JV plan with Ford may give only a limited boost to M&M valuation
Synergies from the JV expected mainly from manufacturing platform; challenges from vendor base and work culture could be daunting.
As a part of the joint venture, Ford India’s assets excluding the engine plant at Sanand and the global research centre at Chennai will be transferred to M&M. The JV will have an enterprise value of ₹1900 crore. M&M will hold 51 per cent in the joint venture while Ford India will hold the remaining stake.
Ford India has over 3 per cent market share in the passenger car segment with an annual capacity of 440,000 cars. Due to lower demand in the domestic market, it has been exporting about two-thirds of its production for the past three years.
M&M’s production capacity will rise by 50 per cent after the JV, which is expected to develop a few vehicles such as B and C sports utility vehicles (SUV) and an electric car on Ford’s Aspire platform. The principal aim of the JV is to bring down product development cost by using synergies, higher economies of scale and better manufacturing capability. Typically, it takes about ₹1200-1500 crore for the development of a new platform. M&M expects savings of 35-40 per cent on product development from the JV.
The JV may not enthuse investors on several counts. First, M&M will get the additional capacity at a time when the demand scenario is cloudy. The capacity utilisation of M&M and Ford is less than 70 per cent and 60 per cent respectively. Analysts expect M&M’s passenger car volume to drop for the current and the next fiscal.
Second, M&M’s track record with mergers and partnerships is not encouraging. It had a limited success with collaborations such as SsangYong, Renault and Navistar in the past. Moreover, history is replete in the auto sector with instances of a vast difference between the theoretical synergy benefits before the merger and the actual benefits. In the best case, the synergies from the M&M-Ford JV are expected mainly from the manufacturing platform, while challenges in the vendor base and work culture would be daunting. These factors are likely to keep the stock’s upside limited in the near term.