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Mahindra & Mahindra
Best play on rural consumption
Event
We transfer coverage of Mahindra & Mahindra (M&M) to Amit Mishra with an
Outperform rating and a target price of Rs860 (previously Rs820), providing
19% upside potential from current levels. We rate M&M our top pick in the
Indian auto space. With its leadership position in utility vehicles and tractor
segments, robust 15% CAGR in earnings that we expect over the next two
years and 11x core auto FY12E PER, we think M&M is one of the most
attractive stocks in the Indian auto sector.
Impact
Tractor segment benefits from growing rural prosperity. M&M’s tractor
sales grew 22% in FY11, driven by rising rural income, increasing agriculture
credit and labour shortages leading to farm mechanisation. We expect these
factors to continue to support segment growth of 12% in the coming years.
Competitive intensity is very low in the tractor segment, and M&M is the
unchallenged leader, with a 42% market share (~300bp market share gains in
last three years). This should support the high margins in this segment.
New products to drive auto segment growth. Strong products catering to
all consumer segments, new product launches and benign competition could
result in M&M’s utility vehicle segment growing at a CAGR of 14% over the
next couple of years. In the LCV space, the recently launched Genio, Gio and
Maxximo have received a good response and should help the segment grow
by 15% in FY12, in our view.
Ssangyong acquisition makes strategic sense. Ssangyong gives M&M
access to the premium utility vehicle (UV) platform and a network of 1,300
dealers across the globe. Ssangyong achieved a turnaround in sales volumes
(+125% to 80,000 units) and EBITDA in CY10. M&M paid US$463m for
Ssangyong, and US$380m of that was equity for a 70% stake.
New businesses to add value in the medium term. M&M has entered new
auto segments — Medium and Heavy Commercial Vehicles (M&HCV) and 2-
wheelers. Given its strong growth prospects and a virtual duopoly in the
M&HCV space, we believe this segment could add significant value.
Earnings and target price revision
We forecast a CAGR of 15% in M&M’s earnings over the next 2 years (FY11-
13E) despite a minor decline in margins. Our estimates are 5% above
consensus, mainly due to higher volume growth assumptions.
Price catalyst
12-month price target: Rs860.00 based on a Sum of Parts methodology.
Catalyst: Volume numbers, fuel price changes, monsoon.
Action and recommendation
The stock trades at a ~15% discount to its peers on core auto business
valuations. We ascribe a PER of 14x to core auto earnings, in line with the
sector average, valuing the segment at Rs690 per share (80% of value). We
value listed subsidiaries at a 20% discount to market value.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra
Best play on rural consumption
Event
We transfer coverage of Mahindra & Mahindra (M&M) to Amit Mishra with an
Outperform rating and a target price of Rs860 (previously Rs820), providing
19% upside potential from current levels. We rate M&M our top pick in the
Indian auto space. With its leadership position in utility vehicles and tractor
segments, robust 15% CAGR in earnings that we expect over the next two
years and 11x core auto FY12E PER, we think M&M is one of the most
attractive stocks in the Indian auto sector.
Impact
Tractor segment benefits from growing rural prosperity. M&M’s tractor
sales grew 22% in FY11, driven by rising rural income, increasing agriculture
credit and labour shortages leading to farm mechanisation. We expect these
factors to continue to support segment growth of 12% in the coming years.
Competitive intensity is very low in the tractor segment, and M&M is the
unchallenged leader, with a 42% market share (~300bp market share gains in
last three years). This should support the high margins in this segment.
New products to drive auto segment growth. Strong products catering to
all consumer segments, new product launches and benign competition could
result in M&M’s utility vehicle segment growing at a CAGR of 14% over the
next couple of years. In the LCV space, the recently launched Genio, Gio and
Maxximo have received a good response and should help the segment grow
by 15% in FY12, in our view.
Ssangyong acquisition makes strategic sense. Ssangyong gives M&M
access to the premium utility vehicle (UV) platform and a network of 1,300
dealers across the globe. Ssangyong achieved a turnaround in sales volumes
(+125% to 80,000 units) and EBITDA in CY10. M&M paid US$463m for
Ssangyong, and US$380m of that was equity for a 70% stake.
New businesses to add value in the medium term. M&M has entered new
auto segments — Medium and Heavy Commercial Vehicles (M&HCV) and 2-
wheelers. Given its strong growth prospects and a virtual duopoly in the
M&HCV space, we believe this segment could add significant value.
Earnings and target price revision
We forecast a CAGR of 15% in M&M’s earnings over the next 2 years (FY11-
13E) despite a minor decline in margins. Our estimates are 5% above
consensus, mainly due to higher volume growth assumptions.
Price catalyst
12-month price target: Rs860.00 based on a Sum of Parts methodology.
Catalyst: Volume numbers, fuel price changes, monsoon.
Action and recommendation
The stock trades at a ~15% discount to its peers on core auto business
valuations. We ascribe a PER of 14x to core auto earnings, in line with the
sector average, valuing the segment at Rs690 per share (80% of value). We
value listed subsidiaries at a 20% discount to market value.
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