Mahindra and Mahindra: Street yet to capture value from MVML: Nomura

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Volume momentum continues to remain strong


Action: Maintain Buy with increased TP of INR896
MM’s stock has declined 12% post 2Q results due to weaker-thanexpected
margins. In our view, stand-alone margins and PAT will not
move in line with volumes as the entity books only distribution margins on
newer vehicles. A large part of income may get booked in MVML, a 100%
subsidiary that manufactures new products. We estimate that MVML will
make PAT of INR2.2b in FY13F and INR3b in FY14F and assign it a value
of INR55/sh.
Catalysts: Value for MVML with successful new products
 Successful new products and value for MVML: MM will ramp up
successful new products like XUV500. It will also launch more new
products in UVs and the LCV space from MVML. As MVML becomes
more significant we believe street will start ascribing value to it.
 Strong rural incomes: With support from the benign policies of the
government and sharp increases in MSPs for agricultural crops (17% for
FY12), rural incomes should continue to stay strong and drive demand
for MM’s UVs and tractors. Shortage of labour due to implementation of
a rural-employment guarantee scheme will drive further mechanisation
in farms, in our view.
Valuation: SOTP-based valuation of INR896 with 21% upside.
We have increased our stand-alone EPS (ex subsidiary dividends)
estimates by nearly 10% for FY12F to factor in stronger demand. MVML
contributes an additional ~7%. We value the stand-alone business at
INR653/sh and MVML at INR55/sh based on 12x one-year forward EPS.
We value other investments at INR188/sh based on market value.