M&M board rejects plan to pump in fresh equity in SsangYong Motor

Mahindra & Mahindra’s (M&M’s) board of directors has turned down a proposal to pump in fresh equity of $406 million in its ailing South Korean subsidiary SsangYong Motor Co (SYMC), Mahindra said in a statement on Friday.

“The magnitude of the unfortunate and unforeseen crisis created by Covid-19 has compelled us to take the difficult decision,” it said. Now, SYMC’s fate hangs in balance as it will need to raise funds from other investors, failing which it may be pushed to bankruptcy, said analysts.

A steep contraction in export volumes, and sudden changes in buyer preference for gasoline vehicles in Korea, among others, hit the company and led to record losses of Rs 704 crore for the Korean arm in CY20.

It also forced the maker of Scorpio and XUV500 to take an impairment charge of Rs 600 crore in the December quarter. In February, M&M said the Mahindra-SsangYong board had put in place a three-year plan to pull the company out of the crisis. It included fresh capital infusion through a mix of debt and equity.

“After lengthy deliberations, given the current and projected cash flows, the M&M board took a decision that it would not be able to inject fresh equity into SYMC and has urged the firm to find alternative sources of funding,” it said in the statement.

The board has, however, authorised the management to go ahead with a special one-time infusion of $32 million over the next three months for continuity of business operations, while they are exploring alternative sources of funding.

M&M “will make every effort to continue supporting all other non-fund initiatives currently in place to help SYMC reduce capex, save costs, and secure funds.” These include (without capex) free access to M&M’s new platforms, such as W601 support technology programmes, which would help reduce SYMC’s capex, assist in material cost reduction program currently underway, and help the Korean automaker’s management find new investors.

Mitul Shah, vice-president of Reliance Securities, said investors will view this positively, as it’s a hard time and cash conservation is critical for any company.

However, another brokerage termed it as a “setback” for SYMC. “Given the current global scenario, finding an investor will be challenging. It will potentially pave the way for bankruptcy,” said the analyst.

M&M had paid Rs 2,100 crore ($463 million) for the purchase. But each year over the past decade has been tough for the maker of Rexton and Tivoli brands.

The first two months of 2020 have been particularly tough, with Covid-19 outbreak knocking off sales in South Korea to the lowest in 11 years in February.

On an average, SsangYong sells 137,000 units (including exports) a year, averaging 11,416 units per month.