Stock trades at 13x FY18E earn­ings for the core auto busi­ness vs sec­tor av­er­age of 17x — it could rise more

The Economic Times - - Smart -

ET In­tel­li­gence Group: Mahin­dra & Mahin­dra (M&M) is set to har­ness the re­vival in ru­ral liq­uid­ity and higher far m-gate prices to drive trac­tor sales, help­ing off­set a de­cel­er­a­tion in de­mand for util­ity ve­hi­cles af­ter the de­mon­eti­sa­tion drive, an­nounced on Novem­ber 8.

The coun­try’s big­gest maker of trac­tors, which is bet­ter known to con­sumers for a sta­ble of tough and rugged home-grown util­ity ve­hi­cles (UV) such as Bolero, Thar, and Scor­pio, will likely be among the ma­jor ben­e­fi­cia­ries of the govern­ment’s move to set re­mu­ner­a­tive floor prices for far m pro­duce. En­hanced acreage of the win­ter­sown crop, called Rabi lo­cally, will also ben­e­fit Mahin­dra & Mahin­dra, whose stock still trades 7% be­low the l eve l i t h a d r e a c h e d by Novem­ber 8.

The stock is trad­ing at 13 times its FY18 pro­jected earn­ings for the core au­to­mo­tive busi­ness, a valu­a­tion that com­pares with the sec­tor av­er­age of 17 times. Hence, re­vival in agri­cul­tural growth, which is key to both UV and trac­tor sales, should help the stock gain sig­nif­i­cantly. Mum­bai-based M&M con­tin­ues to out­per­form the trac­tor in­dus­try’s growth with new launches such as Yuvo. M&M’s trac­tor vol­umes rose 22% in the De­cem­ber 2016 quar­ter as com­pared with the in­dus­try av­er­age of 13%. This re­sulted in M&M’s mar­ket share touch­ing a record high of 44%. De­mand for trac­tors has been quite ro­bust this fis­cal be­cause of ris­ing sow­ing ar­eas and in­crease in av­er­age ru­ral in­come. Trac­tor vol­umes in­creased 25% be­tween April and Oc­to­ber 2016 and af­ter de­mon­eti­sa­tion, most of the ma­jor trac­tor mar­kets, bar ring Pun­jab and Kar­nataka, have shown sharp re­cov­ery. The Street is pric­ing in M&M’s vol­ume growth at 22% and 13% in the cur­rent and next fis­cal, re­spec­tively. The com­pany will launch new trac­tors by Septem­ber of the next fis­cal year, and will ex­pand the Swaraj range. The com­pany’s man­age­ment, in the call af­ter the quar­terly earn­ings, has in­di­cated that trac­tor sales vol­umes will likely rise about 10% in March 2017. Higher trac­tor sales are pos­i­tive for the earn­ings growth of M&M as mar­gins in this seg­ment are twice as those of the au­to­mo­tive seg­ment.

In the third quar­ter, op­er­at­ing mar­gins of the trac­tor seg­ment ex­panded 210 ba­sis points year-on-year to 17.4%, while au­to­mo­tive mar­gins dropped 310 ba­sis points YoY to 7.1%. The in­crease in trac­tor mar­gins helped limit the blended mar­gin de­cline t o 1 3 0 ba­sis points. The trac­tor seg­ment con­trib­uted 59% of the to­tal op­er­at­ing profit (af­ter de­pre­ci­a­tion) in the first nine months of FY17 against 43% in the pre­vi­ous fis­cal.

In the au­to­mo­tive seg­ment, the com­pany took sev­eral steps to ar­rest a de­cline in its UV mar­ket share. M&M has been able to post a 170 ba­sis points se­quen­tial gain in mar­ket share by launch­ing the new Bolero that at­tracts less ex­cise duty. The launch of petrol vari­ants of XUV500 and Scor­pio and two new launches (one MPV in the sec­ond half of FY18 and a com­pact UV in FY19) may help con­sol­i­date M&M’s mar­ket share in UV space.

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