M&M - A good time to accumulate

Ssangyong’s takeover bid by Mahindra & Mahindra, if successful, would be the largest investment by an Indian company in South Korea and through this deal Mahindra will become the second Indian carmaker to enter the South Korean market after Tata Motors, which bought truck maker Daewoo Commercial Vehicle in 2004. Though the value of the bid has not been disclosed, it is anticipated that Mahindra and Mahindra would get a majority stake in Ssangyong of more than 51 per cent.

Ssangyong is mainly a manufacturer of low-priced but robust SUVs such as Rexton, Kyron and Actyon that are sold globally. It also makes sedans. With the addition of the besieged Korean auto maker Ssangyong Motors to its long list of acquisitions, Mahindra & Mahindra is getting closer to realization of its dream, which is to become a global SUV player. Along with Ssangyong’s state of the art technology, the deal will also provide direct access to M&M in the overseas markets-China, Russia, Western Europe and Korea. In the recent past, Ssangyong has had no significant product development which has impacted its sales. The acquisition could be slightly negative for Mahindra in the near term because Ssangyong is a small player and scalability is limited. Moreover, the latter even has some debts in its books. The bid amount offered by M&M would go into settling these debts, thereby giving M&M a debt free company. It would still take M&M at least 2-3 years to turn around the Korean company. Ssangyong's market share in Korea is around only 2% and the company does not have the capacity to scale up production.

Ssangyong would continue operating as an independent entity with Korean management as M&M would be pumping in money in the company’s product portfolio.

Going ahead, M&M is looking forward to, combined sourcing of the two companies to bring down cost for SYMC and M&M. It also expects to bring the premium SUVs priced over `11 lakh to India.

This along with the otherwise strong fundamentals of Mahindra & Mahindra, good monsoon and growing domestic consumption make us recommend investors to use the current downturn to accumulate this bell weather.