Mahindra 2 Wheelers may raise Rs 200 crore

Mahindra 2 Wheelers Ltd, an arm of Mahindra and Mahindra Ltd, is exploring raising around Rs. 200 crore from private equity (PE) investors by divesting a minority stake, said two company officials.

While the parent company has sufficient cash, the external funding is to nudge the two-wheeler maker to perform better, they said, both declining to be identified.

“This is primarily to de-risk the business, though valuations are the concern in the present market scenario and we want an investor who can work according to our terms,” said one of them.

Mahindra 2 Wheelers, which came into being after the acquisition of Kinetic Motors in July 2008, hasn’t been able to gain traction in India’s one million-units-a-month two-wheeler market.

Between April and October, 7.7 million two-wheelers were sold in India, a 15% growth over a year ago, according to the Society of Indian Automobile Manufacturers. Mahindra sold 92,168 units in that period, a 3% increase from a year earlier.

An investment banker who didn’t want to be identified said the PE investment could be an exercise in determining the valuation benchmark. “We have seen Bain Capital Llc. and GIC investing in Hero, so there has been a precedence for PEs to explore this sector,” he said.

Mahindra paid around $22 million to acquire an 80% share in the two-wheeler maker from Kinetic. “Expectations are around 10 times that value currently. So the investment might also facilitate at least a partial exit for Kinetic while the rest of the money can be pooled into the business,” he added.

Mahindra now owns 83% in the two-wheeler arm and Kinetic the remaining stake.

“We cannot provide a time frame for the PE investment as it takes time,” said the second company official.

The company’s facility in Pithampur, Madhya Pradesh, has a capacity to make one million two-wheelers. Plans were underway for another unit, but this had to be deferred due to the slowdown, the official said. The PE money will be used to develop models and plant expansion.

Mahindra’s spokesperson declined to comment.

Mahindra, which sells the Rodeo, Flyte and Duro gearless scooters and has a 6.6% share in the scooter market, had to discontinue sales of its 106cc bike Stallio this year, within five months of its launch, due to some faulty parts and technical glitches.

“We have addressed these glitches and will reintroduce the motorcycle in the Indian market next month,” said the second official.

Mahindra 2 Wheelers’ net loss widened to Rs. 96 crore in fiscal 2010 from Rs. 22 crore in fiscal 2009. The latest numbers weren’t available on the company’s website.

Abdul Majeed, a partner at PricewaterhouseCoopers Pvt. Ltd who leads the auto practice, said that with the two-wheeler segment getting intensely competitive, it’s critical for a new entrant to get the product strategy right at the first go. “Even the investors have to see merit in a long-term commitment.”

Besides seeking engineering and design inputs from Engines Engineering SpA, the Italian design house it acquired in June 2008, Mahindra has been working closely with other global firms in technology and design, and plans to straddle the motorcycle segment with new models in the volume and premium segment, said the second official.