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Mahindra & Mahindra Ltd. |
Expect volume upgrade, maintain BUY |
BUY
CMP: Rs 736 Target Price: Rs 880
n Tractor industry can grow by 11%, Auto sector growth of 15% to 18% is a possibility in 2011. Capacity concerns addressed, M&M well placed to capitalize on expected demand
n Ssangyong’s EBIDTA margins in 9MFY10 at 2%. Volumes in CY10 ~82,000 vs 35,000 in CY09. Volumes to improve due to new products and higher focus on domestic market
n Unlike 2010, cost pressure will have to be passed on by industry. Margins to be under pressure due to inflationary pressures though profit per unit may not be affected
n Expect upgrades in FY12 volumes est. as capacity concerns are addressed. Retain buy rating on the stock with a TP of Rs 880
2010 hits and misses
Successes of 2010 included ‘Maximmo’ (touched run rate of 4000 units p.m.), continued
positive surprise from ‘Bolero’ (10 year old product) and ‘Scorpio’ (9 year old product),
tractor demand for industry (~20%), ‘Yuvraaj’ series of tractors and China JV (turned
profitable). Disappointments for 2010 include ‘Gio’, delay in launch of M&HCVs,
capacity constraints both for UVs and tractors.
2011 outlook
Expect tractor industry growth of 11%. Auto industry growth of 15% to 18% is a
possibility. However, there are concerns with respect to rising inflation and interest
rates. Also liquidity squeeze can impact growth estimates. M&M has addressed the
capacity constraint issues (castings, tyres and fuel injection pumps) and is prepared to
capitalize on expected demand
Commodity prices and margins
2010 witnessed commodity price increase of 7% to 8%. Expect similar inflationary
pressure in 2011. In 2010 not much of the cost pressures were passed on due to
benefits of operating leverage. Cost pressure will have to passed by industry in 2011.
Margins will remain under pressure, though profitability per unit may not be affected.
Product launches
Multiple product launches in auto space. The immediate launch is a premium SUV
(code name – W201). Product launches will be in form of variants in the low tonnage
segment. In the M&HCV space launch of tipper and other higher tonnage vehicles.
Busses will not be launched this year. In tractors M&M is working on two new platforms.
Also focus on variants. Focusing on providing application like rice transplantors,
harvesters, rotavators. Entering in to construction equipment business with two backhoe
loaders.
Wage negotiations
Only Zaheerabad plant is due to wage contract renewals. However, it is difficult to find
qualified people in various skill areas. Employee retention is a key issue in the current
scenario.
Ssangyong
Ssangyong has sold 82,000 units in CY10 as compared to 35,000 units in CY09. Expect
volumes to improve further with the launch of ‘Korando’ (recently launched) and introduction
of new variants of ‘Chariman’. Focus will be to improve brand equity in domestic market as
brand equity has not suffered in the exports markets. Ssangyong has reported EBIDTA
margins of 2% in 9MFY11.
Valuations and View
At CMP of Rs 736, the stock trades at PER of 17x and 15.4x and EV/EBIDTA of 10.5x and
9.1x our FY11 and FY12 standalone estimates respectively. While we expect volume
upgrades for FY12 as management has addressed capacity constraints, we would prefer to
see the January 2011 monthly volumes before upgrading our volume estimates for FY12. We
have valued the standalone business at Rs 710 (FY12E EV/EBIDTA of 9x). We have valued
the listed subsidiaries and Tech Mahindra at Rs 170
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