Utility and tractor manufacturer Mahindra & Mahindra (M&M) has decided to buy the stake held by its US-based partner, Navistar International Corporation, in the truck and engine making joint ventures (JV) -Mahindra Navistar Automotives Ltd (MNAL) and Mahindra Navistar Engines Pvt Ltd (MNEPL) - for about Rs 175 crore.
M&M will acquire the 49 per cent stake held in both the JVs by the Navistar Group and make them wholly-owned subsidiaries. The JV for trucks was formed in 2005, while the JV for engines was formed in 2007.
While neither of the companies explained the logic behind such a move, experts said that despite being in the market for over three years, the JVs did not witness the demand expected from them, forcing the US partner to reorganise its resources.
The truck JV is yet to generate profits and M&M's estimates of turning cash break-even this financial year remains bleak, due to the on-going slump in demand for heavy trucks in the domestic market.
Following the stake buy, M&M would take complete ownership of operations and continue to sell MNEPL and MNAL products. The sale requires regulatory approvals in India, is subject to conclusion of definitive agreements, and is expected to be completed in early 2013, the Mumbai-based company said in a statement.
The deal allows Navistar to continue sourcing components from India, while M&M would keep providing engineering services to Navistar. The US company would continue to support M&M through a licence agreement and extend necessary support to MNAL and MNEPL for the purpose of business continuity.
As part of its Drive to Deliver' turnround plan launched in August, Navistar has been conducting an analysis of all of its businesses and programmes to determine their return on invested capital (ROIC) and identify areas for improvement. Based on this business environment, Navistar has determined that it needs to redirect its efforts to other initiatives that more quickly contribute to the company's goal to improve its ROIC," Navistar said in a release.
Until last year, MNAL had seen an investment of Rs 710 crore with M&M projecting a further infusion of Rs 250 crore during 2012-14 for production and distribution expansion. M&M had Rs 750 crore of equity and 50-50 invested by both the partners along with debt as of that date.
Troy Clarke, president and CEO of Navistar, said, "While the Indian market has not expanded as we had originally expected, and industry challenges there continue in the near-term, we still see promise in India going forward."
The Indian truck market is witnessing a renewed thrust by not just traditional players such as Tata Motors, VE Commercial Vehicles and Ashok Leyland, but also by new players such as Daimler (Bharat-Benz) and MAN and Scania. M&M and Navistar planned to be present in each of the commercial vehicle segments ranging from 3.5 to 49 tonne.
This is not the first time that strategic changes are seen in partnership involving M&M. The company had bought the stake held by Renault in the car making joint venture Mahindra Renault (MRPL). Prior to that, M&M had exited a tripartite joint venture involving Renault and Nissan.