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Mahindra & Mahindra
Reuters: MAHM.BO Bloomberg: MM IN Exchange: BSE Ticker: MAHM
Bucking the sector demand trend
Our preferred pick in the Indian auto sector
Mahindra’s sales performance has been the strongest, relatively, of the Indian
auto companies. Robust increases in support prices for crops and the likelihood of
a normal monsoon underline the positive demand sentiment. Tractors (YTD 20%)
and Pick-ups (YTD 35%) have significantly outperformed our FY12 forecasts of
12% and 19%. Utility vehicles have grown in line – YTD 14% vs FY12E of 15%.
We note that M&M has completely clawed back its market share loss of 400bps
in FY11 to reach 36%. We maintain Buy with a target price of Rs 780.
Normal monsoons and increase in crop prices positive for rural demand
The government has announced increases in minimum support prices (MSPs),
ranging from 8% for rice to 17-19% for oilseeds. Rural areas have already
benefited from the estimated highest-ever food grain production in FY11 at 236m
tonnes. The 2011 monsoon season has begun on an encouraging note, with 26
meteorological divisions reporting excess/normal rainfall and 10 divisions reporting
deficient/scanty rainfall.
1QFY12E – Revenues (Rs 67bn, 29% YoY), 13.8% EBITDA margin
Our margin forecast does not factor in the 80-100bps positive impact of M&M’s
100% subsidiary, which produces its Maxximo LCV. However, this is likely to be
partially offset by the negative impact of the VAT benefit issue (est. Rs 400m),
which remains unresolved. The government of Maharastra has amended its
industrial policy to provide relief against VAT on the sale of products only within
the state rather than all product sales from the Chakan plant. We expect 1Q net
profit of Rs 6.5bn (16% YoY).
Trading at 13.5x FY12E EPS, two-year core EPS CAGR (FY11-13E) of 13%
Our target price (Rs 780) is based on 15x FY12E core EPS (Rs 40) plus Rs
180/share for its stake in listed subsidiaries (20% holdco discount). We note that
M&M's pre-tax ROCE in the auto and tractor businesses is 62% and 166%
respectively, which underlines our positive view and valuations. We estimate
FY11/12 capex of Rs 13.5bn/13bn, FCF of Rs 16bn/18bn and net debt of Rs
7.6bn/1.7bn. Downside risks include slower-than-forecast volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra
Reuters: MAHM.BO Bloomberg: MM IN Exchange: BSE Ticker: MAHM
Bucking the sector demand trend
Our preferred pick in the Indian auto sector
Mahindra’s sales performance has been the strongest, relatively, of the Indian
auto companies. Robust increases in support prices for crops and the likelihood of
a normal monsoon underline the positive demand sentiment. Tractors (YTD 20%)
and Pick-ups (YTD 35%) have significantly outperformed our FY12 forecasts of
12% and 19%. Utility vehicles have grown in line – YTD 14% vs FY12E of 15%.
We note that M&M has completely clawed back its market share loss of 400bps
in FY11 to reach 36%. We maintain Buy with a target price of Rs 780.
Normal monsoons and increase in crop prices positive for rural demand
The government has announced increases in minimum support prices (MSPs),
ranging from 8% for rice to 17-19% for oilseeds. Rural areas have already
benefited from the estimated highest-ever food grain production in FY11 at 236m
tonnes. The 2011 monsoon season has begun on an encouraging note, with 26
meteorological divisions reporting excess/normal rainfall and 10 divisions reporting
deficient/scanty rainfall.
1QFY12E – Revenues (Rs 67bn, 29% YoY), 13.8% EBITDA margin
Our margin forecast does not factor in the 80-100bps positive impact of M&M’s
100% subsidiary, which produces its Maxximo LCV. However, this is likely to be
partially offset by the negative impact of the VAT benefit issue (est. Rs 400m),
which remains unresolved. The government of Maharastra has amended its
industrial policy to provide relief against VAT on the sale of products only within
the state rather than all product sales from the Chakan plant. We expect 1Q net
profit of Rs 6.5bn (16% YoY).
Trading at 13.5x FY12E EPS, two-year core EPS CAGR (FY11-13E) of 13%
Our target price (Rs 780) is based on 15x FY12E core EPS (Rs 40) plus Rs
180/share for its stake in listed subsidiaries (20% holdco discount). We note that
M&M's pre-tax ROCE in the auto and tractor businesses is 62% and 166%
respectively, which underlines our positive view and valuations. We estimate
FY11/12 capex of Rs 13.5bn/13bn, FCF of Rs 16bn/18bn and net debt of Rs
7.6bn/1.7bn. Downside risks include slower-than-forecast volume growth.
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