We maintain a 'buy' rating on Mahindra & Mahindra (M&M) with a target price of Rs 1,450 per share. M&M's automotive segment margins have remained resilient in the weak demand environment and we are forecasting volume revival in FY16. For tractors we expect volume growth to normalize over FY15-16. The core business trades at 12.5x FY16e price-to-earnings (P/E). Our FY15e and FY16e core EPS estimates are Rs 56 and 76, respectively.
M&M’s August-14 domestic tractor volumes came in at 13,733 units (up 1.4% y-o-y). Year-to-date (y-t-d) growth at -1% is running behind our full year forecast. We note that last year’s growth (+22%) was aided by strong monsoon (6% above average) while this year’s monsoon (18% y-t-d deficit) has been weak. We forecast FY15 growth at 5%, in line with management guidance and lower than the long-term trend growth rate of 8%. Our FY15 estimate implies a monthly run-rate (MRR) of 24,015 units over the next seven months versus y-t-d rate of 20,406 units.
Utility vehicle volumes remained weak. UV volumes for the month at 13,840 units (down 7% y-o-y) remained weak after declining by 17% in FY14 and 8.5% in Q1FY15. We are forecasting UV volumes to stabilize in FY15 (-1%) followed by strong revival in FY16 (+29%). Our FY15 forecast implies a MRR of 19,627 units over the next seven months of FY15e compared with y-t-d rate of 16,074 units.