Will Navistar’s Exit Thwart M&M’s CV Dream?

Mahindra & Mahindra (M&M) announced that it would buy JV partner Navistar’s stake in Mahindra Navistar Automotives (MNAL) and Mahindra Navistar Engines (MNEPL) for approximately Rs 175 crore. This development comes in the light of the fact that Navistar faces financial trouble back home. Although shelling out this amount seems to be a cakewalk for M&M, the big question remains. Will Navistar’s exit thwart M&M’s CV dream?

M&M and Navistar entered into the MNAL JV in late 2005 and the MNEPL JV in 2007. However, even after these long years, the JV hasn’t been able to make a mark in the Commercial Vehicles (CV) market of India. Macroeconomic conditions and strong competition have not let the association go beyond a 3-4% market share.

Accumulating Losses

Over the years, MNAL’s sales volumes have increased, resulting in a direct positive impact on the company’s revenues. The company recently rolled out its 5000^th vehicle from its Chakan plant. Its revenues increased by 69.58% in FY12 on a yearly basis to Rs 1229.77 crore. However, both the JVs have been loss making. Losses of MNAL and MNEPL in FY12 amounted to Rs 309.96 crore and Rs 64.76 crore respectively. With M&M now sailing alone, it would have to bear these losses till these companies break even.

M&M’s performance in Passenger Vehicles has been extremely robust. This has been helping the company offset its subdued performance in Commercial Vehicles and Farm Equipment. Although there seems to be added pressure on it in the short-run, M&M seems to be in a position to deal with it.

Declining Sales

Although volumes and revenues of MNAL have increased over the years, increased excise duty and diesel prices, high interest rates and weak industrial output have resulted in subdued demand for CVs in the last few quarters.

From April-November 2012, the overall CVs segment registered growth of 2.73% on a YoY basis. This overall weakness is a cumulative of the weakness in the Medium and Heavy Commercial Vehicles (M&HCV) segment and the strength in the Light Commercial Vehicles (LCV), in which sales changed by -16.34% and 16.98% respectively, over the same period. The story has been no different for MNAL which registered a YoY decline of 6.54% in sales from April-November 2012. The outlook on sales remains negative for the short term.

MNAL’s product portfolio spans from Gross Vehicle Weight (GVW) of 4.6 tonnes to 6.255 tonnes in LCV and 25 tonnes to 49 tonnes in HCV. With a strong product portfolio and consistent efforts to increase dealership and service points, the prospects for growth definitely seem huge. To add to this, is the existing sales and distribution network and brand recognition of M&M developed through its tight grip in the tractor business. This works in MNAL’s favour in the long-run.

Technology Transfer

The big question over the sustainability of M&M’s CV business in the long run arises out of technology transfer. Details of technology know-how, support and transfer are not known at this stage. Prospective investments and alliances will be dependent on the state of technological expertise with M&M at the moment. The future of its standing in the 25 to 49 tonne market would be decided by developments on this front. Moreover, considering M&M’s commitment to turn Ssangyong around, heavy investments in the CV business could see some strapping, ultimately forcing it to look for another partner.

Overall, due to the trend in CVs and the financial performance of MNAL, M&M’s position seems to be tight in the near-term. But this would change in the long-run if it manages to maintain its positioning through productive investments and synergies.