Mahindra & Mahindra - Two wheeler business – the best is yet to come; maintain Add - BRICS

Mahindra Two Wheeler currently has a marginal share in the two wheeler market (FY12 sales of 136,401 units). Apart from five scooter models, the company has recently launched two new motorcycles. We believe that with further launches and ramp up in sales volume through portfolio extension; Mahindra has the opportunity to increase its presence in the two wheeler market. Additionally, Mahindra can also explore export opportunities, as the emerging countries presently offer great potential. Mahindra Two Wheeler could emerge as a large player if it ramps up volume to higher levels (at least 1mn + units). Moreover, Mahindra needs to make further investments towards improving its services, penetration, brand awareness, etc. The two-wheeler division remains a small contributor to our SoTP based target price of Rs981, with potential for a significant increase in its contribution in the years to come. Maintain Add.

M&M's management recently organized a concall. The following are the key highlights of the concall:

- While the two-wheeler market is unlikely post the high growth rates recorded recently, the industry still expects a growth of 8-10% yoy, driven by low penetration, consumers from across all demographic planes and even distribution across rural & urban markets.

- Clutch and powertrain problems in its earlier launch, Stallio, had forced M&M to withdraw the product from the market. The company has now introduced new validation protocols and taken all steps to meet consumer requirements.

- Engines for the M&M's scooters already available in the market – Rodeo and Duro – were developed in collaboration with SYM, Taiwan. For motorcycles, it has developed technology capabilities on its own. The company has one of the largest two-wheeler R&D outfits in India, with 200 engineers, and has invested Rs5bn in R&D over the last 3 years. The company has pegged developing costs for a motorcycle at Rs250-300mn.

- Regular refreshes, innovation and new products will now be the company's mantra to drive volume growth. The company pointed out that over that last year, the volume growth of all incumbent large players has remained flat in the scooter segment, except on addition of new models.

- Over the last 7-8 years, the lifecycle of scooters has halved from8 years earlier. M&M is working on 2-3 two-wheeler models that will be launched this year – the company launched two 110cc bikes Centuro and Pantera, and also unveiled a scooter earlier this week.

- The company plans to classify their motorcycles functionally and not by way of engine displacement size. For example, while both Centuro and Pantera are 100cc bikes that were launched on the same day, they are targeted at different audiences. Centuro at the premium end is loaded with stylish elements and patented technology, while Pantera is built for extreme maneuverability and riding comfort.

- While M&M acquired 300 dealers after taking over Kinetic's business, there has been churning and the dealer count currently stands at 400. The company estimates it has 80% of the market covered and will work towards increasing the depth of its reach with secondary and tertiary outlets.

- The company estimates that the rural market contributes less than just 50% of the industry's motorcycle sales and expects rural demand to lead the growth over the next two years, driven by low penetration (20%), increasing education, higher MSPs and remittances. For tapping the rural market opportunities, the company finds the experience of Mahindra & Mahindra Financial Services experience to be useful.

Outlook & Valuation

A higher contribution from M&M's new products, such as XUV500, expected new launches, growing demand for diesel vehicles (most of its vehicles are diesel-based), and focus on rural market (tractors contribute 35% of total revenue and54% of UV revenue comes from the rural market) will drive the company's growth. Competitive pressures, especially in UVs, is growing —with the launch of UVs, like Ertiga (Maruti Suzuki) and Duster (Renault), the market has been expanding, but also becoming more competitive. We expect most passenger vehicle launches in the next 12-18 months to be UVs (25% of total launches).

We estimate sales of the tractor segment to decline 3% in FY13 and expect a marginal growth of 4% in FY14 — although tractors sales have been slowing down, the auto segment has been providing good support. Going forward, we expect M&M to face increasing challenges in the auto segment, due to intensifying competition from peers in the UV segment. Moreover, a slowdown in the economy could impact sales of the company's pick-ups (Gio and Genio category), though its new launches in the UV segment (mini SUV and Ssangyong UV) will help it overcome these challenges.

M&M trades at 17.5x and 15.6x FY13 and FY14 standalone earnings. We value its core business at Rs654/share at 12x FY14 standalone EPS, a 15% discount to the 5-year average, and its subsidiaries and other investments at Rs327/share (after applying a holding company discount of 20%) to arrive at our SOTP-based target of Rs981.

Source : Equity Bulls

Keywords