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Action
Mahindra and Mahindra (MM) is well positioned to benefit from various government
policies on rural growth and development. The company has a strong brand and
distribution network in rural India and faces low competition. Maintain BUY rating
with a revised price target of INR803, representing 23% potential upside.
Catalysts
Sustained tractor growth and successful new launches could be key catalysts.
Increased rural development budget by the government could provide a boost to
volumes.
Anchor themes
Nomura’s economics team estimates 4.8% agricultural GDP growth for 2011F vs
0.2% in 2010F. Strong agricultural GDP growth should drive rural incomes.
New launch momentum on side
Key beneficiary of rural development
Rural India has been on the development agenda of India’s
government for the past few years. The rural development budget has
more than doubled from INR288bn in FY08 to INR661bn in FY11F. In
addition, the minimum support prices for crops have consistently been
increased, leading to strong income growth for farmers. We believe
MM is likely to benefit from improved rural incomes, as it derives
nearly 80% of its revenues from rural India.
New launches to help volume growth
MM is in the process of launching or ramping up several new projects.
These include the small tractor Yuvraaj; the Geneio pick-up; the Thar
off-roader; construction equipment; heavy commercial vehicles;
variants of the Maaximo and Xylo; a new SUV; and two products from
the Ssangyong stable. We believe that with so many recent and
upcoming launches in the pipeline, the company will continue to
deliver strong top-line growth.
Margins to come under pressure
MM has effected an average price increase of around 1% in the auto
sector but has not raised tractor prices. As a result, we believe that
overall margins could come under pressure. We have lowered our
margin FY12F estimates to 14.2% from 14.9%. We also pared our
EPS estimates by 5.5% to factor in increased capital from shares
issued to the ESOP trust and higher costs.
Revising PT to INR803 (~23% upside); BUY
We value MM at Rs803/share (was INR892). We value the
standalone business at 12x FY13F standalone EPS ex dividends of
INR51.3 and investments at INR188/share. (Our previous valuation
was based on a 13x multiple on the average of FY12F and FY13F
EPS and INR226 for investments.)
Volume momentum likely to remain strong
We expect that given recent and upcoming launches, MM is likely to maintain its strong
volume growth in pick-up trucks such as the Maximo, and utility vehicles and light
commercial vehicles (LCVs). We have thus revised up our volume estimates by 4.5%
for FY11F and 3.9% for FY12F. We are building in 11% volume growth for tractors and
14% for UVs in FY12F.
The key changes in our volume estimates affected the cargo pick-up truck Maximo,
which has been well accepted by the market. We anticipate that the company will
maintain volume momentum with the launch of a passenger variant of this product.
Three wheelers also ramped up strongly, and we thus increased the volume estimates
there as well.
Estimate revisions – paring margins on increased costs
MM management indicated that material costs will increase in 4Q FY11F. Since the
company has not taken price increases in tractors, we believe margins will come off.
We have thus reduced our FY12F margin estimates to 14.2% from 14.9%.
In addition, we also factored in issuance of 17.4mn shares to the employee stock
option (ESOP) trust, leading to an increase in the number of shares from 544.8mn to
562.1mn (a 3.2% increase).
Our standalone EPS ex-subsidiary dividends thus came down by 5.5% to INR54.5 for
FY12F.
Valuation of INR803 representing ~23% potential upside
We value MM at INR803/share (was INR892/share) based on a sum-of-the-parts
(SOTP) methodology (unchanged). We value the standalone auto business at 12x
standalone FY13F EPS (ex-subsidiary dividends) at INR615/share. We value
investments at INR188/share, after a 20% holding discount.
Our previous valuation was based on SOTP methodology with a 13x multiple on the
average of FY12F and FY13F EPS of INR(51.2) and INR226 for investments. We have
lowered our multiple to factor in the higher risk to volume growth from increased
interest costs and a possible rise in either diesel prices or excise duty on diesel
vehicles.
Key risks
Acquisition of Ssangyong Motors: MM is planning to complete its acquisition of
Ssangyong Motors, Korea by March 2011 (announced in August 2010). The fact that it
is not a free cashflow positive company will likely pose a risk to MM’s cashflows. We
are awaiting a financial plan from Mahindra and Mahindra before incorporating this
acquisition into our estimates.
