M&M: Playing the global field

The company will benefit more from the facilities of Ssangyong, than from its presence in the Korean market.

As its overseas operations get wider, Mahindra & Mahindra (M&M) has started feeling the heat of the global dynamics. Global Vehicles, its exclusive distribution partner for pick-up trucks and sports utility vehicles (SUV) in the US, filed a suit on Monday, alleging a delay in product launches. The management at M&M holds that the suit is without merit and will be contested.

It will soon get into another contest, when the bidding process to acquire the Korean SUV company Ssangyong starts. On the face of it, the Ssangyong acquisition will not yield much, as the company has a minuscule market share of 1.5-2 per cent. The Korean market is also shrinking from 4.05 million vehicles in CY07 to around 3.5 million vehicles in CY09. Moreover, the $375-million Ssangyong has accumulated losses of around Rs 4,000 crore.

Funding for the acquisition will not be difficult, as the company has cash balances worth Rs 1,700 crore, and a debt-to-equity ratio of around 0.4:1. If the acquisition is funded through debt, with the first cut valuation estimates of around Rs 2,000 to Rs 2,500 crore, the debt-to-equity may rise to around 0.7:1, which is considered stable. The Korean company has liabilities of around Rs 2,800 crore, so cash infusion will be required at that front as well.

However, M&M can derive advantage from the fact that SSangyong has two strong brands — Rexton and Kyron — which are positioned in the premium segment. Moreover, its research and development facilities are supposed to be strong. This is something that M&M, with a market share of 55 per cent in India, will gain from. The Korean company also has presence in several key countries. Replicating these facilities afresh, say analysts, will take more than twice the valuation numbers doing the rounds. Gearing up with the bid of other players like Ruias from India, Renault and Nissan will surely heat up things.

The deftness of the management to get the right price, as it always has done in its acquisitions, will be the deciding factor.