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G l o b a l e x p a n s i o n g e t s u n d e r w a y . . .
Mahindra & Mahindra (M&M) has completed the acquisition of the South
Korean UV manufacturer SsangYong Motor Co (SMC). As a part of the
deal, M&M has a 70% stake in SMC for $463 million ($378 million new
stocks, $85 million corporate bonds). SMC was earlier under court
rehabilitation following its loss making operations due to declining sales
and labour related issues. M&M and SMC have common synergies on the
business and operational front and a complimentary product portfolio.
Global footprint for M&M at reasonable valuations
SMC’s market share declined to 6% in the South Korea UV segment in
2009 (vs. ~24% in 2002) though it is experiencing an upturn in sales
volume (up ~130% YoY) with improving global scenario. M&M benefits
through SMC’s global presence (has ~1,300 dealers globally) and product
range with better R&D capabilities. We believe the acquisition will help in
creating a global footprint for M&M along with richer product portfolio on
a longer term. On the deal valuation front, the acquisition price appears
reasonable as the deal has been made at a large discount to its peers in
South Korea (CY11E EV/sales of 0.25x vs. ~0.9-1.1x range for peers).
Profitability improvement likely for SMC
SMC would benefit from higher profitability from M&M’s presence as cost
management measures would improve it along with stronger investment
in product development and debt reduction. We believe significant scope
exists for SMC to expand its margins to high single digits from current
levels (~2.9% in CY10) over CY11-12E.
Valuation
M&M has continued to perform well operationally and limit the impact of
high cost pressures. At the CMP of | 654, the stock is trading at 9.5x
FY12E EPS of | 48.0. We have valued it on an SOTP basis with the
standalone business valued at | 513/share and subsidiaries
(listed/unlisted) valued at | 228/share. We have valued SsangYong at |
55/share on the present market capitalisation basis. We have arrived at a
price target of | 741 and retained our BUY rating on the stock.
M&M - SsangYong deal
M&M completes SMC acquisition
M&M has completed the acquisition of South Korea-based UV
manufacturer, SsangYong Motor Co (SMC). This comes on the back of
the definitive agreement signed by the two companies in October 2010.
As per the deal, M&M has paid $463 million ($378 million new stocks and
$85 million corporate bonds) for a 70% stake in SMC. Post the completion
of the deal, M&M has appointed Pawan Goenka (President, Auto & Farm
equipment sector) as the chairman of SMC. The company would continue
to be driven though local management to initially focus on improving the
product pipeline and brand equity of SMC.
Proceeds to reduce debt and increase investment in product development
The proceeds from the stake sale have been used by SMC to retire its
existing debt ($380 million in December 2010), invest in new product
launches and R&D initiatives. SMC has stated the business plans for
investment of 200 billion Korean won for development of newer products.
With the revival of global auto demand coupled with M&M’s financial
stability and strong focus on the UV segment, we expect the acquisition
to benefit SMC (synergies, low cost manufacturing and sourcing, etc).
Additionally, the acquisition will widen the addressable geographic
market for both M&M (in Europe, Russia and Latin America) and SMC (in
India).
Why was SMC on the block?
Market share loss due to continued under-investment…
SMC is the smallest automobile manufacturer (in volume terms) in South
Korea primarily catering to the UV segment. The company has an annual
production capacity of 2,40,000 vehicles (on a double shift basis). It has a
portfolio of seven models, including two large-sized sedans, four SUVs
and one MPV.
Due to the lack of investment in product development and frequent
ownership changes, new product launches by SMC have been few and
far between in the last four years. Consequently, the company has lost
domestic market share in the UV segment (~8.9% in 2010 vs. ~24% in
2002) and the overall auto sector (2.2% in 2010 vs. 9.1% in 2002).
Prior to 1998, SMC was part of the SsangYong group and was divested
by the latter due to losses following the Asian financial crisis. However,
SMC’s new owner Daewoo Motors itself filed for bankruptcy in 2000
resulting in SMC again being put up for sale. As a result of the debt
restructuring programme, the equity stake in SMC was sold by the lender
group to SAIC during 2003-04, taking the latter’s stake in SMC to 51% by
the end of 2004. During 2004-09, SMC continued to be plagued with
stagnant volumes and mounting losses due to under-investment in R&D,
labour strikes, higher input costs and slowdown of the auto sector.