Below-normal rainfall in 2011: We have assumed a scenario of normal rainfall in
2011. However, if rainfall is significantly below normal, it could have a material impact
on our volume estimates.
Excise duty increases: We have assumed that the excise duty will not be increased
from the current 10%. However, if it is raised further, it could have a materially negative
impact on our margin estimates, as the company may not be able to pass through the
increases in excise duty to tractor components.
3Q FY11 results in line at operating level
Mahindra and Mahindra declared results slightly better than our estimates at the
operating level. Operating profit came in at INR9.2bn, ahead of our estimate of
INR9.0bn. Adjusted PAT came in at INR6.17bn, below our estimate of INR6.37bn and
consensus estimate of INR6.45bn.
Reported PAT was higher than expected at INR7.34bn due to an extraordinary gain on
the exercise of a put option on some investments. There was no tax on this gain.
Net sales were INR61.2bn, ahead of our estimate of INR60bn as realization per
vehicle improved by 5.7% q-q versus our estimate of a 3.6% improvement.
Operating profit of INR9.2bn was ahead of our estimate of INR9.0bn.
The 15.1% OPM was in-line with our estimates.
The cost ratios were largely in-line with estimates.
Adjusted PBT of INR8.66bn beat our estimate of INR8.38bn, but adjusted PAT was
lower due to a higher-than-forecast tax rate. The tax rate of 25.3% was higher than
our 24% estimate.
EBIT margins in the farm equipment segment came in at 18.5% and in the auto
sector were 12.3%.
Takeaways from the conference call
MM management appeared more circumspect on volume growth and margins than the
last time they met with investors. Management believes that there could be headwinds
against their FY12 industry growth estimate of 15-18% for the auto industry and 10-
12% for the tractor industry, citing increases in interest rates and lower credit
availability. The company indicated that margins will be under pressure from recent
cost increases in steel and rubber. It was able to take a price increase in the range of
0.5-2% in auto sector from January 2011, but has not increased prices in the tractor
segment. While commodity prices are now at their peak levels last reached in June
2008, management noted they have been able to manage margins thus far.
On the positive side, the company noted it is gaining market share in tractors with the
ramp up of a new 15hp Tractor Yuvraj and in >40hp tractors with the Arjun. The light
commercial vehicles (LCV) segment continues to ramp up strongly and MHCVs have
been well accepted according to management.
Other key takeaways from the conference call
The company improved market share in the tractors division in the quarter to 43.3%.
This is the highest quarterly market share for the company.
On a cumulative 9M basis, market share is flat y-y.
The small 15HP Yuvraaj Tractor has ramped up to 800 units per month. Arjun
tractor at the top end (>40HP) also continues to see strong growth.
Commodity prices are at the peak levels of June 2008 and there is no let up in cost
pressures, particularly rubber and steel.
There have been three new launches recently: Thar; Geneio; and back-hoe loaders.
The company is producing at nearly full capacity and inventory levels are lower
than normal.
The company will take over Ssangyong by end-March 2011 (70% ownership). The
purchase price is W5,000 per share, compared to W10,400 (as on 9th Feb 2011).
The cumulative price increases have been 5% in tractors and 3% in UVs in 9M
FY11. If economic growth continues at a steady pace, then management expects it
will be easier to increase prices.
Over 9M FY11, costs rose by 8-9%. Some of it was neutralized by price increases
and the rest by increased volumes and cost-reduction measures.
The Powerol business (engine components) is flat y-y.
There was no further guidance on employee costs for FY12F. The fair value of
options granted to employees will be amortized over the life of the vesting period.
Ssangyong continues to perform strongly and the company was EBITDA positive in
FY10, with volumes doubling to 82,000 units.
The D/E is 0.18x after the recent FCCB conversion. Capex guidance has not
changed from INR45bn over three years. 9M FY11 capex was INR8bn.
