M & M- ESOP grant - minimal impact on PAT, Edelweiss,

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M&M has issued ~17.3mn shares (~3% of the equity base) to the Mahindra and Mahindra Employee Stock Options Trust. These options will eventually be granted to eligible employees. Key points: 

n  No grants to the promoters

The ESOP’s will be granted to employees upto the Executive Director level. Promoters will not be beneficiaries of the grant. This alleviates any possible concerns on corporate governance.

n  ESOP grant over a period of time

Key features of the grant would include:

a)    ESOPs to be granted over a period of time and not in one particular year.

b)    Vesting period envisaged at 5 years.

c)    Options likely to be granted at par (INR 5/ share).

n  Minimal impact on PAT, EPS to be diluted by 3%

While the shares have been allotted to the trusts; the P&L will be impacted only after a grant is made to the employee.  Post the granting of ESOPs, the difference between the fair value of M&M’s share (to be calculated as per black scholes model) and the strike price (likely to be at par) will be amortised over the vesting period (probably 5 years). Hence the P&L impact is likely to be spread over a long period and could be back ended. We do not expect any meaningful effect on the PAT in FY12. However, on a fully diluted basis, the EPS will be lower by ~3% on account of the new shares issued.

n  Outlook and valuations: Growth intact, maintain ‘BUY’

M&M maintains a strong leadership position across key segments –utility vehicles and tractors. It continues to remain our top pick in the automobile space. Maintain ‘BUY/ Sector Outperformer’ with a target price of INR 900/share.