which is its forte, besides a strong presence in western Europe, Russia and CIS (Commonwealth of Independent States) countries. Products are being re-positioned in African markets, a key zone eyed by most UV makers. But, a ramp-up in overseas markets could well take a few quarters, given that Europe, which accounted for nearly half its exports, is not quite out of the woods yet, and in view of the political turmoil in the Middle East.

Meanwhile, fears on the acquisition turning a cash guzzler for the parent firm are gradually receding. Said Jatin Chawla, analyst institutional equities, India Infoline Ltd, “Post acquisition, Ssangyong is debt-free and it is likely that funds needed for product development and brand building would be raised at the subsidiary level."

Besides, Mahindra’s leverage is at a comfortable 0.18 times equity (December 2010). The recent traction in Mahindra’s share price, which saw a blip when the intent to bid for Ssangyong was announced, perhaps reflects this confidence.

That said, it remains to be seen how well the Mahindra-Ssangyong combination could deliver on chimerically viable hybrid fuel vehicles, a challenge since its recent acquisition of India’s Reva Electric Car Co.

To draw a comparison in the turnaround period of acquisitions, it was not before four to six quarters after Tata Motors Ltd acquired Jaguar Land Rover (JLR) that the latter’s operations turned profitable. But that was in different circumstances. Tata Motors was saddled with hefty debt and high costs on account of JLR, both of which weighed on the former’s balance sheet and profitability. However, at the time of acquisition, Ssangyong’s operations were profitable and its staff strength was down by nearly half. Acquisition funds were ploughed mainly into debt-retirement. And of course, the Mahindra-Ssangyong deal size at around $463 million was barely one-fifth that of the Tata Motors-JLR one.

From Mahindra’s perspective, a ramp-up in the group’s global auto volumes through Ssangyong’s 1,300-strong dealer network will lift revenue and earnings. Analysts estimate 13% growth in the stand-alone entity’s earnings per share, given the pressure on margins on account of higher commodity costs and a series of new launches in the auto segment on the home ground.

The stock, despite trading at a discount to peers since it is a business conglomerate, has outperformed the auto index and the Sensex since April. Faster-than-anticipated turnaround at Ssangyong with brand recognition and revenue traction in 2011 can improve valuations.

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