…and margin contraction due to lower production volumes
In 2009, SMC’s production volumes dipped 57% YoY to 34,703 units as a
result of a 770-day labour strike and slump in global auto demand (due to
the economic slowdown). Consequently, the company’s domestic market
share shrunk to 1.6% in CY09 (vs. 3.4% in CY08) while EBITDA margins
further deteriorated to -17.9% in CY09 (vs. -1.6% in CY08). In CY09, SMC
filed for bankruptcy protection when its owners refused to further fund it.
How does M&M benefit?
Entry in new overseas markets…
The acquisition appears opportune for M&M providing it access to
overseas markets and a strong distribution network. M&M dominates the
UV segment in India with a market share of ~60% but lacks a significant
presence abroad. The acquisition of SMC will provide M&M an entry into
the South Korean market where the former has a strong presence.
Additionally, with a distribution network of 1,300 dealers globally (130 in
South Korea), M&M will gain access to other fast growing auto markets in
Latin America, Europe and Russia. With the expansion of M&M into the
US market getting stalled due to legal hassles, this acquisition provides
welcome support to its global ambitions. In the last six months, SMC has
enjoyed traction in new overseas orders, including an order from the
Russia-based Sollers (export order of ~160,000 SUVs till CY17) and the
Vietnam-based Xuankien Vinaxuki (export order of ~16,000 units of the
Kyron model till CY14). It could roughly provide an attractive export
opportunity of at least ~26,000 units per annum
Expansion of product portfolio…
SMC has been operating in the auto sector for more than 40 years and
has a wide product portfolio along with a positive brand image.
Additionally, the company caters to the premium segment priced over |
12 lakh (where M&M’s top-end model pricing ends). Thus, the acquisition
will strengthen M&M’s product portfolio and provide it a strong line
extension in the high-end UV segment. Along with the SUV segment,
SMC’s Chairman model will mark the entry of M&M into the luxury sedan
segment.
…and access to high-end technology
As a result of the acquisition, M&M’s R&D capabilities will get a boost as
SMC has a strong R&D setup. Additionally, SMC’s existing product range
is based on sophisticated technology and compliant with the latest
environmental standards (Euro VI vs. Euro IV compliance of Indian
OEM’s). M&M plans to use SMC’s R&D facilities for developing green cars
and electric vehicles. Lastly, M&M will gain access to SMC’s expertise on
the engine manufacturing front where the latter has manufacturing plants
for gasoline and diesel engines (annual production capacity of 240,000
units on a double shift basis).
How does SMC benefit?
Liquidity to retire debt; higher production volumes
The fund infusion through the stake sale will allow SMC to retire its
existing debt and invest in new product development. This is likely to
result in higher production volumes in future (and improved operational
profitability). Additionally, SMC is expected to gain significantly from
M&M’s strong management. Lastly, the acquisition also opens up the
large and fast growing Indian auto market to SMC along with a strong
distribution presence and brand name via M&M.
Access to low-cost manufacturing and component sourcing
M&M’s management plans to shift the partial production of Korando C
and Rexton models to India. This will allow SMC to benefit from M&M’s
low-cost manufacturing capabilities and provide a ready source of lowcost components from India. Additionally, manufacturing in India will
allow SMC to significantly expand its production volumes without
incurring a huge capital expenditure and also provide a readymade
market for higher sales.
Sharing of R&D platform
M&M plans to collaborate with SMC for sharing technology and
platforms. This could result in lower R&D cost and lead time for the
development of new vehicles.
SMC’s revival underway
With SMC’s cost cutting initiatives (cut-down in number of employees)
and pick-up of production volumes, the company is returning to
profitability (positive EBITDA margins of 2.9% in CY11). CY10, sales
volumes have grown 129.6% YoY to 80,215 units (vs. 34,936 units in
CY09). The new management has targeted a sales jump of ~49% to CY10
for CY11. We believe the continued growth of sales volumes driven by
better operational efficiencies and new models could result in EBITDA
margins rising to high single digits over the next two years (similar to
CY03 when SMC had ~10% domestic auto sector market share). Lower
interest expenses due to the reduced debt repayment are likely to have a
favourable impact on SMC’s PAT margins.
What are the deal concerns?
