Mahindra & Mahindra Limited - Navistar out... Doesn't matter! - Antique

M&M held a conference call to discuss the buyout of Navistar's stake in the CV JVs (MNAL & MNEL). Given that technology support for engines would remain, we see Navistar's exit as a quasi non-event for the business (barring the brand name, nothing really changes). The CV business (through MNAL & MNEL) remains one of M&M's innumerable loss-making business ventures which we do not ascribe any value to (negative or positive). On a separate note, we downgrade our reco to HOLD post the recent run-up in the stock.

Navistar exit shouldn't really matter!

M&M has bought out Navistar's 49% stake in its commercial vehicle JVs, i.e. MNAL (Mahindra Navistar Automotive Ltd.) and MNEL (Mahindra Navistar Engines Ltd.). Based on the timing (the toughest part of the CV cycle), we reckon that Navistar has sold out at a trough valuation (while they have sold their stake for INR1.75bn, their equity investment till date has been INR5.46bn; M&M's INR5.2bn).

Post their exit, Navistar will continue to support the JV with engine technology (this was the main dependency on Navistar) and barring the change in brand name, there would be no major changes in the functioning of the business. All major designs and intellectual property were owned by the JV and M&M would continue to have world-wide rights to use them indefinitely.

Scope to leverage on potential synergies much more aggressively

M&M gets complete control of day-to-day operations, and therefore, post the buyout, there is huge scope to aggressively leverage on potential synergies between the existing Auto business (UVs/tractors) and CVs - for both, front-end (distribution) and back-end (supply chain).

Management cites that the group board has given them a 3-year timeframe to turn around the business (they are confident of doing it once the CV cycle turns for the better and consequently the high industry-wide discounts come down). The management stated that it would take a run-rate of 7-800 per month to break-even at the PBT level (YTD MHCV monthly run-rate is at ~300). The planned capex/investment over the next three years would be INR2-3bn (immaterial in M&M's overall group capex/investment plan of INR75bn over the next three years).

Downgrade to HOLD!

Separate from the Navistar buyout (which we view as a non-event), post the sharp run-up in the stock, we downgrade our reco to HOLD. With the trough in tractor de-growth behind us, we increase our FY14 core business target multiple from 12x to 13x (translates into our target price increasing from INR945 to INR1,026). However, on the Auto business side, while we are certain that M&M is well equipped to counter the competitive pressures coming up ahead, till the time they prove this (like Maruti has), we believe that the stock could be under some pressure.

Source : Equity Bulls

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