JP Morgan: Sensex at 24K in 2011; Top Buy and Sell

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Asia Analyst Trading List
Action: Add Mahindra & Mahindra as Long and Bajaj Auto as Short


Kalpana Morparia, CEO, JP Morgan is expecting the Sensex to be at 24,000 by the year-end.



• Action: Add Mahindra & Mahindra as Long and Bajaj Auto as Short
• Time horizon: < 3 months
• Rationale:

• Long Mahindra & Mahindra (MM.IN)
• Sustained market leadership: We believe M&M will continue to
benefit from industry growth in the traditional UV and tractor
segments, given sedate competitive intensity. The company intends
to launch a new SUV over CY11 to further cement its market
leadership. We believe the rising mechanization of agriculture will
lead to increasing usage of tractors –M&M being the industry leader
with a market share of 41% will benefit from this growth.
• Entry into high-growth segments: We believe volume growth over
the next 12-18 months will be aided by the introduction of new
models in the high-growth ultra-light ton vehicle segment. Given that
the size of the 1 Ton segment is c.10,000 units p.m., the opportunity
for M&M is sizeable.
• Margin outlook: We expect operating margins to be sustained at
current levels. Given EBIT margins in the tractor segment are c.18%,
we expect operating cash flows to remain robust in FY10-13.
• Subsidiaries to contribute: The company’s subsidiaries are present
in the high-growth areas of the economy and we believe they will
likely benefit from the improved environment. The group companies
account for c.25% of the stock price.
• Modest Valuations: The core auto business is trading at c.12x on
forward earnings (after considering value of listed subsidiaries).


• Short Bajaj Auto (BJAUT.IN)
• Residual growth: To achieve the management unit sales guidance of
4m units for FY11E (+40% yoy), the residual growth required is
c.37% over 4Q. A high base effect over 4Q could impede the
required growth targets. Bajaj has grown at 41% YTD.
• Margin Outlook: We believe margins are likely to remain range
bound at current levels of 20%.
• Valuations: The stock is currently trading at PE band at c.14.5x on
FY12E estimates.
• We reiterate our rating of Overweight for Mahindra & Mahindra and
Neutral for Bajaj Auto.