Stock Review: Mahindra & Mahindra (M & M)

Stock Review: Mahindra & Mahindra (M & M)

   Mahindra & Mahindra (M & M) is the largest player in the domestic utility vehicle (UV) segment and a global leader in the tractor business. It has been able to grow its operations over the past several quarters despite the strong headwinds that the broader auto industry has been grappling with.

That's largely due to the strong rural demand for the company's tractor and allied portfolio, coupled with buoyant demand for its light commercial vehicles or LCVs. In addition, its UVs like Scorpio and Bolero have strong recall in urban markets and have helped the company to deal with rising auto finance rates.
M&M has also been able to manage rising raw material costs better than its domestic peers for the trailing 12 months ended June 2011 quarter. The stock has also outperformed the Sensex over the past six months.

BUSINESS

M&M is present across different auto segments. In utility vehicles, the company competes with models like Scorpio and Xylo. In the LCV segment, it offers models like Maxximo. Apart from that, its farm equipment division includes tractor and allied machinery. M&M controlled 42% of the domestic tractor market at end of FY11. The company also has a presence in defense-related businesses.

M&M had grown its total vehicle sales, including exports, by nearly 24.9% y-o-y to 5.9 lakh units during FY11. However, during the June quarter, growth in total vehicle sales moderated to 22.6% y-o-y.

In a significant thrust to its overseas plan, M&M had announced the acquisition of majority stake in ailing Korean SUV maker Ssangyong Motor in August 2010. During the first six months of calendar year 2011, Ssangyong's vehicle sales are up 53% y-o-y, and it also exited court receivership in March.

FINANCIALS

The company's standlone net sales improved 30.5% on a y-o-y basis in the first quarter of FY 12, but its operating profit margin weakened by 170 basis points to 13.3%. This pressure on margins was due to a jump in the purchase of traded goods. The rise in costs offset the near 6.3% improvement in average realisation per vehicle in the quarter under review. And net profit grew by just 7.6% in June 11 quarter.

At M&M controlled Ssangyong Motor, sales revenue grew 42.9% y-o-y to approximately $1.3 billion in first half of CY 11, while net loss halved during this period. This was thanks to strong demand for SUV models.

Also, for trailing 12-months ended June 11 quarter, M& M has been able to manage commodity input costs and growth in sales far better than its peers.
For example, M & M posted standalone operating margins of 14.3% for 12-months ended June quarter, a fall of 170 basis points, while net sales grew 28.4% to 25,067 crore during this period. In the case of Tata Motors, its standalone operating margins were broadly flat at 8.9% during this period, while net sales improved 25.1 %.

GROWTH DRIVERS & CONCERNS

The company should benefit once again from a reasonably strong monsoon this year and rural demand for its tractors portfolio. It is also looking at launches in its utility vehicle and commercial vehicle segments over the next 12-15 months. Rising auto finance rates coupled with high commodity input costs continue to be a cause for concern.

VALUATIONS

M&M trades at a standalone P/E of 17.4 times on a trailing four-quarter basis. The company has an array of businesses and the Street values them appropriately. Tata Motors trades at a consolidated P/E of 5.2 times, while Ashok Leyland trades at 11.3 times. Investors could consider M & M on a long-term basis.