States like Gujarat, Maharashtra, Orissa and MP saw the highest growth in tractors,
while Bihar, Haryana, Punjab and UP recorded the lowest growth over 9M FY11.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Action
Mahindra and Mahindra (MM) is well positioned to benefit from various government
policies on rural growth and development. The company has a strong brand and
distribution network in rural India and faces low competition. Maintain BUY rating
with a revised price target of INR803, representing 23% potential upside.
Catalysts
Sustained tractor growth and successful new launches could be key catalysts.
Increased rural development budget by the government could provide a boost to
volumes.
Anchor themes
Nomura’s economics team estimates 4.8% agricultural GDP growth for 2011F vs
0.2% in 2010F. Strong agricultural GDP growth should drive rural incomes.
New launch momentum on side
Key beneficiary of rural development
Rural India has been on the development agenda of India’s
government for the past few years. The rural development budget has
more than doubled from INR288bn in FY08 to INR661bn in FY11F. In
addition, the minimum support prices for crops have consistently been
increased, leading to strong income growth for farmers. We believe
MM is likely to benefit from improved rural incomes, as it derives
nearly 80% of its revenues from rural India.
New launches to help volume growth
MM is in the process of launching or ramping up several new projects.
These include the small tractor Yuvraaj; the Geneio pick-up; the Thar
off-roader; construction equipment; heavy commercial vehicles;
variants of the Maaximo and Xylo; a new SUV; and two products from
the Ssangyong stable. We believe that with so many recent and
upcoming launches in the pipeline, the company will continue to
deliver strong top-line growth.
Margins to come under pressure
MM has effected an average price increase of around 1% in the auto
sector but has not raised tractor prices. As a result, we believe that
overall margins could come under pressure. We have lowered our
margin FY12F estimates to 14.2% from 14.9%. We also pared our
EPS estimates by 5.5% to factor in increased capital from shares
issued to the ESOP trust and higher costs.
Revising PT to INR803 (~23% upside); BUY
We value MM at Rs803/share (was INR892). We value the
standalone business at 12x FY13F standalone EPS ex dividends of
INR51.3 and investments at INR188/share. (Our previous valuation
was based on a 13x multiple on the average of FY12F and FY13F
EPS and INR226 for investments.)
Volume momentum likely to remain strong
We expect that given recent and upcoming launches, MM is likely to maintain its strong
volume growth in pick-up trucks such as the Maximo, and utility vehicles and light
commercial vehicles (LCVs). We have thus revised up our volume estimates by 4.5%
for FY11F and 3.9% for FY12F. We are building in 11% volume growth for tractors and
14% for UVs in FY12F.
The key changes in our volume estimates affected the cargo pick-up truck Maximo,
which has been well accepted by the market. We anticipate that the company will
maintain volume momentum with the launch of a passenger variant of this product.
Three wheelers also ramped up strongly, and we thus increased the volume estimates
there as well.
Estimate revisions – paring margins on increased costs
MM management indicated that material costs will increase in 4Q FY11F. Since the
company has not taken price increases in tractors, we believe margins will come off.
We have thus reduced our FY12F margin estimates to 14.2% from 14.9%.
In addition, we also factored in issuance of 17.4mn shares to the employee stock
option (ESOP) trust, leading to an increase in the number of shares from 544.8mn to
562.1mn (a 3.2% increase).
Our standalone EPS ex-subsidiary dividends thus came down by 5.5% to INR54.5 for
FY12F.
Valuation of INR803 representing ~23% potential upside
We value MM at INR803/share (was INR892/share) based on a sum-of-the-parts
(SOTP) methodology (unchanged). We value the standalone auto business at 12x
standalone FY13F EPS (ex-subsidiary dividends) at INR615/share. We value
investments at INR188/share, after a 20% holding discount.
Our previous valuation was based on SOTP methodology with a 13x multiple on the
average of FY12F and FY13F EPS of INR(51.2) and INR226 for investments. We have
lowered our multiple to factor in the higher risk to volume growth from increased
interest costs and a possible rise in either diesel prices or excise duty on diesel
vehicles.
Key risks
Acquisition of Ssangyong Motors: MM is planning to complete its acquisition of
Ssangyong Motors, Korea by March 2011 (announced in August 2010). The fact that it
is not a free cashflow positive company will likely pose a risk to MM’s cashflows. We
are awaiting a financial plan from Mahindra and Mahindra before incorporating this
acquisition into our estimates.
