Leading domestic tractor and utility vehicle (UV) manufactuer, Mahindra and Mahindra (M&M) is lining up over Rs 5 billion investment over the next two years.

The investment is for product development, sprucing up capacity for Scorpio, and maintenance. M&M has cash flow of about Rs 13 billion over the next two years, in addition to foreign currency convertible bonds (FCCB) raised by the company. With this kind of cash flow sitution, the company could pursue inorganic growth in the international market. Also it is estimated that M&M will save nearly Rs 700 million in interest expenses over F2005-06.

M&M raised $100 million in April 04 by way of foreign currency convertible bond (FCCB) issue at conversion price of Rs 647 per share. The bonds with 0% coupon (YTM of 3.75%) and a five-year maturity would result in a 6% equity dilution.

Also M&M posted 51% growth in automotive exports, but tractor export sales declined by 17% (after strong growth in the prior two years). In the automotive business, M&M launched its UVs in Italy in ''04. It is targeting to double its UV exports in during this year, by launching in South Africa, Middle East and Mercosur (South Eastern South American) region.

It feared that M&M may lose market share in UV segment, as competitive pressure is intensifying. Recently GM launched a new UV, the Tavera, with a starting price of Rs 540,000. Besides, Tata Motors is likely to launch a new UV next year. Toyota also has plans to launch variants of the Qualis. Honda (CRV), Hyundai (Terracan), Suzuki (Grand Vitara), Ford (Explorer), which have all launched premium SUVs in the price range Rs 1.4-2 mn, may also launch lower priced variants if the market expands.

In the last year, M&M posted 25% growth in UV sales driven by the success of the Scorpio, which has contributed to nearly 70% of the growth. With the rural economy doing well in F2004, M&M''s traditional products Marshall, MAXX and Commander also did reasonably well. M&M lost market share in the LCV segment, but increased its share in the large three-wheeler segment from 22% to 31%. According to analysts with JM Morgan Stanley, M&M has been the market leader in tractors for early two decades, but competitive pressures have intensified with newer entrants like International Tractors, L&T-John Deere, and New Holland gaining market share.

Competition is likely to further intensify with the entry of the likes of SAME tractors and Brahma Steyr tractors. Also other players like Escorts, Eicher, TAFE and Punjab Tractors are aggressively trying to defend market share by launching new products and variants.