Will MNAL Be Able To Profit In 3 Years?

Mahindra & Mahindra (M&M) recently announced that it would be buying out its JV partner Navistar’s stake in Mahindra Navistar Automotives (MNAL) and Mahindra Navistar Engines (MNEPL). In an analyst conference call, Pawan Goenka, President, Automotive & Farm Equipment Sector, Mahindra & Mahindra, said that MNAL has received 3 years from the board of M&M to turn the business around.

At present, MNAL has not managed to break even. It has sold a little over 5000 vehicles and grabbed a 2-3% of the market so far. Demand has been weak throughout FY13 and the most affected segment in the Indian automobile industry has been Medium & Heavy Commercial Vehicles (M&HCV). This is a segment in which MNAL is present. From April-November 2012, total M&HCV sales have declined by 16.3.4% over the corresponding period in the previous year. The loss-making subsidiary saw an increase in turnover of 69.58% in FY12. However, losses mounted to Rs 309.96 crore.

Commenting on the future of Mahindra’s journey without Navistar, the management said it has dependency on Navistar for engine supplies. However, it is not worried about the technological future on this front. M&M’s license with Navistar continues indefinitely. It has the right to use current IPs of Navistar and also has the right to use or develop these.

The total investment made by both these entities so far has been to the tune of Rs 1066 crore. Looking forward, M&M plans to make an infusion of approximately Rs 7500 crore over the next 3 years. This would include capital expenditure, investments and loss funding. Emission norms, product variants, export variants and body building are some of the areas that these funds would be used for.

MNAL is present in the LCV segment and in trucks above Gross Vehicle Weight (GVW) of 25 tonnes. It has a gap in its product portfolio, in the 9-16 tonne segment. The management said it doesn’t have intentions of making investments in this segment till it achieves breakeven.

In an effort to improve its overall standing, M&M plans to work on its front end and on sourcing. The management said it has got a positive response from its dealer network on the decision to drop Navistar’s name from the branding of the product. It is believed that this will improve sentiment around the brand and strengthen positioning.

With these points clearly stated, the only factor that would result in a turnaround for MNAL is an improvement in overall sentiment. Subdued demand combined with heavy discounts by existing players has resulted in pressure on sales and on margins. An improvement in sentiment was expected by the second half of FY13. However, this hasn’t changed one bit and the near-term outlook continues to remain low. Turning positive for the company now remains in the hands of the environment it operates in.