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Mahindra & Mahindra (MAHM.BO)
Alert: Takeaways from MMFS Con Call
What's New? — We did a quick call with MMFS (Mahindra & Mahindra Financial
Services) management to discern recent trends in the tractor industry, given the current
operating environment and the divergence in results of players like M&M and Escorts.
Key takeaways:
Management signaled a buoyant outlook — Mgmt sounded confident, and noted
that, in the farm equipment space, customers aren’t impacted by the current macro
economic concerns. An above-average monsoon augurs well for farm incomes, whilst
rising gold prices contribute to the wealth effect – mgmt noted that some customers in
rural areas are beginning to monetize their gold holdings and generating alternative
income streams. Between rural and urban growth, mgmt stated that semi urban and
rural areas are growing faster than urban areas – a refrain echoed by OEM mgmts too.
Tractor replacement cycles declining — mgmt noted that a few years ago, a tractor’s
useful life was 7-9 years; now it has declined to ~3-5 years as haulage applications
have reduced the life of a tractor. The flip side is that the alternative revenue stream
generated compensates for the accelerated depreciation. Qualitatively, residual values
are in line with previous trends – especially when adjusted for the additional income
stream that offsets the depreciation.
No meaningful build-up of tractor inventories in the dealer channel — at least for
MMFS’ key customers – though the shortfall situation that persisted a few months ago
has definitely reversed, and demand-supply is now more balanced. Mgmt noted that
LTV trends are also healthy, at present – around 67-70%, formerly 75-80%, increasing
the asset coverage in the instance of a default.
Lower seasonality in farmers’ cash flows a positive — especially for financiers,
from a cash collection perspective. Mgmt noted that previously, farmers’ cash flows
were skewed towards 2H (the harvest season). The current industry scenario has
changed slightly, with cash flows more evenly dispersed through the year as farmers
generate income leasing / utilizing their tractors for non farm applications.
Implications for M&M — Over the next 2-3 months, we see few signs of concern for
M&M’s farm equipment business. Over 1QFY12, there has been some divergence in
growth trends, with players like Escorts reporting a volume decline >15% Y/Y – we note
this isn’t representative of a broader industry trend. Most major players (M&M, TAFE,
John Deere) have grown above the 1Q industry growth of ~13%, whilst ITL has
reported ~10% growth in 1Q.
Mahindra & Mahindra
Valuation
Our target price of Rs767 is based on a sum-of-parts methodology. We value M&M's
core business at Rs623/share (10.5x March2013E core CEPS, at a slight premium to
its 10-year average multiple). We also incorporate value for M&M's listed subsidiaries
at Rs144/share. Our subsidiary valuations are based on a 25% discount to market
prices of the listed subsidiaries. We have chosen P/CEPS to value the core business to
facilitate comparison with historical trading bands; the company is undertaking a
significant product development and capital expenditure program, and also undertook a
restructuring of the balance sheet in FY02. We believe valuations will also be
supported by M&M's listed subsidiaries.
Risks
We rate M&M shares Low Risk, in line with our quantitative risk rating system which
tracks 260-day historical share price volatility, and also reflecting a decline in capex
intensity, and improved business fundamentals have reduced earnings volatility. Key
risk factors to our investment thesis which could prevent the shares from reaching our
target price include: a) Any substantial rise in interest rates that could curb demand for
farm equipment and utility vehicles, b) Increase in raw material costs, especially Steel
and Rubber may put downward pressure on margins. c) Given M&M's strong
dependence on the rural economy (a substantial part of the demand for their products
emanates herein), any weak trend in the prices of agricultural commodities could also
impact demand and sales, d) Escalating competition within the UV segment, which
might lead to an increase in discounts and result in margin pressure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MAHM.BO)
Alert: Takeaways from MMFS Con Call
What's New? — We did a quick call with MMFS (Mahindra & Mahindra Financial
Services) management to discern recent trends in the tractor industry, given the current
operating environment and the divergence in results of players like M&M and Escorts.
Key takeaways:
Management signaled a buoyant outlook — Mgmt sounded confident, and noted
that, in the farm equipment space, customers aren’t impacted by the current macro
economic concerns. An above-average monsoon augurs well for farm incomes, whilst
rising gold prices contribute to the wealth effect – mgmt noted that some customers in
rural areas are beginning to monetize their gold holdings and generating alternative
income streams. Between rural and urban growth, mgmt stated that semi urban and
rural areas are growing faster than urban areas – a refrain echoed by OEM mgmts too.
Tractor replacement cycles declining — mgmt noted that a few years ago, a tractor’s
useful life was 7-9 years; now it has declined to ~3-5 years as haulage applications
have reduced the life of a tractor. The flip side is that the alternative revenue stream
generated compensates for the accelerated depreciation. Qualitatively, residual values
are in line with previous trends – especially when adjusted for the additional income
stream that offsets the depreciation.
No meaningful build-up of tractor inventories in the dealer channel — at least for
MMFS’ key customers – though the shortfall situation that persisted a few months ago
has definitely reversed, and demand-supply is now more balanced. Mgmt noted that
LTV trends are also healthy, at present – around 67-70%, formerly 75-80%, increasing
the asset coverage in the instance of a default.
Lower seasonality in farmers’ cash flows a positive — especially for financiers,
from a cash collection perspective. Mgmt noted that previously, farmers’ cash flows
were skewed towards 2H (the harvest season). The current industry scenario has
changed slightly, with cash flows more evenly dispersed through the year as farmers
generate income leasing / utilizing their tractors for non farm applications.
Implications for M&M — Over the next 2-3 months, we see few signs of concern for
M&M’s farm equipment business. Over 1QFY12, there has been some divergence in
growth trends, with players like Escorts reporting a volume decline >15% Y/Y – we note
this isn’t representative of a broader industry trend. Most major players (M&M, TAFE,
John Deere) have grown above the 1Q industry growth of ~13%, whilst ITL has
reported ~10% growth in 1Q.
Mahindra & Mahindra
Valuation
Our target price of Rs767 is based on a sum-of-parts methodology. We value M&M's
core business at Rs623/share (10.5x March2013E core CEPS, at a slight premium to
its 10-year average multiple). We also incorporate value for M&M's listed subsidiaries
at Rs144/share. Our subsidiary valuations are based on a 25% discount to market
prices of the listed subsidiaries. We have chosen P/CEPS to value the core business to
facilitate comparison with historical trading bands; the company is undertaking a
significant product development and capital expenditure program, and also undertook a
restructuring of the balance sheet in FY02. We believe valuations will also be
supported by M&M's listed subsidiaries.
Risks
We rate M&M shares Low Risk, in line with our quantitative risk rating system which
tracks 260-day historical share price volatility, and also reflecting a decline in capex
intensity, and improved business fundamentals have reduced earnings volatility. Key
risk factors to our investment thesis which could prevent the shares from reaching our
target price include: a) Any substantial rise in interest rates that could curb demand for
farm equipment and utility vehicles, b) Increase in raw material costs, especially Steel
and Rubber may put downward pressure on margins. c) Given M&M's strong
dependence on the rural economy (a substantial part of the demand for their products
emanates herein), any weak trend in the prices of agricultural commodities could also
impact demand and sales, d) Escalating competition within the UV segment, which
might lead to an increase in discounts and result in margin pressure.
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