Home >Markets >Mark To Market >Ford JV exit shows M&M’s auto troubles, although tractors may have its back

After forging several joint ventures over the years, concerns about capital allocation is driving Mahindra and Mahindra Ltd to rehaul its business plans. Its exit from a joint venture with Ford is the latest move in this regard. This showcases the firm’s troubles in the automotive sector.

On one hand, some of the joint ventures, such as the one with Ford, haven’t delivered bang for the buck. At the same time, there is a worry that new product introduction in the passenger vehicle space may get impacted with the lack of decent partnerships.

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“We still remain concerned on the outlook of M&M’s utility vehicle market share. The company would need to collaborate with partners in future for technology and we should be watchful of the same," pointed out analysts at Elara Securities (India) Pvt. Ltd in a client note.

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Now that the JV with Ford has been called off, some of the plans to launch new product variants could change. Some of the larger platforms that were in discussions could now be met by making XUV300 bigger or the W601 platform smaller, say analysts.

For some time now, there have been concerns on capital allocation due to these joint ventures. But the recent exits could help conserve capital.

“M&M’s management has again reinforced investors that capital allocation remains the key tenet (target RoE of over 18) for decision-making," said analysts at ICICI Securities Ltd in a client note.

The firm is also selling its stake in South Korean automaker SsangYong Motor Co. Although M&M has exposure to the firm, much of that is recoverable.

“In the last eight months, the management has taken decisive steps to address capital allocation issues; no further investments in SsangYong, GenZe exit and early exit from Ford JV before making investments being the prominent ones," pointed out analysts at Elara Securities (India) Pvt. Ltd in a client note. GenZe was M&M’s electric two-wheeler brand.

Concerns, however, remain in the automotive division as sales have been dwindling. The auto division saw sales volume dip 10% year-on-year in December. But the fortunes are perking for the tractor division, which saw sales growth continue in high double-digits at 24% y-o-y in December.

One bright spark in the auto division has been the relaunch of Thar. Bookings for Thar remain high with the product commanding an eight- to 10-month delivery backlog.

The M&M stock, of course, has been on a tear, riding on the back of accelerated growth in tractors. It is already up 41% in the past year, and its one-year forward price-earnings of about 22 times FY22 expected earnings, as per Bloomberg data, is not cheap. Investors will certainly need the automotive division to fire up for valuations to get better.

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