CRISIL has reaffirmed its ratings on Mahindra & Mahindra Ltd’s (M&M’s) various bank facilities and debt programmes. The reaffirmation follows M&M’s announcement that it has entered into an agreement to form a joint venture (JV) in China with Jiangsu Yueda Yancheng Tractor Manufacturing Co Ltd (Yancheng Tractor), a leading Chinese tractor manufacturer. M&M will hold 51 per cent in the JV through its subsidiary, Mahindra Overseas Investment Company (Mauritius) Ltd.

The tractor business-related assets and current liabilities of Yancheng Tractor will be transferred to this JV. Yancheng Tractor’s assets include a manufacturing facility with a capacity of 50,000 tractors a year. The value of net assets transferred to this JV will be RMB.335 million (around USD50 million). The transaction is subject to receipt of necessary approvals.

The proposed JV is expected to entail a cash outflow of around Rs.1.1 billion for M&M, which is expected to be funded out of the company’s internal accruals and liquid investments. In CRISIL’s opinion the proposed JV is unlikely to vitiate M&M’s financial profile.

With this JV, M&M is expected to have a tractor product range going up to 125 horse power (HP). The company will also have a large manufacturing base in China, which could be used to cater to the Chinese market and also for low-cost manufacture for exports. The combined distribution network of both operations is expected to give M&M a larger presence in the overseas market.

The ratings continue to reflect M&M’s leadership position in the Indian tractor industry. With the recent successful integration of Punjab Tractors Ltd (PTL), M&M’s market share has increased by about 10 percentage points, to about 40 per cent. PTL adds significantly to M&M’s already strong farm equipment business, and provides it with a significant market presence in North India. M&M also enjoys a strong market position in the utility vehicle industry, and has a diversified presence across the automotive original equipment manufacturer (OEM) and component businesses through various subsidiaries. The ratings also reflect M&M’s highly efficient operations, engendering cost competitiveness.

Over the past two years, M&M has executed a number of mergers and acquisitions. Besides the PTL purchase, it has carried out a spate of acquisitions in the engineering design and auto-components space. M&M has also entered into JVs with Renault and International Trucks and Engines Ltd in the auto OEM space.

Outlook: Negative
CRISIL believes that M&M will continue to pursue its large organic and inorganic growth plans, which will lead to an increase in its financial leverage from current comfortable levels, estimated at around 0.5 times. M&M could also face challenges in integrating the acquired businesses and ramping up new ventures, making it more vulnerable to business volatility. The rating could be revised downwards if M&M funds its future capital expenditure and investments predominantly through debt. Conversely, the outlook could be revised to ‘Stable’ if M&M maintains its comfortable capital structure through the medium term, while managing the operational integration of various acquisitions/JVs successfully and without delays.

About M&M
M&M is the only Indian company among the top three tractor manufacturers in the world, and is the market leader in multi-utility vehicles in India. It also manufactures light commercial vehicles and three-wheelers and has a presence in the passenger car segment through a JV with Renault.

M&M also has an export presence, largely in the US for tractors, and in South Africa for utility vehicles. The Mahindra group, through its subsidiaries and group companies, has a presence in trading, retail, logistics, automotive components, after-market, financial services, hospitality, infrastructure development, and information technology.

For the year ended March 31, 2008, M&M reported a net profit of Rs.11.03 billion (Rs.10.68 billion in the previous financial year) on net sales of Rs.108.05 billion (Rs.96.03 billion).

About Yancheng Tractor
Yancheng Tractor, located in Yancheng city, Jiangsu province, is a state-owned enterprise (SOE). It sells tractors under the brand name Huanghai Jinma, which is the third largest tractor brand in China in terms of volumes sold. The company manufactured around 26,000 tractors in 2007 and generated revenues of around USD120 million. The company’s product portfolio comprises tractors ranging from 16HP to 125 HP. Yancheng has a strong distribution network covering over 25 provinces in China. The company is also a leading exporter of tractors from China, with a footprint in more than 60 countries, including the US, South America, Russia, Europe, and Africa.