Stock Review: M&M

Even as its peer index, the BSE Auto, and the broader markets have registered losses of eight to 10 per cent over the past three months, Mahindra & Mahindra (M&M) has posted a four per cent gain and recently become the country's most valuable automobile company.

While macro headwinds and slowing demand have led to muted volume growth for most of its peers, M&M's leadership position in the fastgrowing utility vehicles (UVs) and farm equipment segments has held it in good stead. Vineet Hetamasaria, head of research at Pioneer Intermediaries, says its outperformance is because the company gets nearly all its sales from the diesel segment and a little over 65 per cent of its sales are to the rural/semi-urban segment. In addition, the introduction of new products in the pick-up segment has helped.

While others are finding the going tough, M&M is expected to maintain its margins and market share, due to its superior product positioning. At the macro level, with rural incomes likely to get a boost from the autumn harvest and higher crop prices, analysts expect the demand for tractors to remain robust. Likewise, the price advantage of diesel over petrol would ensure strong demand for its UVs. Analysts have pegged targets in the range of `800815, which indicates an upside of 15 per cent from the current levels.

The auto sector is likely to put up a muted volume show, with the Society of Indian Automobile Manufacturers cutting its industry growth outlook for the current financial year to 11-13 per cent from the earlier 12-15 per cent, on the back of higher costs of vehicle, fuel and credit. While the M&M management believes industry volumes are likely to moderate, it has maintained its tractor sector growth outlook at 11-13 per cent. Jinesh Gandhi of Motilal Oswal Securities believes the company will post 13 per cent growth in tractors and 18 per cent in UVs in 2011-12.

MARKET SHARE GAINS

Even as the key companies in the passenger vehicle segment are struggling with lower demand, M&M has posted steady growth. For the June quarter, its domestic passenger UV volumes grew 14 per cent, while that of the segment was at five per cent, helping it post market share gains of 450 basis points, to 56.2 per cent. In tractors, sales grew afifth as compared to the industry's 13.7 per cent, helping it to gain 230 basis points in market share to 43 per cent. Analysts say consolidation in the sector such as TAFE's acquisition of Eicher and M&M taking over Punjab Tractors, has helped lower the competitive intensity, giving pricing power to leaders such as M&M. "More often than not, the company has been able to pass on the rise in costs to customers," says Hetamasaria.

COST SAVINGS

On a standalone basis, higher raw material costs dented Ebitda (earnings before interest, taxes, depreciation and amortisation) margins, which declined 170 basis points yearon-year to 13.3 per cent, as input costs jumped 220 basis points in the June quarter.

However, on a sequential basis, the company was able to improve margins by 60 basis points, due to savings on other expenses, as well as price rises to the tune of three per cent taken in April across its portfolio. The gains would have been higher but for the margin hit on its tractor portfolio, due to the higher proportion of costly steel, rubber and castings. The farm equipment (tractor) portfolio fetches higher margins to the tune of 16-17 per cent as compared to the auto segment's 10-12 per cent. Given its leadership position in the two key categories, expect the company to report healthy margins in 2011-12.

SSANGYONG WORRY

M&M's Korean subsidiary is likely to post a small loss on revenue of $3 billion in this calendar year. While analysts expect it to meet the management's expectation of a 50 per cent jump in volume growth for the current year to 120,000 units, its task for the next year, calendar 2012, is cut out. Exports to Europe form a significant part of revenue and given the situation, it will be tough going, says an analyst. Though a small contributor, the company hasn't been able to achieve any significant success in the two-wheeler space, something the Street will keep an eye on.

On the flip side, other subsidiaries like M&M Financial Services, Mahindra Holidays and Tech Mahindra are expected to sustain healthy growth in the coming quarters, thereby adding value to the consolidated entity.