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Mahindra & Mahindra (MAHM.BO, Sell): Downgrade to Sell,
valuation call on rising macro risks
Source of opportunity
1) We find that M&M’s P/E multiple is highly correlated with the industry
demand cycle (R-squared 66%). As a consequence, normalization in
demand growth poses downside risks to valuation and stock price in our
view
2) The stock is trading close to peak on earnings based (P/E, EV/EBITDA),
at upcycle average on balance sheet based (P/B, EV/GCI) and at a
premium to peers on relative returns based (P/B Vs RoE, Director’s Cut)
valuation parameters. This implies high market expectations from the
company, and greater vulnerability of stock price to any negative news
flow, slowing growth or operational disappointments in our view.
3) We believe that the market is optimistic on M&M’s tractor and farm
equipment businesses given rising rural incomes, but is potentially
ignoring that in excess of 50% of consolidated revenues are exposed to
the more cyclical commercial and utility vehicles businesses, which
could drive a cyclical downside in valuations.
We downgrade M&M from Buy to Sell, on account of high valuation and
potential risks to the demand cycle on account of high level of inflation
and interest rates. Since we added it to our Buy List on May 10, 2010 the
stock has risen 39.3% vs. the Sensex up 9.7%. In the past 12 months, the
stock has risen 34.6% vs. the Sensex +11.5%.
Catalyst
1) Higher inflation, rising commodity costs, slowing industry growth.
2) We also believe that the market is potentially overlooking increasing
complexity of the corporate structure, and inherent risks associated with
new ventures such as heavy trucks and the Ssangyong acquisition.
Valuation
Our 12-month FY12E P/E based TP of Rs643 is based on 12X
consolidated P/E (vs. historical average of 11X), which is based on our
P/E multiple vs demand cycle regression analysis, and lower than our
previous target multiple of 13.5X which was based on demand upcycle
(Exhibit 31).
Key risks
1) Higher than expected growth in tractor and utility vehicles demand. 2]
Higher than expected success of the new heavy trucks business. 3)
Higher than expected earnings contribution from Ssangyong Motor.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MAHM.BO, Sell): Downgrade to Sell,
valuation call on rising macro risks
Source of opportunity
1) We find that M&M’s P/E multiple is highly correlated with the industry
demand cycle (R-squared 66%). As a consequence, normalization in
demand growth poses downside risks to valuation and stock price in our
view
2) The stock is trading close to peak on earnings based (P/E, EV/EBITDA),
at upcycle average on balance sheet based (P/B, EV/GCI) and at a
premium to peers on relative returns based (P/B Vs RoE, Director’s Cut)
valuation parameters. This implies high market expectations from the
company, and greater vulnerability of stock price to any negative news
flow, slowing growth or operational disappointments in our view.
3) We believe that the market is optimistic on M&M’s tractor and farm
equipment businesses given rising rural incomes, but is potentially
ignoring that in excess of 50% of consolidated revenues are exposed to
the more cyclical commercial and utility vehicles businesses, which
could drive a cyclical downside in valuations.
We downgrade M&M from Buy to Sell, on account of high valuation and
potential risks to the demand cycle on account of high level of inflation
and interest rates. Since we added it to our Buy List on May 10, 2010 the
stock has risen 39.3% vs. the Sensex up 9.7%. In the past 12 months, the
stock has risen 34.6% vs. the Sensex +11.5%.
Catalyst
1) Higher inflation, rising commodity costs, slowing industry growth.
2) We also believe that the market is potentially overlooking increasing
complexity of the corporate structure, and inherent risks associated with
new ventures such as heavy trucks and the Ssangyong acquisition.
Valuation
Our 12-month FY12E P/E based TP of Rs643 is based on 12X
consolidated P/E (vs. historical average of 11X), which is based on our
P/E multiple vs demand cycle regression analysis, and lower than our
previous target multiple of 13.5X which was based on demand upcycle
(Exhibit 31).
Key risks
1) Higher than expected growth in tractor and utility vehicles demand. 2]
Higher than expected success of the new heavy trucks business. 3)
Higher than expected earnings contribution from Ssangyong Motor.
INVESTMENT LIST MEMBERSHIP
Asia Pacific Sell list
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