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UBS Investment Research
Mahindra & Mahindra
Rural champion
�� Multiple drivers to growth
M&M is a strong play on the rural growth story due to its: 1) leading tractor
franchise; and 2) M&M UV sales, which also have significant exposure to rural
areas and will likely benefit from increasing demand. Strong tractor growth is also
positive for product mix and margins given higher profitability of the segment. We
expect both tractor volumes and UV volumes to grow 15% in FY12. We also
expect the Ssangyong acquisition to be significantly accretive for M&M.
�� Strong growth in tractors, +20%/15% YoY in FY11/12
The government has proposed to link MGNREGA wages with inflation (leading to
an 18-30% increase from current levels) that is likely to put upward pressure on
rural labour cost. We believe this will act as a positive catalyst for tractor demand
growth. In addition, there is increasing investment in rural infrastructure that
provides alternative use (primarily in construction activity) for tractors, fuelling
demand.
We expect the Ssangyong deal to be accretive on a net basis for M&M from FY13.
We estimate Ssangyong can contribute Rs8.4 to our FY13 consolidated EPS for
M&M (+14% to our current estimate). We expect EBITDA margins to improve
from 1.7% in Q310 to 9.4% in FY13 with improving volumes.
�� Valuation: maintain Buy with a price target of Rs910
We derive our 12 month-price target from a sum-of-the-parts methodology. We
value the standalone business at Rs660/share, based on an average 8x FY12-13E
EV/EBITDA; its subsidiaries at Rs190/share; and the 70% stake in Ssangyong at
Rs60/share to arrive at Rs910.
Valuation
We derive our Rs910 price target from a sum-of-the-parts methodology. We
value the standalone (core) business at Rs660/share, based on an average 8x
FY12-13E EBITDA. We value the listed subsidiaries at a 20% discount to the
market price of Rs178/share, unlisted subsidiaries at Rs12/share, and the 70%
stake in Ssangyong at Rs 60/share to arrive at Rs910. Implied PE for M&M is
18.4x and 15.5x on FY12/13 EPS estimates.
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