Modi Spurs Mahindra Expansion as Sales Rebound: Corporate India

Jun 03, 2014 8:36 am ET

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June 3 (Bloomberg) -- Mahindra & Mahindra Ltd. and Ford Motor Co. are preparing for a rebound after the worst sales slump in India in a decade. They are priming new capacity, betting Prime Minister Narendra Modi will spur demand.

Mahindra, India’s biggest maker of utility vehicles and also a producer of tractors, cars and scooters, said last month that it plans to spend 40 billion rupees ($675 million) on a 400,000-unit-a-year factory even as it pared production in existing plants. Ford will open a new facility in Gujarat next year as it seeks to raise output in Asia’s No. 3 market.

The companies are counting on Modi to cool inflation, add jobs, boost income and pave the way for a revival after the highest borrowing costs among Asia’s biggest economies depressed consumer demand. Modi, who became prime minister on May 26 after winning the clearest mandate in three decades, has vowed to revitalize the $1.8 trillion economy that suffered from policy paralysis under the previous administration.

“Car buyers look at the economic and jobs outlooks while making decisions,” said Kapil Singh, an analyst at Nomura Holdings Inc. in Mumbai. “The initial sentiment on these is already looking up.”

Maruti Suzuki India Ltd., the nation’s biggest vehicle maker, reported a 19 percent growth in May deliveries, the best growth in nine months, showing early signs of a rebound. Passenger vehicle sales declined 6.1 percent to 2.5 million units in the year ended March, the biggest drop since 2002.

Early Signs

The S&P BSE India Auto index, representing 10 stocks, has rallied 20 percent this year in anticipation of a pick up. Nomura’s Singh recommends buying shares of Maruti Suzuki, Mahindra, and the nation’s top two truck makers Tata Motors Ltd. and Ashok Leyland Ltd., according to data compiled by Bloomberg.

Maruti’s shares have risen 32 percent this year, while Mahindra has gained 30 percent and Tata Motors 12 percent.

Mahindra plans to spend about 75 billion rupees in capital expenditure over the next three years, Chief Financial Officer V.S. Parthasarathy said in an interview yesterday. Of this, about 25 billion rupees will be spent on the new plant, he said. A further 15 billion rupees will be spent in the fourth and fifth years, he said.

“You have to start investing when you can,” Parthasarathy said in an interview in his office yesterday. “The signals so far have been positive from the new government.”

Ford, which reported a 51 percent increase in May deliveries, will begin producing cars at its $1 billion factory in Gujarat in 2015, it said in an e-mail yesterday. With the new facility, Ford will double its capacity in India.

New Models

Some carmakers are adding new models before a potential recovery. Honda Motor Co.’s local unit plans to introduce the Mobilio minivan in July and the revamped Jazz hatchback this financial year, the company said in an e-mail yesterday.

Tata Motors, the nation’s biggest automaker by revenue, will begin selling its new Bolt hatchback and Zest compact sedan this year, Ranjit Yadav, the president of Tata’s passenger vehicle unit said last week.

Besides Modi, the Reserve Bank of India will also do its bit to revive economic growth, some economists say. The nation’s central bank will cut its benchmark repurchase rate by a half- percentage point by the second quarter of 2015, according to the median of 15 economists surveyed by Bloomberg. That may help stimulate demand as almost 75 percent of all car purchases in India are funded by loans.

RBI Governor Raghuram Rajan today kept the benchmark rate unchanged at 8 percent today and signaled he would ease borrowing costs should inflation slow faster than anticipated.

Poll Years

“Sooner or later, a cut in interest rates along with economic growth and new models will revive demand for cars,” said Yaresh Kothari, an analyst at Angel Broking in Mumbai. “The demand is there in the market, it’s just sentiment that is holding back buyers.”

Passenger-vehicle sales have risen in each of the three fiscal years when voters in the world’s largest democracy went to polls in 1999, 2004 and 2009. Deliveries climbed by an average 31 percent in those years, or more than twice the average 13 percent annual rate over the past 15 years, according to data provided by the Society of Indian Automobile Manufacturers.

During his election campaign, Modi, who led his Bharatiya Janata Party to its biggest electoral victory with 282 seats in India’s lower house of parliament, promised to rein in inflation, expedite foreign investment in most sectors and develop labor-intensive manufacturing.

Growth Outlook

Morgan Stanley expects India’s economy to expand 5.4 percent in the year that started April 1 from 4.7 percent in the previous 12 months. Citigroup Inc. predicts a 5.6 percent growth in the current year.

Stalled projects amid delays in land acquisitions, environmental clearances and graft allegations under former prime minister Manmohan Singh crimped growth to 4.5 percent in the year ended March 2013, the slowest in a decade.

A turnaround in the economy will help auto sales grow 10 percent in 2015, said Deepesh Rathore, the New Delhi-based director of Emerging Markets Automotive Advisors.

“The downturn we have gone through is a minor blip on the long-term horizon,” he said. “Capacity planning is for the long term and the growth story is pretty much intact.”