Product pipeline to continue to remain dry…
SMC has not significantly invested in product development over the last
few years due to declining profitability and limited funding supporting its
owners. Recently, however, the company launched the fourth generation
version of the oldest brand “Korando” in Korea. This was a line extension
of the existing brand and still took it more than three years and 280 billion
KRW of investment. Thus, even though the company has earmarked 240
billion KRW in product and brand development, we believe it would be an
immense challenge for it to make any new brand/product breakthroughs
till FY13. This remains an area of concern in our view.
Small size of premium UV market in India
A significant portion of SMC’s product range can be considered under the
premium segment. Due to the current small size of the premium UV
market in India and significant competition in this space from more
established players (Toyota, Honda, Mitsubishi, Mercedes, etc), M&M will
find it tough to make a significant dent in the Indian market.
Acquisition price appears reasonable
We believe the acquisition price appears reasonable given the pick-up of
production volumes in CY10, improving operating performance and
synergies with M&M. SMC has been acquired at a substantial discount to
its larger peers in South Korea on an EV/sales basis (CY11E EV/sales of
0.25x for acquisition against 1.0x range for Hyundai Motors and Kia
Motors). This valuation has risen to 0.43x EV/sales for SMC post the deal
arrangement declaration in October 2010. We believe SMC is witnessing
normalised volume sales of ~9,000 units and would continue to witness
similar growth in CY11E. It could witness a turnaround if synergies
between the two companies are harnessed effectively.
Valuation
M&M has continued to perform well operationally and limit cost pressures
though rising input prices and interest rates rise have led to an overhang
and multiple contractions. At the CMP of | 654, the stock is trading at 9.5x
FY12E EPS of | 48.0. We have valued the standalone business at 8x
FY12E EV/EBITDA to arrive at a price of | 513/share. The listed
subsidiaries are valued on their current market capitalisation basis
totalling | 285.1/share. Among unlisted subsidiaries, Mahindra Two
Wheelers has been valued at | 6.4/share on a 0.5x price/sales multiple.
Others have been valued at 0.25x price/book value multiple to total
|10.0/share and we have arrived at | 228.1/share value post a 20%
holding company discount. We have valued SsangYong at | 55 /share on
a market capitalisation basis. Our target price of | 741 implies a 13%
upside. We have maintained our BUY rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
G l o b a l e x p a n s i o n g e t s u n d e r w a y . . .
Mahindra & Mahindra (M&M) has completed the acquisition of the South
Korean UV manufacturer SsangYong Motor Co (SMC). As a part of the
deal, M&M has a 70% stake in SMC for $463 million ($378 million new
stocks, $85 million corporate bonds). SMC was earlier under court
rehabilitation following its loss making operations due to declining sales
and labour related issues. M&M and SMC have common synergies on the
business and operational front and a complimentary product portfolio.
Global footprint for M&M at reasonable valuations
SMC’s market share declined to 6% in the South Korea UV segment in
2009 (vs. ~24% in 2002) though it is experiencing an upturn in sales
volume (up ~130% YoY) with improving global scenario. M&M benefits
through SMC’s global presence (has ~1,300 dealers globally) and product
range with better R&D capabilities. We believe the acquisition will help in
creating a global footprint for M&M along with richer product portfolio on
a longer term. On the deal valuation front, the acquisition price appears
reasonable as the deal has been made at a large discount to its peers in
South Korea (CY11E EV/sales of 0.25x vs. ~0.9-1.1x range for peers).
Profitability improvement likely for SMC
SMC would benefit from higher profitability from M&M’s presence as cost
management measures would improve it along with stronger investment
in product development and debt reduction. We believe significant scope
exists for SMC to expand its margins to high single digits from current
levels (~2.9% in CY10) over CY11-12E.
Valuation
M&M has continued to perform well operationally and limit the impact of
high cost pressures. At the CMP of | 654, the stock is trading at 9.5x
FY12E EPS of | 48.0. We have valued it on an SOTP basis with the
standalone business valued at | 513/share and subsidiaries
(listed/unlisted) valued at | 228/share. We have valued SsangYong at |
55/share on the present market capitalisation basis. We have arrived at a
price target of | 741 and retained our BUY rating on the stock.
M&M - SsangYong deal
M&M completes SMC acquisition
M&M has completed the acquisition of South Korea-based UV
manufacturer, SsangYong Motor Co (SMC). This comes on the back of
the definitive agreement signed by the two companies in October 2010.
