We reiterate 'overweight' stance on Mahindra & Mahindra given its broad-based automotive portfolio as well as its presence across industries (IT, finance) via various listed subsidiaries.
We, however, lower our standalone FY14/15 EPS by 12% to factor in the decline in UV segment sales and are revising our FY14 sum-of-the-parts (SOTP) price target to Rs 1,000 (Rs 1,130 earlier).
Mahindra & Mahindra's (M&M) automotive subsidiaries have reported a mixed performance, while Ssangyong has turned profitable in the recent quarter (first-time post acquisition), the local two-wheeler arm as well as the M/HCV segment (which is merging with the parent) continue to be in the red.
Mahindra & Mahindra's presence across automotive and FES segments provides the OEM with a diversified portfolio in the current uncertain environment while growth in the higher-margin tractor segment is healthy. The outlook for UV’s has weakened, led by increased competition and slowing industry sales.
Our outlook for the tractor segment is encouraging. We expect tractor sales to be robust in FY14 (management is guiding for growth of 10-12% in the year) given expected record kharif output at 134.5e million tonnes in the current season.
The decline in SUV sales has taken us by surprise, driven by dip in industry sales as well as market share losses at M&M. New launches such as the Ford Ecosport have created a new compact SUV segment. We believe that as Mahindra & Mahindra is developing new models in collaboration with its Korean subsidiary Ssangyong, the OEM will defend share over the medium term.