Mahindra and Mahindra (MM IN, BUY) and Ford (F US, REDUCE) have announced that they will form a 51:49 JV. The JV will house Ford's India manufacturing business. MM will be responsible for running the JV in India. We believe that the key positives from this deal are:
Improved model cycle at lower cost-MM and Ford will jointly develop multiple products. This, in our view, will bring down capex requirements and improve the model cycle (C-SUV platform-joint platform; B-SUV-Ford platform; MPV platform-MM's platform; and BEV-Ford's Aspire platform).
Synergy from joint sourcing-the joint sourcing requirements would be $7 bn ($5.6 bn for MM and $1.4 bn for Ford). There is scope for cost savings for both companies.
Export opportunity-Ford's global network would support MM's and the JV's exports.
Profit contribution from JV-MM management plans to make the JV more profitable, which should contribute positively to MM's earnings.
With combined capacity of 1.2 mn and utilisation at 65%, there would be no need to expand capacity for a few years.
We maintain our Buy rating on MM given that the core auto business trades at ~9x FY21F EPS, which is attractive, in our view.
Deal structure-JV would be formed with MM holding 51% and Ford 49%
Ford India Pvt. Ltd's plants in Sanand and Gujarat will get transferred to the JV (440,000 cars capacity). Supporting employees from Ford's Global Business Service (GBS) would also move to the JV slowly. MM would have the right to appoint key members of management with approval from Ford. The JV will be able to manufacture products from the MM stable, the Ford stable or jointly developed products. The economic relationship with Ford global would be similar to what Ford India has currently.
Valuation-Attractive for MM
We note that MM would need to invest Rs 6.57 bn and get access to capacity for 440,000 cars annually. A capacity of this size would require capex of ~Rs 50 bn-60 bn. EV/EBITDA based on FY18 EBITDA would be 0.76.
Potential to improve profitability of Ford's India business
We note that Ford India has been improving its profitability over the past few years. With MM's support, the company has potential to further improve the EBIT margin and contribute positively to MM's core auto EPS (~5% based on FY18 financials).
Key takeaways from the concall
Benefits for JV from Ford-Ford will provide advanced technology, maturity in product development, global sourcing and global market reach/know how.
Benefits for JV from M&M-MM will bring in emerging market business model, integrated product development infrastructure in India, India sourcing, and Indian market know-how.
Product portfolio-C-SUV (will have both M&M and Ford products) and save 35-40% in development costs, synergy in sourcing/manufacturing.
The C-SUV launch will happen soon; engine sourcing from M&M to Ford will start earlier than for the C-SUV. In the future, a battery EV will be launched on Aspire platform. Another B-SUV product will come later (which may have 1 or 2 M&M models) as well as an MPV (on the M&M platform). The main focus will be UV/crossover, but sedans can be produced if demand is seen in segment.