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M&M: Research meeting extracts
Aug 31, 2004

Mahindra & Mahindra (M&M) is engaged in the manufacturing of Utility vehicles (UVs), tractors, light commercial vehicles (LCVs) and three-wheelers. While automotive division comprising UVs, LCVs and three-wheelers contributed to 70% of FY04 revenues (domestic), farm equipment division accounted for 30% of revenues. Through investment in its subsidiaries, it has interest in other sectors like software, hotels, real estate and financial services as well. With leadership in both UVs and tractors, the company had a 49% market share in the UV segment and 26% share in the tractor segment during FY2004.

Key impressions:
Utility vehicles (UV) sales to motor along nicely: After having grown by 12% and 35% respectively during FY03 and FY04, the UV industry is poised for yet another year of good growth. With revival in monsoons in large part of the country and robust first quarter sales numbers, the company expects the division to grow in the region of 12% to 15% in the current year. However, in view of the large base effect, the growth might slow down in the succeeding years. We have however, factored in a conservative estimate of 9% YoY growth in our assumptions in FY05.

Much better harvest in store for tractor segment: After being in the wilderness for three years, the tractor industry finally recovered in FY04 and grew by an encouraging 10% YoY. Recovery in monsoons and sops announced for the farming community in the Union Budget’ 04-05 have further ensured that the growth continues to remain robust in the forthcoming years. Already, the volume sales were higher by 60% YoY during the first quarter. However, such high growth is unsustainable and is expected to be toned down but still be a pretty healthy growth of around 20% to 25% during the current fiscal. We have factored in a 12% YoY growth in tractor sales for the company.

LCVs (light commercial vehicles) to tread the tried and tested route: While growth in the segment has been encouraging, the company currently has no plans to straddle other sub-segments. Instead, it wants to concentrate on existing products and will take efforts to increase the market share to around 20% over the medium to long term (11% currently). The segment is expected to grow in line with the industry during the current financial year.

Not the end of road for operating margins: Despite high steel prices, the company managed to put up an encouraging operating performance in FY04, as margins were at their best in the last four years. However, it’s not over yet and there is still further scope for improvement. Provided that the growth in revenues is sustained, operating margins might improve further from the current levels (basically driven by strong tractor division margins). Just for the record, the break-even point for its tractor division has come down by a significant 34% in recent times.

Big designs for auto components business: Given the huge opportunity of component outsourcing staring in the face of Indian companies, M&M is looking to enter this market mainly through the inorganic route. In other words, it is scouting for companies in the domestic as well as international markets to make a foray into the business. However, we would view this cautiously, as this is a diversification from its core business of UVs and tractors.

Capex plans: It would roughly be in the region of Rs 3.5 bn (5% of sales) each for the next couple of years. While a major part is towards acquisitions, the rest would be used to meet the working capital requirements and other financial needs. Besides, the company is also working on a new UV platform, the date of launch of which is yet to be finalised.

Conclusion:

Based on our inferences from the management meeting, the success of ‘Scorpio’ seems to have given the company the much-required fillip and now it is not averse to investing heavily on R&D. On the tractor division front, we expect higher export contribution in the future. Though not necessarily high margin business, it reduces the dependence of the company in the domestic market. However, continuous funding to its subsidiaries, diversifications and its dependence on the vagaries of monsoon does blunt some of the optimism.

However, the sharp rise in petroleum product prices and the possibility of interest rates heading northwards in FY05 could impact volume growth. Though we have been conservative in our estimate, downward surprises cannot be ruled out

At Rs 422, the stock currently trades at 12.5 times FY05E earnings. We had recommended the stock in April 7 at Rs 90 and later at Rs 352 in December 2003 with a target price of Rs 450. We remain optimistic about the company’s growth prospects in the next two to three years and continue to maintain our BUY view on the stock.

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