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M&M: Research meet extracts
Dec 1, 2005

We had recently met up with the management of M&M to get an insight on the industry in general and the company in particular and its outlook for next three to five years. Our main objective of the meeting was to understand the ground realities in rural India. This is because given its strong rural network and rural focus, M&M is the best player to give a correct picture of the prevailing scenario. Here are some extracts of the meeting. Agriculture – changing ground realities: Rural India is witnessing changing ground realities. Not only are corporates taking keen interest in the farming activities, but automobile players are also providing a basket of information to farmers like educating them on the benefits of crop diversification, providing information on availability of seeds and also reducing the need of middlemen to sell the produce.

Similarly, there has been a perceptible shift in borrowing patterns. With the government’s thrust on agri-lending, the availability of funds is no more an issue. Earlier, the banks demanded security of land from farmers against their borrowings. This made them averse of borrowing from banks and hence became the easy target of exploitation in the hands of moneylenders. However, currently not only are such requirements done away with but the banks and other corporate bodies are also offering loans with flexible repayment schedules (based on crop output). This, together with lower interest rates, has been a key driving force for the tractor demand in the country during the past 2 years. To give a perspective, the turnaround time (time taken between loan application and disbursement) for credit disposal has reduced to around 10 days as compared to 2 to 3 months few years back.

As per the management, the current infrastructure spending has not only provided alternative employment opportunities for the rural populace, but it has also aided the growth of the tractor industry. It should be noted that the agricultural use of a tractor is typically around 120 to 140 days in a year. Thereafter, the vehicle usually lay idle. However, during the past 2-3 years, farmers rent out their tractors during the lean season for infrastructure activities like road digging and mining, and transportation, thus generating additional income from the vehicle. This has increased the utilisation of tractor and hence has led to the shortening of the replacement cycle. As per the management, the replacement age for the tractors has reduced to 7 years as against 10 to 12 years around three years back.

Weakening monsoon link: With crop diversification (reduced reliance on traditional crops like wheat and rice), rising other income and increase in acreage under irrigation, the link between farm income and good monsoon is weakening. As per the management, currently, one bad spell of monsoon should not have a drastic impact on the farm output and hence the demand for tractors. The management expects tractor industry to grow at a CAGR of 6% to 9% in the next 5 years.

Utility Vehicles (UVs) – expected to outgrow the passenger car growth: The management has indicated that the demand for UVs is expected to grow at a faster pace going forward. This will primarily be on account of change in the mindset of the people towards UVs. Earlier UVs were not considered as an alternative option to passenger cars and were manufactured and marketed mainly for mass transportation purposes.

Having regards to the share of the UVs in the total vehicle segment, coupled with improving infrastructure and changing branding of UVs, we concur with the management’s view. The management expects demand for UVs to grow at a CAGR of 9% to 13% during the next five years.

Raw material impact: M&M expects prices of raw materials to remain steady with a downward bias. However, it does not expect any significant downfall from the current levels. We have also factored in a marginal decline in raw material costs in our assumptions for FY06. Post FY06, we expect input prices to decline by 10% per annum in FY07 and FY08.

Value unlocking: The management has indicated its intention of listing Mahindra & Mahindra Financial Services Limited (MMFSL) within the next two months. Similarly, Mahindra British Telecom, the telecom software subsidiary of the company, will be next on the block.

New product: Apart from its joint ventures with International Truck and Engine Corporation (ITEC) and Renault, M&M is working on a new UV platform, the launch of which is expected in FY08.

Capex: The company has outlined a capex plan of Rs 6 bn during the period FY06-FY08. A significant portion of this capex is allocated UVs (for enhancing capacity and introducing new platform) and organic and inorganic growth in the auto component division.

What to expect?

At Rs 458, the stock is trading at price to earnings multiple of 12.7 times our estimated FY08 earnings. We had recently recommended a ‘Buy’ on the stock at Rs 397, with a price target of 570 based on our FY08 estimates. Post this interaction with the company’s management, we maintain our view.

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