Edelweiss: ‘Buy’ on M&M with target price of Rs 654 on Ford deal

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Published: October 4, 2019 3:11:05 AM

On the other hand, key concerns are — increase in the already complex structure of the automotive business; no major near-term benefit; and lack of clarity on whether M&M will be able to leverage Ford’s petrol engine expertise, which could help M&M in its BS VI transition.

Edelweiss, Mahindra & Mahindra, Ford India, BS VI transition, automotive businessIndividually, M&M expects to benefit from Ford’s global network and matured product development capability.

Mahindra & Mahindra (M&M) announced a joint venture (JV) with Ford India (FIPL) for a 51% equity stake and 50% of the board seats. Key positives are that it widens the scope of the ongoing collaboration to include product development, manufacture & distribution, 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, attractive pricing with EV to sales of 0.07x FY19; and 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 — increase in the already complex structure of the automotive business; no major near-term benefit; and lack of clarity on whether M&M will be able to leverage Ford’s petrol engine expertise, which could help M&M in its BS VI transition. Maintain ‘buy’ with a TP of Rs 654.

Both the partners are expected to reap operational benefits, including platform-sharing and product development, which can help deliver as much as 30% cost saving for both the partners, joint sourcing expected to aid in cost efficiencies, and the 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. In April 2019, M&M announced that it will develop a new C-SUV for Ford (unrelated to the new JV). Besides, future products which the JV might develop (subject to approvals) include a new engine for the Ford Ecosport, a new battery electric vehicle on Ford’s modified Aspire platform, two new B SUVs for Ford and atleast one (possibly two) new SUV(s) for M&M; and another SUV developed for Ford on M&M’s platform for sale in India as well as exports.

However, hybrid technology has been currently kept outside the JV’s purview. 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 near term, concerns as highlighted in our reports continue to weigh over long-term benefits, raising the risk of another round of earnings downgrade.

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