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Sunday, Jul 11, 2004

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Mahindra & Mahindra: Long-term buy

INVESTORS with a long-term perspective can consider taking exposures to the stock of Mahindra & Mahindra (M&M). At Rs 510, the stock is trading at a price-earnings multiple of 17 times its trailing per share earnings of Rs 30. M&M could be one of the biggest beneficiaries of the excise duty exemption that the Union Budget has extended for tractors.

The Budget has a rider for tractor manufacturers that could potentially wipe out most of the benefit from the excise duty exemption. This is the absence of Modvat credit on components that are outsourced. Excise duty exemption will now be available only for components that are manufactured and consumed in-house by tractor manufacturers. As a result, companies that have a higher percentage of own components in the final product (tractor) will be able to reap the full benefit of the excise exemption. This is where M&M could potentially score over the other tractor manufacturers.

In addition, the other new benefits from the budgetary proposals could come from the planned boost to farm credit and the extension of accelerated depreciation for capacity expansion. The Budget has also allowed for a 150 per cent deduction of expenditure on R&D for automobile companies. This is another feature that could potentially benefit M&M, as the company is now in the throes of developing new passenger vehicle models to complement its successful utility vehicles such as the Scorpio and the Bolero.

Even as M&M contemplates entering into the manufacture of passenger cars, the company's tractors, utility vehicles and light commercial vehicles businesses will be the growth drivers this year. There are positive indicators that can be gleaned from this year's first quarter volumes numbers, when the company recorded a 60 per cent increase in tractor sales and a 29 per cent increase in utility vehicle sales compared to the corresponding quarter of the previous year.

In the meanwhile, M&M's performance this year and its investment plans for future models and capacity expansion could get a leg up from the Budget's proposals.

S. Muralidhar

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