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M&M- Analyst meet extracts
Jun 9, 2005

Tractor and Utility Vehicle (UV) major, Mahindra & Mahindra, held an analyst meet post its FY05 results to give further insight on the future outlook of the company and industry. The extracts of the same are presented below. Outlook for tractor industry: The management expects consolidation to take place in the market going forward. It also expects the tractor industry growth to be in the range of 7% to 9% over the next few years primarily on account of pro-agro government policies and on the assumption of normal monsoons and stable crop prices.

Reasons for below expectation performance in volumes during 4QFY05 and 1QFY06: This has been primarily attributed to the continuation of BS-I (i.e. Bharat Stage-I norms) norms beyond the original deadline (due to end from April 2005). As per the management, the government came out with the extension just 10 days before the expiry date. This significantly affected M&M, as it was not able to meet the demand for BS-I vehicles, these relative cheaper compared to BS-II and BS-III vehicles. Secondly, VAT issues acted as overall dampener creating confusion in the minds of consumers resulting in delay in purchases. Thirdly, the cost of upgradation to BS-II/BS-III norms is significant thereby affecting the pricing power.

On General Motors ‘Innova’: The management opined that the ‘Innova’ should not have significant impact on Scorpio as both cater to different categories (based on their pricing). In fact, it believes that the entry of international players will help expand the market rather than eat into each other’s share.

On Tata Motors’ ACE: The management agreed that ACE is in direct competition with the three wheeler goods and passenger carriers (weighing more than 0.6 mt). It further added that though ACE has got some benefits over ‘Champion’ (M&M’s product in this category) like four wheels, closed doors, metal sheet body and some extra space, there are some disadvantages too. According to the management, the two most important factors that can act against ACE will be its cost (15% to 20% higher) and fuel efficiency (20% to 25% lower).

Mahindra-Renault JV:The JV will manufacture ‘right hand drive’ vehicles under the brand name ‘Mahindra Renault’. Initial investment will be to the tune of Rs 7 bn. M&M will have a 51% share in the JV and the rest with the foreign partner. The expected local content will be in the range of 50% to 60%. The production is expected to commence in first half of 2007 with an annual capacity of 50,000 units.

M&M’s Chinese foray: M&M tractors in China have received a boost on account of government recognition of the quality of its products. As per the management, the Chinese government is ‘expected’ to grant a subsidy of 15% to 20% to customers who will purchase M&M tractors in order to increase the use of tractors in the country.

It must be noted that earlier, the company had entered into an agreement with Jianling group to acquire 80% stake in the Jianling Motor Company. The Chinese company has a capacity to manufacture 12,000 tractors per annum. It will provide M&M with an existing distribution and marketing network. From June 2006, the tractors sold in China will be under the brand name of M&M. Further, Jianling Motor also has a presence in the US, which will enable M&M to concentrate on the US markets. Apart from this, M&M also plans to source components, parts and aggregates from China and is on the lookout for a suitable partner.

Sub-30 HP capacity tractors: M&M has been a traditionally weak player in this category with a market share of around 10% as compared to its over all market share of 26%-28% of the tractor industry. To improve this, the company has lined up two new launches and a team to improve its market share in states of UP and MP as they together account for 40% of the total demand in this sub segment.

Auto ancillary business: The management believes that this sector is likely to witness significant growth over the next few years. The company is, thus, aiming at entering into higher end of components business like gears, crankshafts, sheet metal and forgings where they can provide value addition. The strategy being adopted by M&M is to begin by inducing global players like Nissan, Renault etc, with whom they have a JV, to outsource the components from it. As per the management, the global components market is in the region of US$ 55 to US$ 60 bn. The company is eyeing revenues of US$ 1 bn in next 5 years.

It should be noted that the company has already initiated the process of acquiring auto ancillary companies. Currently, it is looking at acquiring a German company, which can provide the company technological base and access to EU markets. However, company aims to bring back most of the work back to India to take advantage of lower costs.

What to expect? At Rs 522, the stock is trading at price to earnings multiple of 10.9 times our FY07E earnings. While we believe that the exponential growth witnessed during the last few quarters is difficult to sustain (partially due to the high base effect), any reduction in input costs, especially steel, can provide a cushion to margins. Apart from this, the management’s thrust on the auto components sector and also IT services and real estate ventures though invite caution, can provide the company diversification. This can act as an insulating factor in recessionary periods, especially considering that the performance of the tractor industry is largely linked to monsoons. M&M currently remains amongst our preferred plays in the auto sector.

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