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Mahindra's Ssangyong buy: a good decision?

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Utility vehicles maker Mahindra & Mahindra could benefit in the long run from its pending acquisition of Ssangyong but investors are wary about the investments it will need to make in the Korean automaker and its recent foray into commercial trucks.

Over the last 18 months, Mahindra has been on a diversification spree through acquisitions and joint ventures, entering the heavy, medium and small trucks segment where Tata Motors is the leader and into the two-wheeler market with ambitions of making scooters and motorcycles.

Its shares have risen 14.5 per cent so far this year, compared with a 5.5 per cent rise in the main index and a 31 per cent rise in Tata.

TOO MUCH TOO FAST?

Analysts feel multiple moves at the same time would be a drain on Mahindra's cash flows and the stock could enter a phase of underperformance in the next 18-24 months.

"More than Ssangyong, its foray into the heavy commercial vehicles sector is an immediate overhang on the stock," said Jatin Chawla, sector analyst at India Infoline, which has a buy' on the stock.

Mahindra will also have to spend on Logan, the car it is now selling after buying out Renault's stake in a joint venture and new 2-wheelers, which is now a loss-making business.

Analysts are also concerned it would take two to three years for Mahindra to benefit from the Ssangyong acquisition, which would require substantial investment for product development.

With about 70 percent of Ssangyong's sales to Europe, currency fluctuations also pose a substantial risk.

"For now, I would stay away from the stock until I have more clarity. It looks expensive as of now," said Rakesh Rawal, head of private wealth management at Anand Rathi. Rawal manages around $1 billion of wealth for his clients.

EUROPE WITHIN REACH

Still, some remain optimistic. With Ssangyong, Mahindra would be inheriting a debt-free company, whose products are at least two development cycles ahead of Mahindra's.

"The acquisition is definitely a strategic fit for Mahindra. It does not clash with its existing bouquet of products," said Shishir Bajpai, senior vice-president of equities business at IIFL Wealth Management.

Ssangyong's SUV's are already Euro V compliant and will be Euro VI compliant soon, while India is still now meeting Euro IV emission standards. A ready market opens up for Mahindra in Europe, Russia, South America, Middle East, Africa and Asia, where Ssangyong exports.

"Ssangyong buy makes a lot of sense for them. It is their step towards establishing a global footprint," said Bajpai, adding he was positive on Mahindra & Mahindra.

Analysts said it would take a while for all its new products to get stabilised and start generating positive cash flows, but businesses such as heavy trucks, which are high margin, would boost profitability.

"Mahindra has ventured in many areas and their track record so far shows they have been right with their decisions and timing," Arun Kejriwal, director with research firm KRIS. "Their core business - utility vehicles and tractors are doing very well. So, if other ventures take time to deliver, it is not a worry," Kejriwal said adding he has a positive view on the stock.