M&M: Going green all the way

From being a tractor and utility vehicle player, the company has been steadily expanding its operations.

The stake purchase in Reva by Mahindra & Mahindra (M&M) enhances the latter’s scope of operations, as it gets set for the future of the automotive market. Industry experts reckon the electric vehicle (EV) market is slated to reach 5,00,000 units by 2012 and 1.5-2 million units by 2020. According to news reports, Nissan’s Leaf electric car is a sell-out, with around 19,000 pre-orders in the US and Japan for 2010.

The Indian market, too, is slated to touch 80,000 units by 2020, from almost nothing at the moment. No wonder, Reva got global auto major General Motors interested in it for collaboration.

The additional stake in Reva will also enable M&M make further innovations in its three-wheeler segment (‘Bijlee’) and other areas. Moreover, with Rs 2,200 crore in cash, M&M is not exactly a company with any funding issue that will disturb its balance sheet.

In addition, while the company goes green with this acquisition, its core businesses are strengthening. M&M has maintained its leadership position in the utility vehicle (UV) segment. Sales in FY10 grew 41 per cent over the previous year, while market share grew 55 per cent, an 807-basis-point gain. On the other hand, Tata Motors had a share of 13 per cent, down from 18 per cent.

Mahindra will soon target the premium segment with a new model. It is also eating into Tata Motor’s market share in light commercial vehicles (LCVs). Thanks to Maxximo, M&M has captured 32 per cent market share within 12-14 months of launch.

Sales of tractors, which contribute around 35 per cent to its volumes, have been robust. Its tie-up with Navistar will see it penetrating the heavy commercial vehicles market. Its presence in China will also allow it to enter the global tractor market. However, as the company expands in all directions, especially through its subsidiaries — which are into IT services, timeshare, financial services and real estate — the corporate complexity may increase.

Analysts at Goldman Sachs believe this increasing complexity of the corporate structure may potentially attract a higher conglomerate discount, leading to a compression in valuation multiples.