Nomura research: Buy M&M: Set to leverage rural growth

Set to leverage rural growth
􀁣 Favoured play on rural India in our Indian auto coverage
Mahindra and Mahindra (MM) derives nearly 80% of its standalone
revenues from non-urban segments. The company has consolidated
its position in the tractor market with a market share of 40% in FY10.
It has also improved market share in utility vehicles (UVs) from 47% in
FY08 to 58% thus far in FY11 due to its specific focus on this space.
􀁤 Rural growth likely to remain strong
The government of India has taken several initiatives to improve rural
incomes and rural infrastructure. Our recent channel checks suggest
that initiatives such as an increase in the minimum support prices of
crops and the National Rural Employment Guarantee Act (NREGA)
are likely to keep rural demand strong.
􀁥 Threat from competition likely to remain low
Unlike cars, not many players are focussed specifically on the rural
UV segment. MM’s products such as Bolero have grown at a CAGR
of 25% over past two years — virtually unchallenged. It is difficult to a
build brand and sales/service network in rural India, and we believe
that the threat from competition is likely to remain low.
􀁦 The stock remains undervalued relative to the sector
MM’s standalone auto business trades at 11.2x FY12F EPS, below
the sector average multiple of 15.2x. In our view, this is because:
1) the Street remains unsure of tractor growth given historical
cyclicality — as growth comes though valuations could improve; and
2) MM’s recent UV volumes have been weak, growing by only 10%,
due to production constraints. As the company tides over these
constraints, volume growth should improve. We value MM at
Rs814/share, implying 18% upside.