M&M
12th March, 2009
M&M
India Automobiles
CMP:
Sovid Gupta +911243024840 Equity Analyst: Fairwealth Securities Private. Ltd.
Target set on
Rs. 430
M&M’s 3QFY09 performance was below our expectation. Reported net sales at Rs 25.2 bn were as expected down by 17%. EBIDTA margins dipped to 3.4% led by high raw material costs, and Foreign Exchange losses. Company’s automotive segment posted margins of 1%, which was much below our expectation. We expect the company to post much good Q4 numbers on back of reduced raw material prices, reduced inventory write downs, improved price realization and higher sales.
Key Financial Numbers
+25%
FY06
12th Mar09
Net sales
Market Data
FY07
FY08
8105
9848
11281
EBITDA
833
1058
Adj. PAT
682
975
FY09E*
FY10E*
11620
13014
1095
705
1350
953
560
905
Margins (%)
Beta 12M hi/lo Market cap, INR Crores Shares in issue (mn.) Reuters Bloomberg
Target:
Future Estimates:
Priced on March’12, 2009 ±% potential
Rs. 344
721/236 10500 259 MAHM.BO MAHM: IN
EBITDA
10.3%
10.7%
9.7%
6.1%
10.4%
8.4%
9.9%
8.4%
4.8%
7.0%
EPS
26.43
37.79
36.94
21.71
35.08
P/E
13.05
9.13
9.34
15.89
9.84
NPM Per Share Data
Source: Fairwealth Securities Research Estimates, Company data
Share Holding Pattern(%) Promoters FII Institutional Public & Others
Fairwealth Securities
26.5 32.0 26.7 15.0
Page 1
M&M - Buy
Quarterly Result Round up:
Standalone operations reported PAT of Rs 1.2 crore as against 405 crores same period last year. Production M&M reported a 23% Y-o-Y decline in volumes to 61225 units. PBIT Margin(%) Automotive Segment Farm Equipment Segment Other Segments TOTAL
Q3’09
ROCE(%)
Q3’09
Automotive Segment Farm Eqiup. Segment Other Segments TOTAL
Q3’08
-0.76
9.4
10.7
13.7
14.5
1.4
4.5
10.5
Sales:. Automotive segment registered net sales of Rs. 1370 crores a fall of over 24% over last year. Farm Equipment segment registered sales of Rs. 1138 crores a jump of 7% over Q3 FY08. PBIT: Automotive segment posted a net loss of Rs.11 crore for Q3 FY09 versus a profit of Rs. 162 crore for same period FY08. Profits for the division fell as sales plummeted sharply in the quarter and also because of inventory write downs. Margins for the business were -0.8 percent as against 9.4% in Q3FY09.
Q3’08
-0.51
11.4
10.7
16.8
17.1
5.6
3.5
13.3
Q3 FY09
Q3 FY08
% change
Automotive Segment
1370.22
1800.4
-23.89
Farm Equipment Segment
1138.97
1065.95
6.85
Sales
Other Segments TOTAL
Source: Capital Line
16.94
162.97
-89.61
2526.13
3029.32
-16.61
PBIT
M&M’s automotive segment ran at negative PBIT margins for Q3 FY’09 as sales dropped by 24%.
Automotive Segment
-10.43
168.74
-106.18
Farm Equipment Segment
121.39
146.47
-17.12
2.46
2.3
6.96
Reduced raw material prices and increased sales in Q4, will help the company turnaround its main business in Q4
TOTAL
113.42
317.51
-64.28
Other Segments Capital Employed Automotive Segment
2055.62
1483.51
38.56
Farm Equipment Segment
1138.79
870.56
30.81
14.42
41.03
-64.85
3208.83
2395.1
33.97
Other Segments TOTAL Source: Company Data
Fairwealth Securities
Page 2
M&M - Buy
Highlights:
XYLO has received good response from customers.
Farm equipment segment of the company registered a strong growth of 40% y-o-y to 9,123 vehicles in Feb’09 as against 6,522 vehicles in the same period last year.
Product mix % UV's Three Wheelers Tractors Export
3QFY09
3QFY08
48% 14% 33% 5%
51% 11% 31% 7%
Source: Company Data
M&M reported a forex loss of Rs 1.4 bn on cancellation of forward contracts for exports due in 3QFY09.
In Q3 FY’09 entire industry came out with bad set of number as global economic gloom had its effect on Indian economy as well, which clocked only 5.3% growth in Q3. M&M reported a 23% Y-o-Y decline in volumes to 61225 units. Net sales however decreased by only 14% as price realization increased by 7%. Although volumes decreased by 23%,corresponding decrease in raw materials was only 9%, as prices of raw materials fell only in later half of Q3(Raw material form approximately 67% of sales for the company) . First two months of Q4 FY09 has shown much better performance against last year. January sales at 24,500 declined by 19% Y-o-Y as against 23% drop in Q3 FY’09. Drop in sales was witnessed across all segments. All companies have had a favorable month of February having registered impressive growth led by improved lending, lower interest rates and reduced excise rates. M&M registered sales volume of 29000 units, 10% growth over previous year. Maximum growth was registered in farm equipment sales as domestic tractor sales rose by 48% to 8900 units against 6000 units in corresponding period last year. Utility vehicles witnessed 17% growth rate on back of new product launch Xylo, finding favour with the audience. Three wheeler segment registered a growth of 45% at 3400 units. PV sales remain dismal and its sad that M&M is not taking part in the rise of Indian middle class. Lone passenger vehicle Logan sales fell by 63% at 1000 units versus 2750 units for same period last year. Exports fell from 1800 units (combined for automotive and Farm Equipment) to 540 units a drop of 70%.
