Large companies often take the mergers and acquisitions (M&A) route to expand capacity, garner resources and gain market share. Mahindra and Mahindra Ltd’s JV with global auto giant Ford Motor Company underscores this strategy.
On the face of it, the deal looks like a win-win for both the auto firms. Mahindra’s initial investment of ₹656 crore for a 51% equity stake in the JV, gives it access to Ford’s India production facilities at its Chennai and the Sanand plants.
Mahindra's investment is minuscule considering its annual profit of about ₹4,800 crore and market capitalisation of about ₹69,000 crore. Note that Ford has a capacity to roll out around four lakh vehicles from its Indian units.
“In a dynamic and challenging auto market, the joint venture combines the benefits of scale and sourcing. With competition rising from incumbents and new entrants, this is one way to bring down costs and offer new products to customers rapidly," says Jigar Shah, CEO, Maybank Kim Eng Securities Ltd.
That said, there are concerns about the success of this JV, despite their long association in India. This is because of several failed associations in the past M&M has had, especially with global auto firms.
Mahindra’s joint venture with French auto firm Renault, almost a decade ago, failed. The latter finally exited. Also, its Korean acquisition Ssangyong Motors continues to bleed ( ₹400 crore in Q1FY20) on the back of weak domestic and export markets. Even France’s Peugeot Motorcycles, in which Mahindra bought a majority stake in 2015, has been through rough terrain. The joint-venture is hopeful of EBITDA break-even by FY21E.
Although, these form a relatively small value of the consolidated business, they weigh on the stock price on the basis of sum-of-the-parts valuation. Also, it makes investors wary of the management’s utilisation of cash reserves. If this JV defies historic trends, it should support revenue and profit growth in the long term.
In the past year, M&M shares have underperformed the Nifty Auto index by a wide margin. While the auto index has fallen 23%, the company’s shares have fallen 34%.
The higher fall in M&M shares is attributed by analysts to weak sales even in the farm segment, which normally shores up profitability of the company.
As things stand, the domestic passenger vehicle market continues to be on a weak footing. Mahindra’s September auto sales continued to slide falling by 22% year-on-year, on the back of a 32% fall in August.
Industry watchers reckon that the JV should help Mahindra get nimble-footed and launch more products to take on competition from Maruti Suzuki India Ltd and Hyundai Motor India Ltd. Both Ford and Mahindra will tap emerging markets on the strength of their individual brands for now. Recall that Mahindra management has in the recent past voiced its intent to emerge stronger in exports too.