Why might Mahindra & Mahindra, India’s largest maker of sport-utility vehicles, turn around Ssangyong Motors, if China’s Shanghai Auto couldn’t? That’s what reporters have been asking the Indian group’s executives in Mumbai - and the responses were confident.
“Mahindra brings financial strength, frugal engineering, sourcing and market synergies to Ssangyong,” said Mahindra’s president, Pawan Goenka.
Anand Mahindra, the head of the family-controlled Mahindra conglomerate, added that India’s fast growing market for SUVs and luxury cars would provide ample opportunities to revive South Korea’s cash-strapped Ssangyong.
Investors initially seemed to have doubts about a possible deal. On Thursday, Mahindra’s shares dropped 1 per cent soon after Ssangyong announced in Seoul that it had chosen the Indian group as its preferred bidder for a controlling stake.
However, things quickly improved, after analysts’ positive comments convinced investors to put their money back into Mahindra. There was, analysts said, some rationality in the strategic restructuring plan.
For many the clincher was Mahindra’s statement that it would be buying a “debt-free” company, as bid payments would clear Ssangyong’s long-term debt, which is valued at about $620m. This means Ssangyong can forget about past worries and look at how to build the future.
Keep in mind, too, that Shanghai Auto’s purchase was ill-timed. The company bought a controlling stake in Ssangyong in 2004, just a few years record oil prices and a global recession. Both factors dented the Chinese group’s hopes of boosting SUV and luxury sales in mainland China.
By contrast, the current market scenario in India is extremely auspicious. Car sales in India hit an all-time high in July on the back of soaring rural demand, and Tata Motors reversed recent losses with better-than-forecast profits in the quarter ended June 30 as sales at its luxury marques soared. Tata plans to produce luxury cars in India to tap the country’s rising demand.
Meanwhile in China car sales rose at their slowest pace in 15 months, a clear sign that the Asia’s biggest economy is losing a little momentum.
The bottom line is simple, say global car analysts. China is trying to slowdown to avoid bubble risks, which means that growth will fall. Meanwhile, India, which is a decade behind the Chinese dragon, is more likely to maintain near-double-digit growth over the medium-term.
That is what lies behind Mahindra’s confidence.
