Bloomberg News

Mahindra Shrinks Vehicle to Attract Maruti Customers

September 20, 2012

Mahindra & Mahindra Chairman Anand Mahindra

Anand Mahindra, managing director of Mahindra & Mahindra Ltd. Photographer: Adeel Halim/Bloomberg

Mahindra & Mahindra Ltd. (MM), India’s biggest utility vehicle maker, unveiled a cheaper version of its Xylo model to win potential customers of Maruti (MSIL) Suzuki India Ltd.’s best-selling models and revive profit margins.

Mahindra yesterday started selling the Quanto, targeting customers of Maruti’s Swift and DZire with the vehicle that’s 12 percent shorter in length than the Xylo, according to Pravin N. Shah, chief executive officer of its automotive division. The company can produce 7,000 units of the Xylo and Quanto a month.

Chairman Anand Mahindra is banking on the success of the Xylo platform to lure customers away from Maruti, India’s biggest carmaker, and maintain Mahindra’s lead in the nation’s fastest-growing vehicle segment. The company’s earnings forecast may be raised by analysts should it sell more than 1,500 units of the Quanto a month, said Umesh Karne, an analyst at Brics Securities Ltd. in Mumbai.

“It’s a game-changer for us,” Mahindra’s Shah said in an interview. “We can attract customers from hatchbacks and sedans, allowing us to play in a bigger playground.”

It took Mahindra, which started making sports utility vehicles with the Willys Jeep in 1945, about 32 months and 1 billion rupees ($18 million) to develop the Quanto, which has a three cylinder, 1.5 liter engine, Shah said. The Xylo has a 2.2 liter, four cylinder engine.

The Quanto, priced at 582,000 rupees, will also compete with Mahindra’s former partner Renault SA, which began selling the Duster utility vehicle for 751,000 rupees in July in India. Maruti introduced the 779,000-rupee Ertiga in April, a model that shares a platform and components with its Swift and DZire cars.

Easy Availability

A larger network and low-cost parts may help Maruti keep buyers, said Brics’ Karne. Maruti, which started producing cars in 1983, has 1,100 dealers and 2,958 service stations all over the nation, compared with 300 dealers for Mahindra. The unit of Suzuki Motor Corp. (7269) sells 15 brands in the South Asian nation. Maruti Chairman R.C. Bhargava declined to comment on the challenge from Mahindra.

Mahindra, which has risen fivefold since introducing the Xylo in January 2009, fell 1.7 percent to 784.60 rupees in Mumbai yesterday. The BSE Auto Index (BSEAUTO) has risen fourfold in the period. Maruti gained 0.5 percent to 1,282.9 rupees.

Mumbai-based Mahindra reported its narrowest operating profit margin in 9 years in the 12 months ended March as raw material costs surged even as sales expanded at the fastest pace since at least 2003, helped by the introduction of new utility vehicles. The market for such vehicles expanded 57 percent in the five months to Aug. 30 even as passenger car sales growth slowed to 0.9 percent in the period.

Operating Margin

Rising raw material expenses and slowing sales at Mahindra’s tractor unit may result in operating profit margins shrinking further to 9.3 percent in the year that started April 1 from 9.5 percent, according to a forecast of 12 analysts compiled by Bloomberg.

The move to reduce the Xylo’s size by 53.5 centimeters (21 inches) and introduce a smaller engine will help Mahindra cut costs. Companies have to pay an excise tax of 12 percent for cars that are less than 4 meters long and have a diesel engine capacity of 1.5 liters, less than a 27 percent levy for bigger cars.

The pricing may entice “people to think about upgrading to an SUV from a hatchback,” said Basudeb Banerjee, an analyst with Quant Broking Pvt. in Mumbai. “The pricing is broadly in line with the cost for a diesel variant of the Swift.”

Maruti last year sold 345,886 Swift, DZire, Estilo and Ritz cars, according to data from the Society of Indian Automobile Manufacturers. Maruti first began selling the Swift hatchback in 2005. The diesel-fueled variant of the 1.2 liter engine capacity Swift starts at 578,171 rupees.

‘Tackle Challenges’

Mahindra sold 109,949 units of the Xylo, Scorpio and Bolero vehicles in the same period. Total sales of its passenger vehicles rose 36 percent to 245,700 units in the year ended March 31.

Mahindra had to close bookings twice after getting swamped with orders following the introduction of the XUV500 SUV last year. Priced between 1.1 million rupees and 1.36 million rupees, the XUV500 initially received 8,000 orders in 10 days, and led Mahindra to increase production to 5,000 a month, from the initial 3,000 unit capacity it had set up.

Mahindra will unveil the first jointly developed platform with Ssangyong Motor Co. (003620) by 2015, seeking to integrate its South Korean unit and boost margins. Mahindra will spend 300 billion won ($267 million) to develop the vehicles with the automaker it acquired last year, the company said in June.

“Mahindra’s continuous launches of competitive products and its robust experience in utility vehicles will help it tackle challenges,” said Brics’ Karne. New products will “push its automotive volumes further.”

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net


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