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Mahindra & Mahindra
Core Earnings Slowing;
Moving to EW
What's Changed
Rating Overweight to Equal-weight
Price Target Rs803.00 to Rs682.00
F11/F12/F13 StandaloneEPS By -4%/-6%/-5%
F11/F12/F13 Consol EPS By -2%/-6%/-5%
With limited upside to our revised price target of
Rs682 (down from Rs803), likely muted near-term
earnings, and limited long-term visibility for tractors,
we are lowering our rating to Equal-weight.
Limited upside to price target, thus moving to
Equal-weight: Adjusting for F4Q results disappointment
and taking into consideration our macro view of slowing
consumption spending, we believe the stock offers
limited upside from current levels thus we move to an
Equal-weight rating. Our top picks in the group are Tata
Motors on its global exposure and Exide as a hedge in a
slowing OEM sales scenario.
Muted earnings near term with limited visibility on
tractors long term: The sharp margin compression in
F4Q implies that earnings growth for M&M will be muted
in the near term. Moreover, although tractors will be
strong in the coming year, we do not have visibility on
the sustainability of long-term growth. Thus, in our view,
the triggers for a re-rating to play out are missing.
Pricing in the positives: Monsoons will drive the stock
near term; we have built in an in-line monsoon season in
our numbers. We expect 13% growth in tractors and
16% growth in automotives in F2012.
Valuations: M&M’s core business currently trades at a
F2012E P/E of 11.5x, a roughly 12% discount to MSIL.
Given high terminal growth in cars vs. tractors, we think
this discount is justified. Further, we note that in past
cycles, M&M’s core business has traded at a median of
around 10x F2012E, and we set our price target at12x
F2012E core earnings (vs. 13x earlier).
Valuation
We arrive at our price target using a combination of a
sum-of-the parts valuation and price-earning multiples. We
set our base-case value at 12x F2012E core business
earnings. Based on the data in Exhibit 10, we note that the
median multiple of core business is 10x F2012E, and in a
strong cycles rises to 13x. We lowered our core business
multiple as earnings are entering a slow-growth phase.
For the listed non-core businesses (Tech Mahindra, Mahindra
Finance, Mahindra Life Space, Mahindra Holidays, and
Kinetic Motors Ltd.), we use market valuations. Overall, we
apply a 20% holding company discount to M&M’s listed
subsidiaries. Our non-core listed businesses value is Rs179
per share. We also value unlisted investments like Navistar
and two wheelers at book value, implying Rs22 per share.
Given that M&M’s acquisition of Ssangyong is now almost
complete and the financial details on acquisition are out, we
have added Ssangyong’s value to our sum-of-the-parts
calculation. Given that Ssangyong is an illiquid name and a
potential turnaround story, we value it on price paid by M&M
rather than Ssangyong’s market capitalization. M&M paid
US$463mn for a 70% stake in the company, and thus we
arrive a value of Rs27 of per share.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra
Core Earnings Slowing;
Moving to EW
What's Changed
Rating Overweight to Equal-weight
Price Target Rs803.00 to Rs682.00
F11/F12/F13 StandaloneEPS By -4%/-6%/-5%
F11/F12/F13 Consol EPS By -2%/-6%/-5%
With limited upside to our revised price target of
Rs682 (down from Rs803), likely muted near-term
earnings, and limited long-term visibility for tractors,
we are lowering our rating to Equal-weight.
Limited upside to price target, thus moving to
Equal-weight: Adjusting for F4Q results disappointment
and taking into consideration our macro view of slowing
consumption spending, we believe the stock offers
limited upside from current levels thus we move to an
Equal-weight rating. Our top picks in the group are Tata
Motors on its global exposure and Exide as a hedge in a
slowing OEM sales scenario.
Muted earnings near term with limited visibility on
tractors long term: The sharp margin compression in
F4Q implies that earnings growth for M&M will be muted
in the near term. Moreover, although tractors will be
strong in the coming year, we do not have visibility on
the sustainability of long-term growth. Thus, in our view,
the triggers for a re-rating to play out are missing.
Pricing in the positives: Monsoons will drive the stock
near term; we have built in an in-line monsoon season in
our numbers. We expect 13% growth in tractors and
16% growth in automotives in F2012.
Valuations: M&M’s core business currently trades at a
F2012E P/E of 11.5x, a roughly 12% discount to MSIL.
Given high terminal growth in cars vs. tractors, we think
this discount is justified. Further, we note that in past
cycles, M&M’s core business has traded at a median of
around 10x F2012E, and we set our price target at12x
F2012E core earnings (vs. 13x earlier).
Valuation
We arrive at our price target using a combination of a
sum-of-the parts valuation and price-earning multiples. We
set our base-case value at 12x F2012E core business
earnings. Based on the data in Exhibit 10, we note that the
median multiple of core business is 10x F2012E, and in a
strong cycles rises to 13x. We lowered our core business
multiple as earnings are entering a slow-growth phase.
For the listed non-core businesses (Tech Mahindra, Mahindra
Finance, Mahindra Life Space, Mahindra Holidays, and
Kinetic Motors Ltd.), we use market valuations. Overall, we
apply a 20% holding company discount to M&M’s listed
subsidiaries. Our non-core listed businesses value is Rs179
per share. We also value unlisted investments like Navistar
and two wheelers at book value, implying Rs22 per share.
Given that M&M’s acquisition of Ssangyong is now almost
complete and the financial details on acquisition are out, we
have added Ssangyong’s value to our sum-of-the-parts
calculation. Given that Ssangyong is an illiquid name and a
potential turnaround story, we value it on price paid by M&M
rather than Ssangyong’s market capitalization. M&M paid
US$463mn for a 70% stake in the company, and thus we
arrive a value of Rs27 of per share.
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