Mahindra & Mahindra is set to make its first acquisition in the automotive component industry. It has entered the final round of negotiations with the Rajkot-based Sar Auto Products.

The acquisition, once completed, will take Mahindra's total gear manufacturing business to Rs 150 crore (Rs 1.5 billion).

Sar Auto, which has been a long-time vendor to M&M's farm equipment sector, manufactures gears and transmission components for the tractor industry.

Sources close to the development have confirmed that M&M will acquire a majority stake in the company. "The deal is expected to be signed within a couple of weeks," they added.

When contacted, M&M officials refused to comment on this. "We neither confirm nor deny these speculative reports," said a company spokesperson. S R Virani, managing director of Sar Auto also offered "no comments."

On an earlier occasion, Hemant Luthra, president, Mahindra Systems and Automotive Technologies (MSAT) said: "We are close to sealing a deal with a local gear company with a capacity of around 1.5 million gears per year." M&M was at that time conducting a due diligence of the target company.

Sar is a Rs 20.25 crore (Rs 202.5 million) company promoted by Ramesh Virani of the Virani Industries which makes gears for industrial sewing machines, power tools, agricultural equipment, two wheelers, machine tools, etc.

The company manufactures more than a 100,000 gears a month in its Rajkot facility and is a supplier to International Tractors and New Holland Tractors besides Mahindra & Mahindra.

This will be M&M's first step towards building up a Rs 2000 crore auto component business in the next three years. In the pipeline is a Munich-based engineering services company which after acquisition will be merged into Mahindra Engineering Services.

Mahindra's MSAT sector, formed last month, includes its engineering services and R&D facilities, strategic sourcing business unit, Mahindra Ugine Steel, Siroplast, PSSL and its gear and axle manufacturing interests. It currently has a turnover of Rs 1,200 crore (Rs 12 billion).

So far, the sector has been servicing the needs of M&M's farm equipment and automotive sectors primarily, but Luthra is working towards reducing the dependence of the MSAT sector on M&M by 50 per cent in the next three years.