Despite the purchase of Renault’s stake, the company is likely to face challenges in re-positioning the product.
Mahindra & Mahindra (M&M) has decided to purchase its French partner Renault’s 49 per cent stake in their joint venture (JV), Mahindra Renault Pvt Ltd, for an undisclosed amount. The JV manufactures Logan, an entry-level no-frills sedan.
Both partners, off late, have had differences over the future of the venture, especially as the Logan has seen its sales dip over 60 per cent to 5,532 units in 2009-10.
M&M may rebrand the Logan with its name in 18 months and come out with a new version of the car, which will be four metres in length, thus attracting a lower excise duty of 10 per cent (currently 22 per cent). According to the agreement, Renault will continue to support the Logan through a licence agreement and supply of key components, including engine and transmission.
Reports say Renault will also pay its share of the debt pegged at around Rs 160 crore. “While the company will face challenges in re-positioning the product, we believe that with a minimal acquisition cost, the risk return is favourable. In the near term, we see little impact on M&M,” states an Edelweiss Research report.
On the operational front, analysts expect M&M’s margins to decline across segments in 2010-11 due to higher material costs. “Overall, I expect 100-150 basis points impact on margins in the fourth quarter of 2009-10 due to rising input costs,” said Vaishali Jajoo, analyst, Angel Securities. Steel prices are also likely to stay firm due to strong domestic demand, higher input costs and the expected revival in global demand.
The stock ended flat on April 19 at Rs 503.65 and trades at a PE multiple of 13.7x FY11 standalone earnings, according to analysts’ estimates.
