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M&M: Strong tractor demand
M&M is continuing to see strong tractor demand driven by improving rural
incomes and worsening rural labour shortage. The supply chain issues in
UVs have been resolved and M&M’s production has improved in recent
months. We upgrade FY12-13 EPS by 1-5% factoring in 8-13% higher
tractor volumes but slightly lower margins. We believe that M&M is in a
sweet spot with strong industry growth outlook in UVs and tractors,
multiple exciting new launches and minimal incremental competition. We
maintain BUY on M&M with a target price of Rs910.
Strong tractor growth continues
Tractor demand has surprised positively in YTD FY11 with a YoY growth of
21%. Improving rural incomes and a worsening rural labour shortage is
boosting tractor demand on a structural basis. We expect strong growth to
continue over FY12-13 and estimate 13% industry growth – ahead of M&M’s
internal estimate of 11%. M&M has the potential to grow faster than industry
given that it will launch the low-cost tractor ‘Yuvraj’ across India over FY12-
13 and we now estimate 15% tractor volume CAGR for M&M over FY12-13.
This results in a 8-13% upgrade to our FY12-13 tractor volumes.
New launches will keep UV growth strong
M&M will launch a whole new generation of UVs over FY12 and FY13, first of
which will be a new UV priced above the ‘Scorpio’ targeting urban customers.
As per media reports, this will be followed by a compact version of the ‘Xylo’
and a new compact SUV. The ‘Maxximmo’ is seeing a good response and has
captured 23% market share in the low-tonnage LCV segment. We expect
‘Maxximmo’ volumes to rise further in FY12 since it was launched on a pan-
India basis only in Oct-10. The supply problems that plagued production in 1H
have been resolved and production is back to normalized levels. We expect
15% UV and LCV growth for M&M in FY12 and FY13.
Upgrading EPS 1-5%; maintain BUY
Our FY12-13 EPS estimates rise 1-5% with this volume upgrade. Our
estimates build in a 100 bps drop in EBITDA margins by FY13 since the profits
from the products made in the Chakan plant will be shared between M&M and
Mahindra Vehicles Manufacturing Limited (MVML). The ‘Yuvraj’, too, will eat
into percentage margins but will boost absolute EBITDA. We maintain BUY on
M&M with a sum-of-parts target price of Rs910. We don’t assign any value to
Ssangyong Motors as yet and this could boost valuations higher once
disclosure improves post completion of acquisition. M&M is our top Autos pick.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
M&M: Strong tractor demand
M&M is continuing to see strong tractor demand driven by improving rural
incomes and worsening rural labour shortage. The supply chain issues in
UVs have been resolved and M&M’s production has improved in recent
months. We upgrade FY12-13 EPS by 1-5% factoring in 8-13% higher
tractor volumes but slightly lower margins. We believe that M&M is in a
sweet spot with strong industry growth outlook in UVs and tractors,
multiple exciting new launches and minimal incremental competition. We
maintain BUY on M&M with a target price of Rs910.
Strong tractor growth continues
Tractor demand has surprised positively in YTD FY11 with a YoY growth of
21%. Improving rural incomes and a worsening rural labour shortage is
boosting tractor demand on a structural basis. We expect strong growth to
continue over FY12-13 and estimate 13% industry growth – ahead of M&M’s
internal estimate of 11%. M&M has the potential to grow faster than industry
given that it will launch the low-cost tractor ‘Yuvraj’ across India over FY12-
13 and we now estimate 15% tractor volume CAGR for M&M over FY12-13.
This results in a 8-13% upgrade to our FY12-13 tractor volumes.
New launches will keep UV growth strong
M&M will launch a whole new generation of UVs over FY12 and FY13, first of
which will be a new UV priced above the ‘Scorpio’ targeting urban customers.
As per media reports, this will be followed by a compact version of the ‘Xylo’
and a new compact SUV. The ‘Maxximmo’ is seeing a good response and has
captured 23% market share in the low-tonnage LCV segment. We expect
‘Maxximmo’ volumes to rise further in FY12 since it was launched on a pan-
India basis only in Oct-10. The supply problems that plagued production in 1H
have been resolved and production is back to normalized levels. We expect
15% UV and LCV growth for M&M in FY12 and FY13.
Our FY12-13 EPS estimates rise 1-5% with this volume upgrade. Our
estimates build in a 100 bps drop in EBITDA margins by FY13 since the profits
from the products made in the Chakan plant will be shared between M&M and
Mahindra Vehicles Manufacturing Limited (MVML). The ‘Yuvraj’, too, will eat
into percentage margins but will boost absolute EBITDA. We maintain BUY on
M&M with a sum-of-parts target price of Rs910. We don’t assign any value to
Ssangyong Motors as yet and this could boost valuations higher once
disclosure improves post completion of acquisition. M&M is our top Autos pick.
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