As per the deal, M&M has paid $463 million ($378 million new stocks and
$85 million corporate bonds) for a 70% stake in SMC. Post the completion
of the deal, M&M has appointed Pawan Goenka (President, Auto & Farm
equipment sector) as the chairman of SMC. The company would continue
to be driven though local management to initially focus on improving the
product pipeline and brand equity of SMC.
Proceeds to reduce debt and increase investment in product development
The proceeds from the stake sale have been used by SMC to retire its
existing debt ($380 million in December 2010), invest in new product
launches and R&D initiatives. SMC has stated the business plans for
investment of 200 billion Korean won for development of newer products.
With the revival of global auto demand coupled with M&M’s financial
stability and strong focus on the UV segment, we expect the acquisition
to benefit SMC (synergies, low cost manufacturing and sourcing, etc).
Additionally, the acquisition will widen the addressable geographic
market for both M&M (in Europe, Russia and Latin America) and SMC (in
India).
Why was SMC on the block?
Market share loss due to continued under-investment…
SMC is the smallest automobile manufacturer (in volume terms) in South
Korea primarily catering to the UV segment. The company has an annual
production capacity of 2,40,000 vehicles (on a double shift basis). It has a
portfolio of seven models, including two large-sized sedans, four SUVs
and one MPV.
Due to the lack of investment in product development and frequent
ownership changes, new product launches by SMC have been few and
far between in the last four years. Consequently, the company has lost
domestic market share in the UV segment (~8.9% in 2010 vs. ~24% in
2002) and the overall auto sector (2.2% in 2010 vs. 9.1% in 2002).
Prior to 1998, SMC was part of the SsangYong group and was divested
by the latter due to losses following the Asian financial crisis. However,
SMC’s new owner Daewoo Motors itself filed for bankruptcy in 2000
resulting in SMC again being put up for sale. As a result of the debt
restructuring programme, the equity stake in SMC was sold by the lender
group to SAIC during 2003-04, taking the latter’s stake in SMC to 51% by
the end of 2004. During 2004-09, SMC continued to be plagued with
stagnant volumes and mounting losses due to under-investment in R&D,
labour strikes, higher input costs and slowdown of the auto sector.
…and margin contraction due to lower production volumes
In 2009, SMC’s production volumes dipped 57% YoY to 34,703 units as a
result of a 770-day labour strike and slump in global auto demand (due to
the economic slowdown). Consequently, the company’s domestic market
share shrunk to 1.6% in CY09 (vs. 3.4% in CY08) while EBITDA margins
further deteriorated to -17.9% in CY09 (vs. -1.6% in CY08). In CY09, SMC
filed for bankruptcy protection when its owners refused to further fund it.
How does M&M benefit?
Entry in new overseas markets…
The acquisition appears opportune for M&M providing it access to
overseas markets and a strong distribution network. M&M dominates the
UV segment in India with a market share of ~60% but lacks a significant
presence abroad. The acquisition of SMC will provide M&M an entry into
the South Korean market where the former has a strong presence.
Additionally, with a distribution network of 1,300 dealers globally (130 in
South Korea), M&M will gain access to other fast growing auto markets in
Latin America, Europe and Russia. With the expansion of M&M into the
US market getting stalled due to legal hassles, this acquisition provides
welcome support to its global ambitions. In the last six months, SMC has
enjoyed traction in new overseas orders, including an order from the
Russia-based Sollers (export order of ~160,000 SUVs till CY17) and the
Vietnam-based Xuankien Vinaxuki (export order of ~16,000 units of the
Kyron model till CY14). It could roughly provide an attractive export
opportunity of at least ~26,000 units per annum
Expansion of product portfolio…
SMC has been operating in the auto sector for more than 40 years and
has a wide product portfolio along with a positive brand image.
Additionally, the company caters to the premium segment priced over |
12 lakh (where M&M’s top-end model pricing ends). Thus, the acquisition
will strengthen M&M’s product portfolio and provide it a strong line
extension in the high-end UV segment. Along with the SUV segment,
SMC’s Chairman model will mark the entry of M&M into the luxury sedan
segment.
