Braveheart Series: Mahindra & Mahindra - Tacit Transformation :: Edelweiss

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It is our conviction that Mahindra & Mahindra’s (M&M) tractor and utility vehicle (UV) segments will stage a robust turnaround in FY16/FY17, despite the market share loss and near-term weak demand outlook headwinds. Market share gains in the emerging compact UV segment will be driven by: (1) product launches (with smaller engines) developed at its fully integrated R&D centre; and (2) absence of credible competition from incumbent leaders. Meanwhile, below peak penetration, labour shortages and revival in infrastructure activities will push tractor demand. Robust volumes, 29% FY15-17E EPS CAGR and market share gains are bound to spur valuation rerating.

Utility vehicles: Concerns overdone; rejig to bring cheer

We believe the Street is underestimating M&M’s efforts to realign with the changing demand dynamics in the past 4 years-product, quality, features, etc. Herein lies the similarity between Jaguar Land Rover (JLR) and M&M-there are concerns on their development capabilities and options to expand product/engine portfolios. It may be noted that unlike in cars, leaders in UVs have not been aggressive in introducing new products, giving M&M adequate scope to recoup lost ground.

Tractors: Structural drivers intact; rain gods hold the key

Long-term drivers like below peak penetration, mechanisation and labour shortages persist. However, monsoon remains the vital variable (apparent from sharp drop in FY15 sales). But, with the infra sector gathering pace, demand is expected to receive a fillip in FY16/FY17 given that ~25% of tractor usage is for non-farm purposes.

LINK
https://www.edelweiss.in/research/Braveheart-Series-Mahindra-And-Mahindra--Tacit-Transformation/28075.html