| The July31, 2006 issue of Businessweek featured an American farmer sitting on a tractor. Nothing unusual about that except that the tractor was an Indian one---made by the Rs 8,327 crore auto major Mahindra & Mahindra. |
| The Mumbai-headquartered M&M's exports of tractors today are small-""it exported just about 7,000 tractors in 2005-06. But it would like to do better and the acquisition of Punjab Tractors Limited (PTL), in which M&M has picked up a 43.3 per cent stake, will help further its ambitions. |
| As Anjanikumar Choudhari, president, farm equipment sector, says, "PTL has several products that can be exported to markets where M&M has a presence such as the USA or Africa." |
| But of course that's not why M&M, which earns around 38 per cent of its revenues from tractors, has bought out the Rs 958.55 crore PTL (FY06 revenues) for an estimated Rs 1,400 crore paying Rs 360 per share. |
| The main reason why the company was willing to pay such a high price, say industry watchers is because it wants to keep away the competition, especially foreign contenders. |
| Indeed, at these steep valuations---16 times FY08 EV/EBITDA, it seems M&M was quite desperate to buy the Chandigarh-based PTL, even though it has estimated receivables of over Rs 500 crore. |
| According to insiders, the company's initial bid was through a combination of cash and stock. But with rival bidder Ashok Leyland ready for an all-cash deal, M&M had little option but to revise the offer. |
| Is the price worth it? Says Ashutosh Goel, who tracks the automobile space at Edelweiss Securities, "On the face of it the deal looks expensive but in the medium to long term, the benefits should come through." |
| The buyout gives M&M a commanding 40 per cent share of the Indian market which is tipped to grow at around 10 per cent in the next few years. |
| Moreover, as Goel points out, "the consolidation will help bring both price and production discipline in a downturn and pricing power in good times." |
| As far as acquisitions go, there are synergies aplenty. PTL has the capacity to make 60,000 tractors but uses just half of it. M&M is almost full up on manufacturing capacity of around 100,000 tractors and can save itself an expansion programme. |
| In addition, PTL also has an engine plant with a capacity to make 30,000 engines. Choudhari says this will come in handy because M&M has also started selling engines and gensets a couple of years back. |
| Ramnath S, vice-president, SSKI Securities, points out, "PTL's tractors are of a bigger size""higher than 50 hp and would be a neat fit for M&M's product portfolio which comprises smaller tractors." |
| Again, PTL is strong in the north, which accounts for over a third of the industry's sales, but been losing share in the past few years; M&M, on the other hand has a share of just 24 per cent in the north compared with 40 per cent in the south and east and 29 per cent in the west. So M&M could use PTL's spare capacity to sell more in the region either through Mahindra's brands or PTL's 'Swaraj", which is fairly popular. |
| Besides, as Choudhari observes, procurement costs should go down with increasing scale. That's important because raw materials account for nearly 70-75 per cent of production costs. Also the combined dealer network can be used more effectively. And of course there is the option to export. |
| Says Choudhari, " Some of PTL's tractors we feel can be sold in overseas markets. It is profitable to export though the margins may be slightly lower than those on domestic sales and in some markets we get better realisations." |
| M&M currently has a manufacturing presence in China and three assembly units in the USA and is the fourth largest tractor manufacturer in the world. It may time to move up in the global hierarchy but at home, M&M has made sure it remains on top. |
Explore Business Standard