…and access to high-end technology
As a result of the acquisition, M&M’s R&D capabilities will get a boost as
SMC has a strong R&D setup. Additionally, SMC’s existing product range
is based on sophisticated technology and compliant with the latest
environmental standards (Euro VI vs. Euro IV compliance of Indian
OEM’s). M&M plans to use SMC’s R&D facilities for developing green cars
and electric vehicles. Lastly, M&M will gain access to SMC’s expertise on
the engine manufacturing front where the latter has manufacturing plants
for gasoline and diesel engines (annual production capacity of 240,000
units on a double shift basis).
How does SMC benefit?
Liquidity to retire debt; higher production volumes
The fund infusion through the stake sale will allow SMC to retire its
existing debt and invest in new product development. This is likely to
result in higher production volumes in future (and improved operational
profitability). Additionally, SMC is expected to gain significantly from
M&M’s strong management. Lastly, the acquisition also opens up the
large and fast growing Indian auto market to SMC along with a strong
distribution presence and brand name via M&M.
Access to low-cost manufacturing and component sourcing
M&M’s management plans to shift the partial production of Korando C
and Rexton models to India. This will allow SMC to benefit from M&M’s
low-cost manufacturing capabilities and provide a ready source of lowcost components from India. Additionally, manufacturing in India will
allow SMC to significantly expand its production volumes without
incurring a huge capital expenditure and also provide a readymade
market for higher sales.
Sharing of R&D platform
M&M plans to collaborate with SMC for sharing technology and
platforms. This could result in lower R&D cost and lead time for the
development of new vehicles.
SMC’s revival underway
With SMC’s cost cutting initiatives (cut-down in number of employees)
and pick-up of production volumes, the company is returning to
profitability (positive EBITDA margins of 2.9% in CY11). CY10, sales
volumes have grown 129.6% YoY to 80,215 units (vs. 34,936 units in
CY09). The new management has targeted a sales jump of ~49% to CY10
for CY11. We believe the continued growth of sales volumes driven by
better operational efficiencies and new models could result in EBITDA
margins rising to high single digits over the next two years (similar to
CY03 when SMC had ~10% domestic auto sector market share). Lower
interest expenses due to the reduced debt repayment are likely to have a
favourable impact on SMC’s PAT margins.
What are the deal concerns?
Product pipeline to continue to remain dry…
SMC has not significantly invested in product development over the last
few years due to declining profitability and limited funding supporting its
owners. Recently, however, the company launched the fourth generation
version of the oldest brand “Korando” in Korea. This was a line extension
of the existing brand and still took it more than three years and 280 billion
KRW of investment. Thus, even though the company has earmarked 240
billion KRW in product and brand development, we believe it would be an
immense challenge for it to make any new brand/product breakthroughs
till FY13. This remains an area of concern in our view.
Small size of premium UV market in India
A significant portion of SMC’s product range can be considered under the
premium segment. Due to the current small size of the premium UV
market in India and significant competition in this space from more
established players (Toyota, Honda, Mitsubishi, Mercedes, etc), M&M will
find it tough to make a significant dent in the Indian market.
Acquisition price appears reasonable
We believe the acquisition price appears reasonable given the pick-up of
production volumes in CY10, improving operating performance and
synergies with M&M. SMC has been acquired at a substantial discount to
its larger peers in South Korea on an EV/sales basis (CY11E EV/sales of
0.25x for acquisition against 1.0x range for Hyundai Motors and Kia
Motors). This valuation has risen to 0.43x EV/sales for SMC post the deal
arrangement declaration in October 2010. We believe SMC is witnessing
normalised volume sales of ~9,000 units and would continue to witness
similar growth in CY11E. It could witness a turnaround if synergies
between the two companies are harnessed effectively.
Valuation
M&M has continued to perform well operationally and limit cost pressures
though rising input prices and interest rates rise have led to an overhang
and multiple contractions. At the CMP of | 654, the stock is trading at 9.5x
FY12E EPS of | 48.0. We have valued the standalone business at 8x
FY12E EV/EBITDA to arrive at a price of | 513/share. The listed
subsidiaries are valued on their current market capitalisation basis
totalling | 285.1/share. Among unlisted subsidiaries, Mahindra Two
Wheelers has been valued at | 6.4/share on a 0.5x price/sales multiple.
Others have been valued at 0.25x price/book value multiple to total
|10.0/share and we have arrived at | 228.1/share value post a 20%
holding company discount. We have valued SsangYong at | 55 /share on
a market capitalisation basis. Our target price of | 741 implies a 13%
upside. We have maintained our BUY rating on the stock.
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