Mahindra & Mahindra (M&M) announced a joint venture (JV) with Ford India (FIPL) for 51% equity stake and 50% of the board seats. Key positives are:
1) widens the scope of the ongoing collaboration to include product development, manufacture & distribution;
2) brings cost synergies due to platform sharing, joint platform sharing (M&M expects this to lower costs by as much as 30% gradually) & common sourcing benefits;
3) attractive pricing with EV to sales of 0.07x FY19; and
4) since FIPL is PAT positive, it limits the extent of further investment required by M&M (unlike Ssangyong).
On the other hand, key concerns are:
1) increase in the already complex structure of the automotive business;
2) no major near-term benefit; and
3) lack of clarity on whether M&M will be able to leverage Ford’s petrol engine expertise, which could help M&M in its BSVI transition.
Maintain BUY with TP of INR654.
Envisaged JV synergies: Both the partners are expect to reap operational benefits including: 1) platform sharing & product development, which can help deliver as much as 30% cost saving for both the partners; 2) joint sourcing expected to aid in cost efficiencies; and 3) management control with M&M, thereby bringing in frugality. Individually, M&M expects to benefit from Ford’s global network and matured product development capability. Similarly, Ford will benefit from M&M’s expertise, network and understanding of the Indian market, where it has so far met with limited success.
Product pipeline: In April 2019, M&M announced that it will develop a new C-SUV for Ford (unrelated to the new JV). Besides that, future products which the JV might develop (subject to approvals), include: 1) a new engine for the Ford Ecosport; 2) a new battery electric vehicle on Ford’s modified Aspire platform; 3) two new B SUVs for Ford & atleast one (possibly two) new SUV(s) for M&M; and 4) another SUV developed for Ford on MM’s platform for sale in India as well as export markets. However, hybrid technology has been currently kept outside the JV’s purview.
Valuation and view: This is another arrangement after Toyota – Suzuki, which entails equity interest and sharing of best practices. We believe, the deal is positive for M&M as it reflects management’s yet another effort to fill capability gaps in product development. However, in the near term, concerns continue to weigh over long-term benefits, raising the risk of another round of earnings downgrade. We maintain ‘BUY/SO’ with SOTP-based TP of INR654.