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Mahindra & Mahindra
Quick Comment: Budget Expectations, What If?
The Budget Expectations: The government is likely to
announce the annual budget at the end of February, and
along with it there could be changes in the excise duty
structure. Given that the petroleum minister just
announced that there will not be any diesel price hikes in
the near future, a lot of investors are concerned that this
may lead to some kind of additional duty on diesel
vehicles like SUVs. Although the industry tends to pass
all duty hikes on to the end consumer, the concern is
that a potential sharp uptick in prices may slow demand
in those segments. Within our coverage universe, M&M
has a large UV portfolio, and thus we believe the stock
could be volatile until the final announcement is made. In
this note, we analyze the earnings impact of a duty hike
on M&M.
Impact: A 2% additional duty on diesel vehicles would
have limited impact on M&M, but a 4% additional duty/
price hike could dampen volumes. A 4% additional duty
seems sharp to us, and it would bring the excise on
greater than 1500 cc engine vehicles to 2007 levels and
also substantially widen the gap between lower-engine
vehicles (small cars) and sedans/UVs. Exhibit 2 shows
our volume assumptions and possible corresponding
earnings and price targets. Assuming that UV growth is
flat in F2012 (our bear case scenario, low probability
scenario), our earnings would be cut by 9% and our
price target would come to Rs740, which is close to the
current price; thus we see limited downside on the stock
price but sentimentally a hike could be an overhang.
At this stage, we do not have confirmation of the likely
hike or the nature of any increase (engine size and
corresponding price hike), but we believe that in the run
up to the budget, the stock could be volatile. Current
Structure of Excise duty: Currently: 1) excise duty on
small cars, CV and three-wheelers is 10% and the
excise duty on large cars and SUVs is 22%. 2) Specific
component of excise duty applicable to large cars/utility
vehicles of engine capacity >1500cc is Rs15,000 per
vehicle.
Valuation: We arrive at our price target using a combination of
a sum-of-the parts valuation and price-earning multiples. We
set our base case value at 13x F2012 core business earnings,
implying a 10% discount to Sensex and 20/25% discount to
peer valuations. We value the core business at Rs600 per
share.
For the listed non-core businesses (Tech Mahindra, Mahindra
Finance, Mahindra Life Space, Mahindra Holidays, and Kinetic
Motors Ltd.), we use market valuations. Overall, we apply a
20% holding company discount to M&M’s listed subsidiaries.
Our non-core listed businesses value is Rs180 per share. We
also value unlisted investments like Navistar and two wheelers
at book value, thus implying Rs20 per share.
Key downside risks
1) Excess monsoons may have adverse impact on standing
crop, thus slowing agriculture growth.
2) Sharp rally in raw material puts pressures on margins.
3) Rising complexity of business models could lead the market
to ascribe a higher holding company discount to various
ventures.
Company Description
Mahindra & Mahindra manufactures and markets general
purpose utility vehicles, including medium and heavy
commercial vehicles, jeeps, cars, agricultural tractors, and other
related products. With revenue of nearly US$2.8bn in F2009, it
is one of the top-five auto companies in India. It has several
subsidiaries involved in businesses such as financing, telecom
software, construction, steel, and auto components.
India Four-Wheelers: Commercial Vehicles
Industry View: Cautious
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra
Quick Comment: Budget Expectations, What If?
The Budget Expectations: The government is likely to
announce the annual budget at the end of February, and
along with it there could be changes in the excise duty
structure. Given that the petroleum minister just
announced that there will not be any diesel price hikes in
the near future, a lot of investors are concerned that this
may lead to some kind of additional duty on diesel
vehicles like SUVs. Although the industry tends to pass
all duty hikes on to the end consumer, the concern is
that a potential sharp uptick in prices may slow demand
in those segments. Within our coverage universe, M&M
has a large UV portfolio, and thus we believe the stock
could be volatile until the final announcement is made. In
this note, we analyze the earnings impact of a duty hike
on M&M.
Impact: A 2% additional duty on diesel vehicles would
have limited impact on M&M, but a 4% additional duty/
price hike could dampen volumes. A 4% additional duty
seems sharp to us, and it would bring the excise on
greater than 1500 cc engine vehicles to 2007 levels and
also substantially widen the gap between lower-engine
vehicles (small cars) and sedans/UVs. Exhibit 2 shows
our volume assumptions and possible corresponding
earnings and price targets. Assuming that UV growth is
flat in F2012 (our bear case scenario, low probability
scenario), our earnings would be cut by 9% and our
price target would come to Rs740, which is close to the
current price; thus we see limited downside on the stock
price but sentimentally a hike could be an overhang.
At this stage, we do not have confirmation of the likely
hike or the nature of any increase (engine size and
corresponding price hike), but we believe that in the run
up to the budget, the stock could be volatile. Current
Structure of Excise duty: Currently: 1) excise duty on
small cars, CV and three-wheelers is 10% and the
excise duty on large cars and SUVs is 22%. 2) Specific
component of excise duty applicable to large cars/utility
vehicles of engine capacity >1500cc is Rs15,000 per
vehicle.
Valuation: We arrive at our price target using a combination of
a sum-of-the parts valuation and price-earning multiples. We
set our base case value at 13x F2012 core business earnings,
implying a 10% discount to Sensex and 20/25% discount to
peer valuations. We value the core business at Rs600 per
share.
For the listed non-core businesses (Tech Mahindra, Mahindra
Finance, Mahindra Life Space, Mahindra Holidays, and Kinetic
Motors Ltd.), we use market valuations. Overall, we apply a
20% holding company discount to M&M’s listed subsidiaries.
Our non-core listed businesses value is Rs180 per share. We
also value unlisted investments like Navistar and two wheelers
at book value, thus implying Rs20 per share.
Key downside risks
1) Excess monsoons may have adverse impact on standing
crop, thus slowing agriculture growth.
2) Sharp rally in raw material puts pressures on margins.
3) Rising complexity of business models could lead the market
to ascribe a higher holding company discount to various
ventures.
Company Description
Mahindra & Mahindra manufactures and markets general
purpose utility vehicles, including medium and heavy
commercial vehicles, jeeps, cars, agricultural tractors, and other
related products. With revenue of nearly US$2.8bn in F2009, it
is one of the top-five auto companies in India. It has several
subsidiaries involved in businesses such as financing, telecom
software, construction, steel, and auto components.
India Four-Wheelers: Commercial Vehicles
Industry View: Cautious
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