Will Hindustan Motors’ New Strategy Work To Its Advantage?

Hindustan Motors, the maker of the iconic car Ambassador and manufacturer and marketer of Mitsubishi vehicles in India, has decided to demerge and transfer its Chennai car plant to its fully-owned subsidiary Hindustan Motor Finance Corporation.

Hindustan Motors has 3 production facilities at:

1. Uttarpara in Hooghly district, West Bengal, where it manufactures the Ambassador, a Light Commercial Vehicle (LCV) named Winner and automotive and forged components.
2. Pithampur near Indore, Madhya Pradesh, where it produces the 1800 cc CNG variant of the Winner.
3. Tirruvalu, in Tamil Nadu, its Chennai car plant (CCP), where it produces premium passenger cars like Lancer, Pajero and Montero under a licensed technical collaboration with Mitsubishi Corporation of Japan.

As per the recently announced demerger, while the CCP would be transferred to Hindustan Motor Finance Corporation (HMFCL), the remaining business and interests of Hindustan Motors (HML) would continue to belong and to be managed by it.

The CCP has been incurring losses since 2008-09, when global economic problems started taking a toll on sales volumes. The problems were further compounded by adverse movement in foreign exchange, which resulted in declined profits. After this came the domestic downturn in sales trend led by high interest rates and rising fuel prices. The cumulative effect of all these factors has been a manufacturing facility that is not profitable.

The case has been no different for the Uttarpara plant, which has been affected by the lost charm of the Ambassador and Winner’s ‘yet to be achieved’ volumes. The high-potential components business too lost its ability to profit due to the effect of prolonged strikes and macroeconomic factors.

Transferring the CCP to a subsidiary seems to be a move towards separating businesses and concentrating better on the respective operations in the company’s attempt to regain profitability. Currently, the CCP has a production capacity of 12000 vehicles per annum. However, it must be remembered here that CCP manufactures in collaboration with Mitsubishi, whose sales have been significantly lower. In CY2012, the sales of vehicles under the name of Mitsubishi amounted to all of 4139, which is a mere 35% of total capacity. Although the company has been planning to boost sales by introducing new models and increasing the number of dealerships, it hasn’t quite been able to do so successfully.

As per the proposed scheme of agreement, HMFCL will issue and allot to the shareholders of HML one equity share of Rs 5 each in HMFCL, credited as fully paid-up for every 13 equity shares of Rs 5 each fully paid-up held by them in the capital of HML. Although the move seems to be another step towards boosting performance, the sales volumes, currency movements and past performance do not suggest the possibility of a major turnaround in the near-medium term.

It stands true that sales of utility vehicles and premium cars are on the rise, but HML has a long way to achieve volume growth combined with profitability. The outlook looks good in the long-term if the steps planned are in the right direction. Thus, we recommend that investors with a short-medium term perspective to avoid investing in the scrip. However, long-term investors with a high-risk appetite can invest in HML to garner returns.