markettrend766
21-09-2008, 08:36 PM
Significant developments since our earlier ‘buy’ recommendation on Mahindra and Mahindra (M&M) in March this year prompts us to take a re-look at the stock. While the amalgamation of Punjab Tractors and the recent joint venture in China bodes well for volume growth (tractors) in both the domestic and export market, the timing of the entry into the two-wheeler segment strikes a note of caution.
However, improved performance in the farm equipment division, capacity expansions and planned launches in the utility and commercial vehicles segment, present good earnings prospects over a three-four year time-frame, notwithstanding the pressure on margins due to increased input, interest and depreciation costs in the near-term.
At the current market price of Rs 554, the stock trades at an attractive price-earnings multiple of about 12.5 times its trailing 12-month standalone earnings. For investors with a long-term perspective and an appetite for risk, the current price provides an attractive entry point.
Tractors lend promise
On the farm equipment front, unlike the first quarter of FY-2007, the sector has opened the year on a high note, with a ten per cent year-on-year growth in tractor sales in the April-June quarter. While a part of this growth may have been triggered by advance purchases in expectation of a price increase, agricultural loan waivers announced in the Budget and normal monsoons do lend a positive outlook for this segment’s growth.
Two, the company has entered into a joint venture with the Yangcheng Tractor Company in China last month. M&M already has a footprint in China through its JV with the Jiangling Tractor Company (Mahindra China Tractors). Unlike Jiangling, which has a presence only in the 18-25 HP (horse power) segment, Yangcheng has a presence across all capacities — from 16 HP-125 HP, thus supplementing products and providing scope for consolidating the Chinese operations and improving market share.
Besides, exports to the US and Europe will also receive a fillip as this JV will give M&M a second low-cost export base. Using the well-established distribution network of Yangcheng, M&M can also find new markets for exports.
For tractors manufactured in India too, this acquisition will help save costs as M&M now has a broader vendor base in China to source components from, thus providing greater negotiating power. This comes in handy especially when the company has announced plans to produce ultra-low cost tractors in India (in the Rs 2 lakh range) to delve deeper into the rural markets.
Three, M&M picked up a majority stake in Punjab Tractors (PTL) last year and subsequently amalgamated the company with itself. Though this move will dilute equity by about 7 per cent, synergies from the deal such as a cost-effective vendor base for raw material procurement, a foothold in the northern markets where PTL’s ‘Swaraj’ brand has a strong presence and the use of excess production capacities of PTL for M&M will provide an impetus to earnings.
Two-wheeler foray
Another development that warrants attention is the acquisition of Kinetic Motors and the consequent entry into the two-wheelers segment. The company had earlier in the year acquired an Italian design company, Engines Engineering, which specialises in two-wheeler design and develops motorcycle prototypes.
The company plans to cater to the demand for two-wheelers in the rural and semi-urban areas using its tractor distribution network. At the other end, the company is also gearing up to meet the shift in urban preferences towards high-end, premium bikes. For this, the company is in talks (for a possible takeover) with the Italy-based Malaguti Moto, which has products in the ‘250cc and above’ category.
At a time when there is stiff competition in the industry and existing players themselves are faced with unfavourable market conditions due to tightening credit availability and rising input costs, questions remain on the prospects for this venture.
This may create additional burden on the resources as Kinetic Motors itself has a small market share and is cash-negative. But, given the small size of the company (turnover of Rs 102 crore in 2007-08) this is unlikely to impact M&M’s earnings significantly in the next few years.
Sustained demand
For the quarter-ended June 2008, the automotive division recorded a healthy 28 per cent growth in volumes, led by the Scorpio and Bolero models. Exports too grew 31 per cent in the same period, backed by vehicle launches in Turkey and Paraguay.
Being a player in the UV and LCV segment, the company has been shielded from the slowdown in the medium and heavy commercial vehicle and two-wheeler segments in the last one year.
Going forward, M&M has planned few other launches to sustain its growth momentum. The Ingenio, a multi-purpose vehicle (MPV), will hit the roads in the last quarter of 2009.
Priced attractively between the Scorpio and the Bolero, the MPV will take on Toyota’s Innova. The company is also launching a mass-market platform, similar to the Tata Ace in 2010 as well as a successor to the Scorpio over the next two years.
Financials
In the first quarter, net sales grew by 26 per cent Y-o-Y to Rs 3,293 crore. Profits fell by 16 per cent to Rs 160 crore, primarily due to a mark-to-market loss on FCCBs. Operating margins too declined by about 1 percentage point to 9.5 per cent due to hike in commodity prices.
To compensate for the increased raw material costs, the company had effected a price increase of about Rs 10,000 on tractors and Rs 8,500 on utility vehicles during the quarter.
Although this does not fully cover the rise in input costs, any further price increase may be difficult as the government has already slapped an additional excise duty of Rs 15,000-20,000 on MUVs and SUVs in mid-June.
