Mahindra & Mahindra - Auto business remains buoyant; tractor downgrades behind us! - Antique

UVs - Rural king takes on the urban boys!

M&M continues to defy the competitive landscape in the auto industry and the XUV5oo (a continuum of the existing product range) has strengthened the UV portfolio. The phenomenal response in the more brand-conscious metro cities is testimony to the success of the XUV (more so since the parent brand is better associated-with in rural regions).

We reckon that the next (and bigger) leg of XUV's success would come when the product is opened up to Tier 2 & 3 cities where Mahindra's brand equity is unmatched. Additionally, the Quanto creates a new segment and hence should add to retails without cannibalising any of the existing UVs.

Tractor downgrades behind us...

On the tractor side, the current sluggishness in volumes doesn't worry us from a stock perspective as sharp downgrades are already behind us (we forecast a -5%/10% tractor volume growth in FY13e/14e). In fact, after the extremely frantic downgrades, for the first time in the last 3 years, the street is much below the conservative management's guidance (i.e. 0-2% growth in FY13). From a stock perspective, this pessimism is a good thing as it has finally provides scope for tractor volumes positively surprising again.

Dealer inventory has now been corrected (from >5 weeks to ~4 weeks). Fag-end of the ratetightening cycle can't hurt (80% of tractors are financed). Also, in a softening commodity price scenario, tractors are normally the biggest beneficiary given that its gross metal content (as a proportion of capital cost) is the highest.

Mahindra ~ Ssangyong - Synergies galore

The Mahindra ~ Ssangyong alliance has multiple synergies for both parties. While Ssangyong benefits from access to the lucrative Indian markets (visible with the India launch of the Ssangyong Rexton in October, which will be followed by the Korando C), Mahindra benefits from access to Ssangyong's superior technology (Euro V & VI compliant products; engines ranging up to 175hp - as against M&M's 140hp). The strongest synergy of the alliance is Ssangyong's huge dealership base in markets relatively untapped by M&M (Europe, South America, Middle East, and Africa).

BUY!

We reiterate our BUY recommendation with a target price of INR925, valuing the core Auto business (M&M + MVML) at INR722 per share and other subsidiaries (including Ssangyong) at INR203 per share.

Source : Equity Bulls

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