Stock Review: Mahindra & Mahindra

Mahindra and Mahindra (M&M) saw its net sales surge 19 per cent year-on-year (y-o-y) to just over `5,300 crore in the September quarter, boosted by a 20 per cent y-o-y increase in sale of vehicles to just over 1.31 lakh units.

The strong momentum in its core segments, utility vehicles (17 per cent y-o-y) and tractors (13 per cent y-o-y), was a positive signal, given the company's dominant market position in both these segments. Given that these segments are also closely levered to the monsoon-led demand resurgence, the outlook looks bright. While supply side shortages in tyres, fuel injection systems and castings constrained production by about 5,000 units in the quarter, it is expected to improve over the rest of the year.

A sequential dip in raw material costs boosted margins sequentially by 170 bps to 16.8 per cent, a 180 bps compression on a y-o-y basis given the higher raw material and employee costs. The `48.5 crore octroi refund, while comparable on ay-o-y basis, boosted numbers sequentially and altogether the net profit grew 8per cent y-o-y and a more substantial 35 per cent qo-q to `758.5 crore.

The company is looking to launch three variants of the Xylo and Maxximo in the coming quarters and is targeting a new SUV launch in FY12. A new 40-tonne vehicle and tipper launch is expected by the end of FY11. The total capital expenditure planned over the next couple of years is `4,500 crore with an additional investment of

`2,500 crore . Another positive is that the company has converted almost all of its outstanding FCCBs into shares or GDRs, thereby bringing its debt to equity ratio down to 0.2, strengthening its position ahead of its SSangyong acquisition. At Thursday's closing price of `777.7, the stock trades at a P/E valuation of 15x consensus estimates of the FY12 EPS.

Robust growth in revenue powered by sustained momentum in sales volume for utility vehicles and tractor segments