The Hindu Business Line : Mahindra and Mahindra: Buy

The company’s proposed launches, improved performance from the farm equipment division and the consolidation of its tractors business, lend promise.

With the announced amalgamation of Punjab Tractors, the company will get a foothold in the northern markets where PTL’s ‘Swaraj’ brand has a strong presence.

Parvatha Vardhini C

The Mahindra and Mahindra (M&M) stock has shed over 30 per cent since our earlier recommendation in end-September. While a large part of the fall can be attributed to broader market volatility, a fall in profits in the second quarter, primarily due to forex losses, has also done its bit to pull the stock down.

However, the company’s strong show in the automotive segment, proposed launches, improved performance from the farm equipment division and the consolidation of its tractors business, both in India and China, lend promise to its long-term earnings prospects.

For investors seeking exposure to the auto space, M&M remains one of the better picks and the current market price is a good entry point.

At Rs 379, the stock trades at a valuation of about 13 times its estimated diluted earnings for the current year, on a standalone basis. Shareholders too can consider adding to their holdings at this level.

Sustained demand

Being a player in the UV (utility vehicle) and LCV (light commercial vehicle) segment, the company was relatively shielded from the slowdown witnessed in the other segments over the past year. The company has continued the good run into this year as well.

For the April-September 08 period, M&M’s volumes in the passenger vehicles segment grew by about 11 per cent. Commercial vehicle and three-wheeler volumes also grew by 20 per cent and 56 per cent respectively.

Going forward, planned launches/variants are expected to keep the growth momentum going. During the second quarter, the company launched the Scorpio Automatic and the Bolero with CRD engine. M&M has also introduced a ‘micro-hybrid’ model of the Scorpio and the Bolero, which would increase fuel efficiency and help save costs.

The Xylo (Project Ingenio), a multi-purpose vehicle (MPV), will hit the roads in the last quarter of 2009.

Expected to be priced between the Scorpio and the Bolero, the MPV will take on Toyota’s Innova. The company is also launching a sub-one-tonne vehicle similar to the Tata Ace in 2010 and a new SUV (sports utility vehicle) over the next two years.

Tractors get a fillip

Unlike in 2007, tractors have recorded reasonably good sales in the first half-year, growing by 8 per cent. This has come despite price increases of around Rs 15,000 on tractors to cover the rise in raw material costs.

Agricultural loan waiver announced in the budget, normal monsoons and a good farm output are all expected to aid tractor sales in the second half as well.

Secondly, the company’s joint venture with the Yangcheng Tractor Company in China will help M&M extend its product line into the higher capacity tractors, thus supplementing products and providing scope for consolidating the already existing Chinese operations and improving market share.

Besides, exports to the US and Europe will also receive a fillip as this JV will give M&M a second low-cost export base. For tractors manufactured in India too, this acquisition will help save costs as M&M now has a broader vendor base in China to source components from, thus providing greater negotiating power.

This comes in handy especially when the company has announced plans to produce ultra-low cost tractors in India (in the Rs 2 lakh range) to delve deeper into the rural markets.

Thirdly, with the announced amalgamation of Punjab Tractors (PTL), the company will get a cost-effective vendor base for raw material procurement, a foothold in the northern markets where PTL’s ‘Swaraj’ brand has a strong presence and the use of excess production capacities of PTL.

Financials

For the first half year of the current fiscal (April-September 08), net sales grew by 18 per cent to Rs 6,288 crore. Net profits dropped by about 25 per cent to Rs 355 crore, primarily due to an exchange loss of Rs 117 crore.

This includes notional loss of about Rs 97 crore on its foreign currency borrowings. Concerns about outstanding FCCBs ( maturing in 2011) may have weighed on the stock.

But since there is a fairly long period to conversion, it dosen’t pose much of a threat to earnings currently. It also gives the company, the opportunity to reset the conversion price.

Excluding exchange losses and other exceptional items, year-on-year profits for the same period grew by 11 per cent to Rs 458 crore.

Input cost pressures, lower realisations due to higher sales of entry-level UVs such as the Bolero also saw adjusted operating margins decline to 8.7 per cent.

What can give respite to the pressure on the operating margins is that commodity prices are on the downtrend.

But this might show up only in the medium-term as the lag effect of higher prices may remain in the next one or two quarters.

Related Stories:
Forex losses drag M&M profits down 21%
Volumes grow, profits shrink, says M&M

More Stories on : HCV/LCV/Tractors | Stocks | Recommendation | Mahindra & Mahindra Ltd

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