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Mahindra & Mahindra Ltd (MM)
Initiating Coverage
Proxy on growing rural consumption, BUY
MM, is a leading maker of tractors and utility vehicles (UVs). Growing
rural income (rising agri price) would support EPS growth of 17–20%
over FY11‐FY13. MM’s sales are far less sensitive to crude prices unlike
those of passenger car makers because tractors (38% of MM’s revenue)
are business equipment for farmers. We derive our ‘sum‐of‐the‐parts’
valuation of Rs845/sh by valuing the auto business at PER of 12x FY12F
(Rs614/sh) and investments at market price (Rs232/sh).
Rural market accounts for 60% of revenue
MM’s sales volume is growing 15% pa. We forecast it to remain at this
level over the next 2 years. Market share gains through innovative
product launches have helped MM to exceed sector growth of 12%
(estimated by auto makers). For our FY12 earnings forecast, we factor in
market share gains in the UV and CV segments (+150bp in UV and +350bp
in CV).
FY12F GM to remain unchanged at 29%; EPS growth of 17%
GM ranged 27–32% and in the past 3 years. Rising prices of steel cut GM
to 29% in FY11. We are confident of EPS growth of 21% for FY11F and 17%
in FY12F because tractor sales, which form 50% of earnings, are at less
risk from rising interest rates and fuel prices.
3‐year CAPEX of Rs70bn funded mainly by free CF; net D/E of 0.1x
Capex on product development is Rs14bn for FY11 and Rs18bn pa over
the next 2 years. In Jan 2011, MM acquired 70% stake in Ssangyong, the
Korean SUV maker, for Rs21bn.
PER based ‘sum‐of‐the‐parts’ valuation of Rs845/sh
MM’s CMP of Rs711 reflects value of only the auto business. Market value
of its holdings in financial services, technology is at least Rs232/sh.
Recommendation – Strong BUY
We rate MM as a Strong BUY because:
• It has low sensitivity to rising interest rates and fuel prices,
given that tractors form half of its earnings.
• It has a strong inorganic and organic growth strategy across
each of the main business segments to gain market share
over the next 3 years and a sound team in place to execute
the strategy.
• It has a flexible B/S for growth and a proven track record of
capital allocation to extract better long‐term RoI.
• It is one of the few corporate groups in India with high
corporate governance standards, which make it a favorite
with investors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra Ltd (MM)
Initiating Coverage
Proxy on growing rural consumption, BUY
MM, is a leading maker of tractors and utility vehicles (UVs). Growing
rural income (rising agri price) would support EPS growth of 17–20%
over FY11‐FY13. MM’s sales are far less sensitive to crude prices unlike
those of passenger car makers because tractors (38% of MM’s revenue)
are business equipment for farmers. We derive our ‘sum‐of‐the‐parts’
valuation of Rs845/sh by valuing the auto business at PER of 12x FY12F
(Rs614/sh) and investments at market price (Rs232/sh).
Rural market accounts for 60% of revenue
MM’s sales volume is growing 15% pa. We forecast it to remain at this
level over the next 2 years. Market share gains through innovative
product launches have helped MM to exceed sector growth of 12%
(estimated by auto makers). For our FY12 earnings forecast, we factor in
market share gains in the UV and CV segments (+150bp in UV and +350bp
in CV).
FY12F GM to remain unchanged at 29%; EPS growth of 17%
GM ranged 27–32% and in the past 3 years. Rising prices of steel cut GM
to 29% in FY11. We are confident of EPS growth of 21% for FY11F and 17%
in FY12F because tractor sales, which form 50% of earnings, are at less
risk from rising interest rates and fuel prices.
3‐year CAPEX of Rs70bn funded mainly by free CF; net D/E of 0.1x
Capex on product development is Rs14bn for FY11 and Rs18bn pa over
the next 2 years. In Jan 2011, MM acquired 70% stake in Ssangyong, the
Korean SUV maker, for Rs21bn.
PER based ‘sum‐of‐the‐parts’ valuation of Rs845/sh
MM’s CMP of Rs711 reflects value of only the auto business. Market value
of its holdings in financial services, technology is at least Rs232/sh.
Recommendation – Strong BUY
We rate MM as a Strong BUY because:
• It has low sensitivity to rising interest rates and fuel prices,
given that tractors form half of its earnings.
• It has a strong inorganic and organic growth strategy across
each of the main business segments to gain market share
over the next 3 years and a sound team in place to execute
the strategy.
• It has a flexible B/S for growth and a proven track record of
capital allocation to extract better long‐term RoI.
• It is one of the few corporate groups in India with high
corporate governance standards, which make it a favorite
with investors.
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