Below-normal rainfall in 2011: We have assumed a scenario of normal rainfall in
2011. However, if rainfall is significantly below normal, it could have a material impact
on our volume estimates.
Excise duty increases: We have assumed that the excise duty will not be increased
from the current 10%. However, if it is raised further, it could have a materially negative
impact on our margin estimates, as the company may not be able to pass through the
increases in excise duty to tractor components.
3Q FY11 results in line at operating level
Mahindra and Mahindra declared results slightly better than our estimates at the
operating level. Operating profit came in at INR9.2bn, ahead of our estimate of
INR9.0bn. Adjusted PAT came in at INR6.17bn, below our estimate of INR6.37bn and
consensus estimate of INR6.45bn.
Reported PAT was higher than expected at INR7.34bn due to an extraordinary gain on
the exercise of a put option on some investments. There was no tax on this gain.
Net sales were INR61.2bn, ahead of our estimate of INR60bn as realization per
vehicle improved by 5.7% q-q versus our estimate of a 3.6% improvement.
Operating profit of INR9.2bn was ahead of our estimate of INR9.0bn.
The 15.1% OPM was in-line with our estimates.
The cost ratios were largely in-line with estimates.
Adjusted PBT of INR8.66bn beat our estimate of INR8.38bn, but adjusted PAT was
lower due to a higher-than-forecast tax rate. The tax rate of 25.3% was higher than
our 24% estimate.
EBIT margins in the farm equipment segment came in at 18.5% and in the auto
sector were 12.3%.
Takeaways from the conference call
MM management appeared more circumspect on volume growth and margins than the
last time they met with investors. Management believes that there could be headwinds
against their FY12 industry growth estimate of 15-18% for the auto industry and 10-
12% for the tractor industry, citing increases in interest rates and lower credit
availability. The company indicated that margins will be under pressure from recent
cost increases in steel and rubber. It was able to take a price increase in the range of
0.5-2% in auto sector from January 2011, but has not increased prices in the tractor
segment. While commodity prices are now at their peak levels last reached in June
2008, management noted they have been able to manage margins thus far.
On the positive side, the company noted it is gaining market share in tractors with the
ramp up of a new 15hp Tractor Yuvraj and in >40hp tractors with the Arjun. The light
commercial vehicles (LCV) segment continues to ramp up strongly and MHCVs have
been well accepted according to management.
Other key takeaways from the conference call
The company improved market share in the tractors division in the quarter to 43.3%.
This is the highest quarterly market share for the company.
On a cumulative 9M basis, market share is flat y-y.
The small 15HP Yuvraaj Tractor has ramped up to 800 units per month. Arjun
tractor at the top end (>40HP) also continues to see strong growth.
Commodity prices are at the peak levels of June 2008 and there is no let up in cost
pressures, particularly rubber and steel.
There have been three new launches recently: Thar; Geneio; and back-hoe loaders.
The company is producing at nearly full capacity and inventory levels are lower
than normal.
The company will take over Ssangyong by end-March 2011 (70% ownership). The
purchase price is W5,000 per share, compared to W10,400 (as on 9th Feb 2011).
The cumulative price increases have been 5% in tractors and 3% in UVs in 9M
FY11. If economic growth continues at a steady pace, then management expects it
will be easier to increase prices.
Over 9M FY11, costs rose by 8-9%. Some of it was neutralized by price increases
and the rest by increased volumes and cost-reduction measures.
The Powerol business (engine components) is flat y-y.
There was no further guidance on employee costs for FY12F. The fair value of
options granted to employees will be amortized over the life of the vesting period.
Ssangyong continues to perform strongly and the company was EBITDA positive in
FY10, with volumes doubling to 82,000 units.
The D/E is 0.18x after the recent FCCB conversion. Capex guidance has not
changed from INR45bn over three years. 9M FY11 capex was INR8bn.
States like Gujarat, Maharashtra, Orissa and MP saw the highest growth in tractors,
while Bihar, Haryana, Punjab and UP recorded the lowest growth over 9M FY11.
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