Mahindra plans to spend $1b to raise production

Mahindra’s biggest spending plan will boost capability to make SUVs, trucks and other vehicles to as many as 400,000 annually, Pawan Goenka, the company’s president in charge of the automobile business, said in a phone interview October 10. A part of the amount will also be used to develop new products, Goenka said.

New facilities and models may help Mahindra, the Indian partner of Renault SA, to fend off competition from overseas automakers such as General Motors Corp. and Hyundai Motor Co. that are expanding into the country. More automakers are entering India as expansion in the world’s second-fastest growing major economy makes automobiles affordable to more people.

“Expansion is good, but companies must ensure utilisation as well,” said R.K. Gupta, who manages the equivalent of $75 million of assets at Credit Capital Asset Management in New Delhi.

Only seven in 1,000 people own a car in India, compared with 10 per 1,000 in China, 500 in Western Europe and 450 in the U.S. Record economic expansion has boosted car sales in eight of the past 10 years in India, prompting Hyundai, Renault and GM to enter India or expand facilities.

This year, India’s 1.1 billion people will snap up vans, small trucks and cars more quickly than anyone except the Chinese, according to research firm Global Insight Inc. From 2006 through 2011, India will be the fastest-growing automaker among the world’s top 20 car-making countries, New York-based accounting firm PricewaterhouseCoopers LLP says.

Vehicle sales in India reached a record of 1.38 million in the year ended March 31. “Long term demand outlook in India is very good,” said Goenka from Mumbai, where the company is based. “The capacity expansion will be supported by new products in the pipeline,” Goenka said, declining to give details of the funding programme.

Mahindra earned a cumulative Rs40 billion ($1 billion) as net income in the past five years, according to data compiled by Bloomberg. It raised $200 million selling convertible bonds last year, following up on similar offerings in 2004.

The automaker’s shares have fallen 8.5 per cent this year compared with a 34 per cent gain in the benchmark Sensex index. Mahindra yesterday gained 1.8 per cent to Rs828.45, the highest in more than seven months, on the Bombay Stock Exchange.

Mahindra is currently developing four new products — a truck, the Ingenio scheduled for sale next year, a mass transport vehicle for 2009 and a new SUV by 2010, Goenka said. He wouldn’t give details about the products.

The automaker plans to start selling the Scorpio SUV in the U.S. starting in the middle of 2009, Goenka said. Mahindra will initially offer diesel-powered Scorpios and later models based on hybrid technology.

Mahindra’s plan is similar to the efforts of Japanese and South Korean carmakers, who offered fuel-efficient vehicles to take on large SUVs made by General Motors Corp. and Ford Motor Co.

“We are offering a value proposition,” with the Scorpio, whose Indian customers can get as much as 12 kilometres (7.5 miles) to a litre of diesel, said Goenka. “We are no worse off today than what others have been in their infancy.”

Mahindra was set up as a franchise for assembling vehicles of Willys Overland Corp., maker of the Jeep brand. The company began assembling the Jeep in 1949, according to its Web site.