Mahindra & Mahindra Limited - True test lies ahead... - Antique

M&M seems to be where Maruti was 3-4 years back, i.e. when heavy competition was just upon it. While Maruti proceeded to withstand competitive pressures extremely well, the stock was under pressure till they proved their mettle. We now foresee the same happening with M&M. While only time will where their UV market share stabilises, till all OEMs of reasonable repute have had their fair shot at the relatively untapped UV space, we expect the stock to remain under pressure. Conversely, the support for the stock is 1) an upcoming election year (huge industry tailwind), 2) worst being behind for tractors (a money-spinner for them) and 3) reasonable valuations (core auto biz FY15 P/E at ~10x). Maintain HOLD!

UVs finds the fancy of the urban buyer (doesn't help M&M)

In our view, what really kept the urban buyer away from the SUV space historically was the lack of an apt urban SUV in the market (Mahindra Bolero and Tata Sumo never fit the bill). However, evident from the XUV5oo, the SUV as a product has suddenly found the fancy of the urban buyer and unfortunately for M&M, that's where the growth is coming from presently. In our view, while the Mahindra brand (which is better associated-with in rural regions) is superbly equipped to counter competitors in tier-2 and tier-3 cities, the more brand conscious urban buyer might be swayed by an equally (if not more) competent product by a foreign OEM.

Mere upgrades may not be enough...

The Duster selling upwards of 5k units/month is a concern, given that the parent brand (Renault) is probably the weakest in India among all the foreign OEMs. It also makes us wonder what kind of numbers a similar product from a formidable competitor (Maruti, Ford, Hyundai) might do. It has gone unnoticed that M&M's YTD UV market share has fallen from 55% to 48% (gained by Maruti Ertiga and Renault Duster) even as competitive pressures in the compact SUV space are at the tip of the iceberg. Besides the Ford EcoSport, there are compact SUV launches expected from Nissan (a cheaper Duster), Maruti (XA-Alpha), VW (Taigun), Tata, Hyundai and Toyota over the next 2-3 years. On the other hand, M&M's product pipeline seems more skewed towards refreshments of existing UVs. In our view, to counter the upcoming competitor flurry, something like an XUV300 seems to be the need of the hour (mere refreshments of the Bolero, Scorpio, etc. might not cut it with the urban buyer). That said, fresh spy shots of the S101 (all new monocoque chassis; sub 4 metre SUV) looks to be a step in the right direction.

Worst seems behind for the cash-cow (tractors)

The current sluggishness in tractor volumes doesn't perturb us from a stock perspective given that sharp downgrades are behind us. Notwithstanding near-term concerns of over-capacity, we pin our hopes on a decent monsoon this year (as forecasted) and expect an eventual up-cycle to kick-in towards end FY14. This should hopefully coincide with an uptick in infra activities and a resultant increase in tractor utilisation even on the non-farm side. For M&M in particular, should the lagging South India market recover, not only would it improve their market share (South India is their strongest market with a ~50% market share), but also improve their product mix and thereby margins (South India is a high HP market).

Slash earnings; still reasonably valued... HOLD!

With upcoming competitive pressures (expected to put pressure on Auto volumes, margins or both) we slash our FY14e/15e earnings by 16%/14%. Even then, core auto business trades at an FY14e/15e P/E of 12.6x/10.3x. Maintain HOLD with a target price of INR910 (INR697/sh for the core auto business + INR213/sh for the listed subs).

Source : Equity Bulls

Keywords