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India Equity Research Reports, IPO and Stock News
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Mahindra & Mahindra (MM)
Automobiles
Volume growth momentum intact; upgrade to BUY. We upgrade the stock to BUY
as we believe volume growth for M&M is likely to remain strong despite concerns of
slower economic growth, driven by – (1) new model launches in the UV segment and
(2) rising agricultural incomes driven by good crop/rise in minimum support prices which
could support strong growth in tractors. We upgrade the stock to BUY (from ADD
earlier) on attractive valuations.
Volume growth likely to remain strong which would be key trigger for stock performance
Our recent interactions with UV dealers and tractor financiers indicate that utility vehicle and
tractor volumes are likely to remain robust in the Nov-Mar 2012 period. M&M volume growth in
2HFY12E would be supported by existing bookings of new XUV500 and strong growth in Bolero.
Tractor volume growth is likely to be supported by good rabi crop and higher minimum support
prices. M&M market share in both utility vehicle and tractor businesses is at historic high levels but
we expect M&M to maintain its market share in both businesses driven by new model launches
and stronger growth in the South/West tractor market where M&M has a dominant market share.
We expect utility vehicle volumes to grow by 13% yoy between November and March 2012 for
M&M, higher than the industry growth of 8% yoy during this period. XUV 500 volumes of 8,000
over the Nov-Mar 2012 period has been built in our forecast, hence excluding XUV500 we
estimate M&M’s existing UV volumes to grow at 3% yoy between November and March 2012.
Tractor volumes in South and West India have grown at 30% and 42% yoy in the Apr-Sep 2011
period outpacing pan-India growth of 20% during this period. M&M’s market share in South and
West region is ~50% higher than its pan-India market share of 42%, which has helped M&M to
maintain its market share in the tractor market.
We reduce our earnings estimates by 6% over FY2012-13E on cost pressures
We have reduced our earnings estimates by 6% over FY2012-13E driven by 100-140 bps reduction
in EBITDA margins due to higher-than-estimated raw material cost pressure in 2QFY12 and stable
raw material outlook for 2HFY12E (versus earlier estimate of decline in raw material cost). We have
thus cut our target price to Rs845 (from Rs900 earlier) which is based on sum-of-the-parts
valuation methodology. We value the standalone business at Rs646/share (at 14X FY2013E parent
earnings less dividend from subsidiaries) and subsidiaries at Rs196/share.
Key risks to the call are (1) increase in excise tax on passenger diesel vehicles by the government,
(2) rising agricultural NPAs which could restrict lending to the tractor segment and thus pose a
threat to the tractor volume growth and (3) sharp rise in commodity costs.
Upgrade to BUY
We upgrade the stock to BUY as we believe the recent fall in the stock price is a good
opportunity to enter the stock. The stock trades at 11.1X PE on our FY2013E standalone
estimates (excluding value of subsidiary) which we believe is attractive considering volume
growth in both utility vehicle and tractor businesses is expected to remain buoyant. Our
target price is based on the sum-of-the-parts valuation methodology. We value the
standalone business at Rs646/share (at 14X FY2013E parent earnings less dividend from
subsidiaries) and subsidiaries at Rs196/share. We have reduced our target price to Rs845
(from Rs900 earlier) as we have lowered our EBITDA margin assumptions because raw
material cost pressures were higher than our expectations in 2QFY12. The management has
indicated that raw material cost pressures are unlikely to decline in 2HFY12E due to sharp
depreciation of Rupee versus US$ which has nullified the impact of a decline in commodity
prices.
We have revised our earnings estimates downwards by 6% over FY2012-13E to factor in
lower EBITDA margin assumptions in 2HFY12E due to lower-than-expected reduction in raw
material costs. We have, however, kept our volume assumptions unchanged as our channel
checks suggest no slowdown in M&M utility vehicle and tractor volumes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MM)
Automobiles
Volume growth momentum intact; upgrade to BUY. We upgrade the stock to BUY
as we believe volume growth for M&M is likely to remain strong despite concerns of
slower economic growth, driven by – (1) new model launches in the UV segment and
(2) rising agricultural incomes driven by good crop/rise in minimum support prices which
could support strong growth in tractors. We upgrade the stock to BUY (from ADD
earlier) on attractive valuations.
Volume growth likely to remain strong which would be key trigger for stock performance
Our recent interactions with UV dealers and tractor financiers indicate that utility vehicle and
tractor volumes are likely to remain robust in the Nov-Mar 2012 period. M&M volume growth in
2HFY12E would be supported by existing bookings of new XUV500 and strong growth in Bolero.
Tractor volume growth is likely to be supported by good rabi crop and higher minimum support
prices. M&M market share in both utility vehicle and tractor businesses is at historic high levels but
we expect M&M to maintain its market share in both businesses driven by new model launches
and stronger growth in the South/West tractor market where M&M has a dominant market share.
We expect utility vehicle volumes to grow by 13% yoy between November and March 2012 for
M&M, higher than the industry growth of 8% yoy during this period. XUV 500 volumes of 8,000
over the Nov-Mar 2012 period has been built in our forecast, hence excluding XUV500 we
estimate M&M’s existing UV volumes to grow at 3% yoy between November and March 2012.
Tractor volumes in South and West India have grown at 30% and 42% yoy in the Apr-Sep 2011
period outpacing pan-India growth of 20% during this period. M&M’s market share in South and
West region is ~50% higher than its pan-India market share of 42%, which has helped M&M to
maintain its market share in the tractor market.
We reduce our earnings estimates by 6% over FY2012-13E on cost pressures
We have reduced our earnings estimates by 6% over FY2012-13E driven by 100-140 bps reduction
in EBITDA margins due to higher-than-estimated raw material cost pressure in 2QFY12 and stable
raw material outlook for 2HFY12E (versus earlier estimate of decline in raw material cost). We have
thus cut our target price to Rs845 (from Rs900 earlier) which is based on sum-of-the-parts
valuation methodology. We value the standalone business at Rs646/share (at 14X FY2013E parent
earnings less dividend from subsidiaries) and subsidiaries at Rs196/share.
Key risks to the call are (1) increase in excise tax on passenger diesel vehicles by the government,
(2) rising agricultural NPAs which could restrict lending to the tractor segment and thus pose a
threat to the tractor volume growth and (3) sharp rise in commodity costs.
Upgrade to BUY
We upgrade the stock to BUY as we believe the recent fall in the stock price is a good
opportunity to enter the stock. The stock trades at 11.1X PE on our FY2013E standalone
estimates (excluding value of subsidiary) which we believe is attractive considering volume
growth in both utility vehicle and tractor businesses is expected to remain buoyant. Our
target price is based on the sum-of-the-parts valuation methodology. We value the
standalone business at Rs646/share (at 14X FY2013E parent earnings less dividend from
subsidiaries) and subsidiaries at Rs196/share. We have reduced our target price to Rs845
(from Rs900 earlier) as we have lowered our EBITDA margin assumptions because raw
material cost pressures were higher than our expectations in 2QFY12. The management has
indicated that raw material cost pressures are unlikely to decline in 2HFY12E due to sharp
depreciation of Rupee versus US$ which has nullified the impact of a decline in commodity
prices.
We have revised our earnings estimates downwards by 6% over FY2012-13E to factor in
lower EBITDA margin assumptions in 2HFY12E due to lower-than-expected reduction in raw
material costs. We have, however, kept our volume assumptions unchanged as our channel
checks suggest no slowdown in M&M utility vehicle and tractor volumes.
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