M&M: Designed to last

The acquisition of Jeco will bring in a strong clientele for M&M

In the past two years, Mahindra & Mahindra has snapped up four companies in auto ancillary and engineering space, a key growth area for the company.

Mahindra Systech, which houses the auto components business, is looking at a turnover of Rs 4,500 crore by 2010 from its current revenues of around Rs 1,100 crore.

The industry is likely to grow at 25 per cent annually for the next few years and M&M is also using the inorganic route to achieve this target.

Jeco is M&M's biggest buyout in this space, bigger than all the previous four acquisitions combined and reflects the increasing aggression of the firm. It had paid $60 million for the others, acquiring in the process revenues of $100 million.

The acquisition of 67.9 per cent stake in the ¤185-million Jeco Holding will bring it a strong clientele comprising Volvo, Scania Renault and Daimler Chrysler and a forging capacity of 100,000 tonne across three locations in Germany.

That together with the product capabilities and technology would help M&M tap other markets in Europe. The cost advantage in India can be well exploited in the engineering, design and forgings segments on which M&M is focussing.

The joint venture with International Trucks and Engine Corporation (ITEC) allows M&M to provide engineering and design services to ITEC globally.

The Jeco deal has been struck at an enterprise value of euro 140 million and Jeco is believed to have a low level of debt. At Rs 680, the M&M stock trades at just under 13 times FY07 and 10.5 times FY08 estimated earnings and is attractively valued.