Mahindra & Mahindra Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Automobiles - Passenger Cars

Company

Mahindra & Mahindra Ltd

Reco Price
Rs. 1378.00
Price Target (1 Year)
Rs. 1655.00
Upside
20.10%

Date

June 07, 2016
Sensex
27009.67
CNX Nifty
8266.45

Exchange

Code

NSE
M&M
BSE
500520

Strong volume growth and favourable monsoon will boost financials.

Structurally Strongest Player:
Amongst four-wheeler players, M&M enjoys some structural advantages like a) significantly higher exposure to rural and semi-urban markets (70% of domestic volumes), b) relatively lower competitive intensity in core UV and tractor business, c) immensely successful launches in UV segment like Scorpio and XUV500, d) recent successes like Ssangyong Rexton and all new Scorpio, e) strong financing arm that specialises in rural lending, and f) increased demand for farm mechanization due to scarce labour. We believe Ssangyong is a strategic fit for M&M’s automotive division. Ssangyong will help M&M absorb newer technology and extend its product range in India by introducing premium Ssangyong SUVs with access to foreign market through its distribution network.

Growing Volumes:
While there were 10 new launches and major refreshes during FY16, these launches would be ramped up in FY17. KUV100 has already clocked more than 40000 bookings since launch in Jan’16. With KUV100 and TUV300, M&M regained 40%+ market share in UV segment. The company is focusing on developing petrol engines for all its vehicles. M&M completely regained its lost volumes in ‘Scorpio’ and ‘XUV500’ in NCR region by lowering engine capacities to 1.99l. SCV’s clocked positive growth in Q4FY16 due to replacement demand and pick up in mining activities.

Diesel to Petrol Migration to be completed in the next 18 months:
Currently M&M is developing an all new range of petrol engines for all of its existing vehicles. These new petrol engines range are being co-developed with SsangYong. Over the next 18 months, M&M plans to cover its entire product portfolio by the petrol engine variant by offering petrol engine option for all of its models. (Petrol engines like 1.5/1.6/2.2 lit). Petrol engines will be developed in-house in association with Ssangyong. The company has recently unveiled its first SUV (KUV1OO) with petrol and diesel options. Currently 80% of its SUV’s volumes are based on diesel engine.

Capex Plan:
Company is planning to spend Rs 10,000 crores over FY15-18, out of which Rs 7500 crores will be a capex and Rs 2500 crores will be invested in unlisted subsidiaries and joint ventures as investments over FY15-18E. Out of Rs 7500 crores planned capex, Rs 2500 crores is likely to be utilized for capacity expansion and Rs 5000 crores is likely to be used for new product developments. The company plans to utilize majority of its capital expenditure for capacity expansion at Chakan plant.

Monsoon trigger:
M&M’s growth prospects in tractor as well as in automotive business are highly correlated with the performance of Southwest Monsoon in the country. As per India Meteorological Department, in its first forecast for this monsoon season, southwest monsoon in the month of April/May is likely to be 106% of the long period average. According to Skymet Weather, Monsoon in India in 2016 is likely to remain above than the normal at 105% of the long period average. Initial forecast from global weather agencies, Australian Weather Bureau (AWB) and World Meteorological Organization (WMO) have indicated towards an overall weakening of the El Nino (phenomenon resulting from warming in the Pacific Ocean which leads to atmospheric changes associated with droughts and floods in different parts of the world). El Nino was responsible for the consecutive droughts of 2014 and 2015 in India. The Australian Weather Bureau (AWB) in its weather forecast released on 15 March 2016 has mentioned that El Nino continues its gradual decline in 2015-16 due to which sea surface temperatures in the tropical Pacific Ocean are cooling. India's southwest monsoon is expected to hit precisely during that time. As per World Meteorological Organization (WMO) update released on 18 February 2016 the 2015-16 El Nino has passed its peak strength and it is expected to continue to weaken over the coming months, with models indicating a return to ENSO-neutral during the second quarter of 2016.

Proactive Steps to Counter Regulatory Concerns:
Going forward 33%+ of its sales is expected to come from the newly launched models which are below 2,000CC category and hence regulatory compliant. As the company has already announced the launch of its all new 1.99-litre diesel engine which is likely to power the New Generation Scorpio and the New Age XUV500, 30% of its volumes are expected to immediately become regulatory compliant. Over the next 15-18 months, we expect, M&M to launch new engines (Petrol and diesel) in stages so as to cover its entire product portfolio and insulate itself from regulatory risk.

