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M&M: Going global - Views on News from Equitymaster
 
 
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  • Aug 9, 1999

    M&M: Going global

    Mahindra & Mahindra (M&M) is planning to set up tractor assembly units abroad. At the same time the company is also considering setting up of greenfield capacities in the domestic market. M&M is targeting Europe, Turkey, Egypt and Latin America.

    M&M (FY99 Sales Rs 34.5 bn) is a dominant player in the utility vehicle segment as well as the tractor segment of the automobile industry. It is also engaged in the manufacture of light commercial vehicles and is aiming to become the largest player (in terms of volumes) in the world tractor market. M&M also has a presence in the information technology, consultancy and realty sectors.

    M&M, which has been riding the boom in the domestic agriculture production, is gathering its act to focus on the international market. The decision is in keeping with the company's aim of becoming the number one tractor company in the world.

    The company's decision to venture into the international markets is a bold one. The costs involved in setting up such a project would be large. Also, given the high level of competition existing in the international markets, the company might take a long time to break even (which on a smaller capacity base may be even longer). This could prove to be a drain on the company's cash flows for some time to come.

    The company is setting up regional greenfield capacities of upto 10,000 units. The first such capacity is expected to be commissioned in the forthcoming year. This move will help the company increase its marketing reach and also help the meet the increasing demand for tractors. However, the decision to set up regional manufacturing units would lead to higher investments and fixed costs. Also, the advantages of economies of scale would whither if the company were to set up capacities of only 10,000 units per annum.

    M&M is also introducing mini tractors for smaller Indian farmers. This will increase the size of the targeted market and give the company a presence in all segments of the industry. Apart from this, this product could also prove to be a source of sales volume growth in the future.

    Finally, M&M has drawn up plans which involve a large amount of capital spending. This could lead to higher borrowings and interest costs. Moreover, if the domestic recovery were not to sustain, then the company could face a serious funding problem.

    Market View:
    The stock has been rated as a 'BUY' on account of the restructuring exercise undertaken by the company, the effects of which are already evident in the first quarter results. Moreover, with booming agricultural production, sales of tractors and utility vehicles are expected to grow substantially.

     

     

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