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Action: Reiterate Buy with a revised target price of R934 for a 29% upside: The results of M&M and MVML together were around 20% ahead of our estimates due to stronger-than-expected ASPs and margins.

Action: Reiterate Buy with a revised target price of R934 for a 29% upside: The results of M&M and MVML (Mahindra Vehicle Manufacturers Ltd) together were around 20% ahead of our estimates due to stronger-than-expected ASPs (average selling price) and margins. Despite weak tractor volume and the rise in excise duty in Mar-12, M&M has been able to maintain margins in the farm equipment segment, indicating the pricing power and strong cost control. Although there could be near-term weakness in tractor volume growth due to the high base effect, we see improvement from Jan-13 onwards. The impact of a potential drought in FY13F (forecast) will be mitigated by high food prices. M&M may benefit from any fiscal stimulus to the rural economy in FY14. MM?s core business trades at 8.5x our FY14F EPS (M&M + MVML) of R61.2. The stock is our auto sector top pick.

Catalysts

A recovery in tractor industry growth; continued strong growth in the auto segment? While we note that tractor volume will possibly remain weak over the next three months due to the high base effect, we expect tractor volumes to see a positive growth from Jan-13.

Valuation

SOTP-based taregt price rose to R934 ?We raise our EPS estimates by 4-5% for FY13-14F to factor in the auto segment. We value the stand-alone business at R675 per share and MVML at R59 per share based on 12x FY14F EPS. We value other investments at R200 per share at a 20% discount to the market value. Our target price is 19% ahead of consensus.

Key risks

A sharper-than-expected slowdown in tractor volumes ? we assume a 5% decline in tractor volume for FY13F. However, if the tractor volume declines due to bad monsoon, there could be downside risks to our estimates.

Impact of slower-than-expected GDP growth ? Nomura India?s GDP growth expectation is 5.8% for FY13F and 6.6% for FY14F. If the economic slowdown is sharper, there would be a downside risk to our volume estimates.

Higher excise duty on diesel vehicles ? in the event that the government decides to impose a higher excise duty on diesel vehicles , there could be downside risks to our estimates.

?Nomura

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First published on: 13-08-2012 at 04:39 IST
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