Stock Data

CMP (Rs)
1377.95
Face value (Rs)
5
52 Week Range (Rs)
1442.05 - 1091.25
Market cap (Rs Crores)
85577.21
Price To Book Value (x)
2.99
P/E Ratio (x)
26.65
EV/EBIDTA (x)
11.64

One Year indexed Stock Performance

Mahindra & Mahindra LtdSensex
Mahindra &  Mahindra Ltd
Return (%)
1m
6m
12m
36m
Absolute
2.10
4.10
14.22
42.59
Sensex
5.14
5.80
1.83
39.02

Shareholders

(in %)
31-Mar
Promoter
26.93
Public
73.07
Others
0.00
Total
100

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Industry

The Indian auto industry is one of the largest in the world. The industry accounts for 7.1 per cent of the country's Gross Domestic Product (GDP). As of FY 2014-15, around 31% of small cars sold globally are manufactured in India. The Two Wheelers segment with 81% market share is the leader of the Indian Automobile market owing to a growing middle class and a young population. Moreover, the growing interest of the companies in exploring the rural markets further aided the growth of the sector. The overall Passenger Vehicle (PV) segment has 13% market share. India is also a prominent auto exporter and has strong export growth expectations for the near future. In the April 2015 -January 2016 period, exports of Commercial Vehicles registered a growth of 18.36% over the April 2014-January 2015 period. In addition, several initiatives by the Government of India and the major automobile players in the Indian market are expected to make India a leader in the Two Wheeler (2W) and Four Wheeler (4W) market in the world by 2020.

Profile

Mahindra And Mahindra Ltd is an India-based company with operations in 18 industries that include aerospace, aftermarket, agribusiness, automotive, components, construction equipment, consulting services, defense, energy, farm equipment, finance and insurance, industrial equipment, information technology, leisure and hospitality, logistics. The Company’s business segments include Automotive Segment that comprises of sale of automobiles, spare parts and related services and Farm Equipment Segment, which includes sale of tractors, spare parts and related services. Its subsidiaries include Tech Mahindra Limited, Mahindra & Mahindra Financial Services Limited, Mahindra Investments (India) Private Limited, Mahindra Investments (International) Private Limited etc.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar-14
Mar-15
Mar-16
Mar-17E
Mar-18E
Income:-
  • Net Sales & and Operating Income
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Exceptional Items
  • Profit Before Tax
  • Provision for Tax
  • Profit After Tax
  • Minority Interest
  • Shares of Associates
  • Consolidated Net Profit
  • Adjusted EPS
  • 74000.93
  • -
  • 63880.77
  • 10120.16
  • 13.68
  • 505.09
  • 10625.25
  • 2953.93
  • 7989.17
  • 2169.57
  • 317.85
  • 5819.60
  • 1496.22
  • 4323.38
  • -486.87
  • 830.42
  • 4666.93
  • 75.83
  • 71448.00
  • -3.45
  • 62654.71
  • 8793.29
  • 12.31
  • 525.03
  • 9318.32
  • 3156.69
  • 6436.53
  • 2123.83
  • 274.90
  • 4312.70
  • 1720.02
  • 2592.68
  • -243.91
  • 788.70
  • 3137.47
  • 50.69
  • 78015.60
  • 9.19
  • 68368.21
  • 9647.39
  • 12.37
  • 541.00
  • 10188.39
  • 3372.94
  • 6820.48
  • 2581.64
  • 5.03
  • 4238.84
  • 1863.65
  • 2375.19
  • -139.86
  • 975.93
  • 3211.28
  • 51.70
  • 86550.00
  • 10.94
  • 75010.00
  • 11540.00
  • 13.33
  • 550.00
  • 12090.00
  • 3250.00
  • 8790.00
  • 2910.00
  • 50.00
  • 5880.00
  • 2585.20
  • 3294.80
  • -150.00
  • 1140.40
  • 4285.20
  • 68.99
  • 95996.00
  • 10.91
  • 83254.00
  • 12742.00
  • 13.27
  • 550.00
  • 13292.00
  • 3250.00
  • 9992.00
  • 3369.00
  • 50.00
  • 6623.00
  • 2911.87
  • 3711.13
  • -150.00
  • 1398.50
  • 4959.63
  • 79.85
Source: Stockaxis Research, Company Data

Valuation

M&M's Automobile segment volumes are expected to grow more than 15% in FY17E & FY 2018E primarily led by demand from new launches. On the farm equipment side, tractor volumes are expected to grow at 16% in FY17E on the prospects of better monsoon (after 2 consecutive years of tepid rainfall). For its new UV launches, M&M is keeping the price competitive, which is expected to cap upside in margin. We recommend “BUY” maintain on the stock as the CMP prices in most of the benefits that may accrue to M&M over the next 1 year. We have a target price of Rs 1655 trading at 20x FY2018E which is reasonable valuation for the stock.

 

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