Company executives hopes to get the turnaround plan financed half from equity and rest from bank loans. The company is also looking for third party investments.
11 Feb 2020 | 10770 Views | By Sumantra B Barooah & Shahkar Abidi
Mahindra & Mahindra (M&M) has drawn a 450-500 billion Korean won (Rs 2,700-3,000 crore) blueprint for turning around its Korean subsidiary SsangYong which, till the first half of 2019, was on track to break-even but took a U-turn in the second half. The reasons cited by M&M are global economic slowdown, decline ...
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Mahindra & Mahindra (M&M) has drawn a 450-500 billion Korean won (Rs 2,700-3,000 crore) blueprint for turning around its Korean subsidiary SsangYong which, till the first half of 2019, was on track to break-even but took a U-turn in the second half. The reasons cited by M&M are global economic slowdown, decline in exports and change in fuel preference of customers.
The fuel trend impacted the company as SsangYong, similar to M&M, had a large portfolio of diesel vehicles. The development did have a temporary impact on the company before it could get corrected as now about 50 percent of its sales come from sales of petrol vehicles. Additionally, one more reason for SsangYong's dwindling fortunes was that there was significant reduction in exports to 4-5 top markets such as Iran, Chile, Egypt and Western Europe due to geopolitical dynamics. The executives added that above developments collectively led to SsangYong witnessing its worst-ever loss of 320 billion Korean won (Rs 1,924 crore ).
Making realistic expectations about the turnaround Dr. Pawan Goenka, MD, M&M said, "Clearly from where we are, it is not going to be possible to turn profitable this year, that is not realistic. There is work that needs to be done”. The company expects to turn profitable by 2022. Towards that objective the company has drafted a three-year turnaround plan.
Company executives hopes to get the turnaround plan financed half from equity and the rest from bank loans. The company is open to third-party investments. The company expects the financial arrangements to get completed by March this year and is therefore said to be in talks with various banks and international financial institutions.
SsangYong, Korea’s fourth largest automotive company, saw its losses deepen to $130 million (Rs 926 crore) in December financial quarter as compared to a year ago period. The speculation about its financial health led to the rumor mills working overtime as the company management reportedly postponed its scheduled board meeting three times before releasing the earning results.
Three-year plan and four-pronged strategy for turnaround
M&M has already stitched together a three-year long plan for moving SsangYong out of the red. The company lists 4 focus areas to achieve a turnaround. First and foremost is to bring down material costs and save at least $75-80 million (Rs 534 crore - Rs 570 crore) annually. The step will help the company gain around 3 percent improvement in its operating profit margin.
The second step that the company is working on around the capex by bringing in more synergy with M&M and is also looking to how the same can be done with Ford, a joint venture which received clearance from Competition Commission of India (CII) on Monday.
Thirdly, the company has already achieved some consideration given by labour and workers union, which will help in bringing down the personal cost significantly in CY2020 and CY2021. An important plan is with regard to exports with the company looking to push the products to markets in Russia and Vietnam. While Russian exports may start by 2021, the ones to Vietnam may happen by the end of 2021.
“A combination of these 3-4 steps will give us the kind of improvement that we are looking at,” added Goenka. The total sales for the SsangYong brand was around 120,000 units last year, which the company does not expect to improve in 2020. However, it may improve in the year 2021 back on the new product launches. According to the company executives SsangYong could work with M&M and Ford in two products — the C SUV and V SUV .
M&M's Q3 FY2020 net profit plunged by 73 percent to Rs 380 crore due to loss on exceptional and one off items of Rs 554 crore. The profit for Q3 was flat Rs 1,396 crore.
New launches
Talking about the new launches, Dr Goenka said that new Thar (code named W501) is expected to be launched during quarter (Q1) of FY2021.
M&M and Ford have deepened the scope of their partnership by announcing the co-development of a midsize C-segment SUV for which M&M will provide the platform and powertrain. The new SUV will be based on the platform underpinning the next-generation Mahindra XUV500 (codename: W601). The W601 will see the light of day during the next fiscal year.
Though Ford will share the mechanicals and powertrain, it will not be a mere badge-engineering exercise. Mahindra's new-generation, state-of-the-art, 2.0-litre diesel that’s expected to develop up to a whopping 180hp will be powering the W601. This BS VI-compliant engine will be shared with Ford's C-SUV as well.
The Scorpio (Z101) will be out in Q1 of FY2022. The new Mahindra Scorpio will rival the likes of Hyundai Creta ,MG Motor India's Hector, Tata Motors, Kia Motors, Maruti Suzuki.
The electric KUV which is codenamed as S110 is likely to be launched later this year while electric XUV300 (codenamed as S210) will be out in the second half of FY2022.