What can give respite to the pressure on the operating margins is the fact commodity prices are on the downtrend. But this might show up only in the medium-term as the lag effect of higher prices may remain in the next one or two quarters.
However, improved performance in the farm equipment division, capacity expansions and planned launches in the utility and commercial vehicles segment, present good earnings prospects over a three-four year time-frame, notwithstanding the pressure on margins due to increased input, interest and depreciation costs in the near-term.
At the current market price of Rs 554, the stock trades at an attractive price-earnings multiple of about 12.5 times its trailing 12-month standalone earnings. For investors with a long-term perspective and an appetite for risk, the current price provides an attractive entry point.
Tractors lend promise
On the farm equipment front, unlike the first quarter of FY-2007, the sector has opened the year on a high note, with a ten per cent year-on-year growth in tractor sales in the April-June quarter. While a part of this growth may have been triggered by advance purchases in expectation of a price increase, agricultural loan waivers announced in the Budget and normal monsoons do lend a positive outlook for this segment’s growth.
Two, the company has entered into a joint venture with the Yangcheng Tractor Company in China last month. M&M already has a footprint in China through its JV with the Jiangling Tractor Company (Mahindra China Tractors). Unlike Jiangling, which has a presence only in the 18-25 HP (horse power) segment, Yangcheng has a presence across all capacities — from 16 HP-125 HP, thus supplementing products and providing scope for consolidating the Chinese operations and improving market share.
Besides, exports to the US and Europe will also receive a fillip as this JV will give M&M a second low-cost export base. Using the well-established distribution network of Yangcheng, M&M can also find new markets for exports.
For tractors manufactured in India too, this acquisition will help save costs as M&M now has a broader vendor base in China to source components from, thus providing greater negotiating power. This comes in handy especially when the company has announced plans to produce ultra-low cost tractors in India (in the Rs 2 lakh range) to delve deeper into the rural markets.
Three, M&M picked up a majority stake in Punjab Tractors (PTL) last year and subsequently amalgamated the company with itself. Though this move will dilute equity by about 7 per cent, synergies from the deal such as a cost-effective vendor base for raw material procurement, a foothold in the northern markets where PTL’s ‘Swaraj’ brand has a strong presence and the use of excess production capacities of PTL for M&M will provide an impetus to earnings.
Two-wheeler foray
Another development that warrants attention is the acquisition of Kinetic Motors and the consequent entry into the two-wheelers segment. The company had earlier in the year acquired an Italian design company, Engines Engineering, which specialises in two-wheeler design and develops motorcycle prototypes.
The company plans to cater to the demand for two-wheelers in the rural and semi-urban areas using its tractor distribution network. At the other end, the company is also gearing up to meet the shift in urban preferences towards high-end, premium bikes. For this, the company is in talks (for a possible takeover) with the Italy-based Malaguti Moto, which has products in the ‘250cc and above’ category.
At a time when there is stiff competition in the industry and existing players themselves are faced with unfavourable market conditions due to tightening credit availability and rising input costs, questions remain on the prospects for this venture.
This may create additional burden on the resources as Kinetic Motors itself has a small market share and is cash-negative. But, given the small size of the company (turnover of Rs 102 crore in 2007-08) this is unlikely to impact M&M’s earnings significantly in the next few years.
Sustained demand
For the quarter-ended June 2008, the automotive division recorded a healthy 28 per cent growth in volumes, led by the Scorpio and Bolero models. Exports too grew 31 per cent in the same period, backed by vehicle launches in Turkey and Paraguay.
Being a player in the UV and LCV segment, the company has been shielded from the slowdown in the medium and heavy commercial vehicle and two-wheeler segments in the last one year.
Going forward, M&M has planned few other launches to sustain its growth momentum. The Ingenio, a multi-purpose vehicle (MPV), will hit the roads in the last quarter of 2009.
Priced attractively between the Scorpio and the Bolero, the MPV will take on Toyota’s Innova. The company is also launching a mass-market platform, similar to the Tata Ace in 2010 as well as a successor to the Scorpio over the next two years.
Financials
In the first quarter, net sales grew by 26 per cent Y-o-Y to Rs 3,293 crore. Profits fell by 16 per cent to Rs 160 crore, primarily due to a mark-to-market loss on FCCBs. Operating margins too declined by about 1 percentage point to 9.5 per cent due to hike in commodity prices.
To compensate for the increased raw material costs, the company had effected a price increase of about Rs 10,000 on tractors and Rs 8,500 on utility vehicles during the quarter.
Although this does not fully cover the rise in input costs, any further price increase may be difficult as the government has already slapped an additional excise duty of Rs 15,000-20,000 on MUVs and SUVs in mid-June.
What can give respite to the pressure on the operating margins is the fact commodity prices are on the downtrend. But this might show up only in the medium-term as the lag effect of higher prices may remain in the next one or two quarters.