Industry Performance Industry performed badly in Q3 FY’09 and January’09, registering a sharp drop in volume. However February has been a turn around of sorts as voumes raised both on M-oM and Yo-Y basis fist time in four months. Passenger vehicles sales witnessed a huge jump in February. CV sales continue to struggle giving signs that economy is still into troubled waters.
There are reports that the Indian defence forces is planning to place immediate orders to buy vehicles to meet their requirements for two years. According to the report, if the government approves the plan, the auto sector is expected to get Rs 3,000 crore to Rs 4,000 crore worth of orders that will be spread over the next two quarters. Mahindra and Mahindra, Ashok Leyland, Maruti Suzuki, Tata Motors and state-owned BEML are the major vehicle suppliers for the three defence forces.
Fairwealth Securities
Page 3
M&M - Buy
Company Description: M&M is the flagship company of Mahindra Group that has a significant presence in several high growth sectors. Standalone: The company has two main divisions – automotive and farm equipment.
M&M Finance
Automotive: M&M is a dominant player in the UV segment with its ‘Scorpio’ and ‘Bolero’ models – main constituents of sales in the automotive division and currently accounts for about half of India’s market for utility vehicles. M&M controls a 55% share of the domestic utility vehicle market. The auto major hopes to close this year with a 8-10% growth over the past year. M&M is also engaged in the manufacture of three-wheelers and light commercial vehicles (LCV’s). It is also present in domestic passenger vehicle market and manufactures Logan in association with Renault. Going forward the company will also distribute Renault cars manufactured in India. Farm Equipment Segment: With a network of 800 dealers and capacity to produce more than 150,000 tractors a years. M&M is the largest manufacturers of Tractors in India. And one of the largest player globally through plants and JV’s in US, Europe, Australia, etc. Group Companies: Mahindra Finance: One of India’s leading non-banking finance companies focused on the rural and semi-urban sectors providing finance for Utility Vehicles (UV’s), tractors and cars. The company provides retail financing services in the rural and semi-urban areas of India, and strategy is to provide a range of financial products and services to our customers through our nationwide distribution network. Services provided by the company include vehicle and other Retail Financing, Insurance and Mutual Fund selling, etc. We believe that the company has huge growth potential and should grow at 10% compounded CAGR considering its presence in relatively un-served rural markets, Tech Mahindra: Tech Mahindra (TM) is India's eighth largest software services exporter with an extensive domain knowledge in the telecommunications industry. The company was formed in 1986 as a joint venture between Mahindra & Mahindra (M&M) and British Telecom Plc (BT).Conservative broker estimates value the company at 4x FY10E earnings. We have discounted Tech Mahindra by 30% from the broker estimates of Rs. 300 per share. Mahindra Lifespaces: Mahindra Lifespaces developer is a smaller player in real estate development segment. However it is one of the best managed companies and was the only player in the real estate segment to show increased revenues on Y-0-Y basis. It has low debt and is managing projects through internal accruals. We believe that the company has strong growth potentials and is trading at Rs. 125 which is huge discount to its broker consensus value of Rs 500 per share.
Fairwealth Securities
Page 4
M&M - Buy Valuations: We have valued M&M on the basis of SOTP valuations.
Core business value: We value M&M's core business at Rs281/share (8x Mar10E EPS) Listed Subsidiaries Valuation basis
M.Cap (Rs. Crore)
Holding of M&M (%)
Holding of M&M (Rs. Crore)
15% discounted value (per share basis)
Mahindra Finance
CMP
1970
60%
1,182.0
39
Mahindra Forgings
CMP
300
60%
180.0
6
Mahindra Life
CMP
367
51%
187.2
6
Mahindra Ugine
CMP
60
51%
30.6
1
Tech Mahindra
CMP
3200
44%
1,408.0
Total
46 97.7
Unlisted Subsidiaries Mahindra Resort
0.5x PE Deal
1600
98%
1,568.0
Sum Total
51 149
We have valued listed subsidiaries conservatively and have discounted their valuations by 15%. Each of these companies has set ambitious growth targets for themselves, which would be EPS accretive for the parent company. On individual broker consensus companies like Tech Mahindra, Mahindra Life and Mahindra Finance have been valued at double their current market price. We believe that one year forward valuations of listed and unlisted subsidiaries would be upwards of Rs. 250 on per share basis. Combined value of the company comes at Rs. 430 per share. Rs. 281 for core operations and 149 for other listed and unlisted subsidiaries. Valuations are also supported by strong management and new initiatives of the company.
Fairwealth Securities
Page 5
M&M - Buy
Key Risks: Lower growth for Indian Economy could stiffle the Automobile industry, even 10% drop in Sales will lead to sharp drop in Margins, which will lead to downward revsion for the stock. More than expected Derivative losses and inventory write downs in Q4 are key risk areas. More disclosures are required from the company on the same. M&M drives almost all its sale from two segments UV’s and Tractors. High concentration and strong dependence on two segments is a key risk area for the company. M&M has already started witnessing cannibalization between its recently launched model Xylo and Scorpio. Company has reported 25% cannibalization since the launch of Xylo in February. Automotive segment already registered negative margins with the reduction in price of Scorpio in March (between 35000 and 70000) margins will continue to be under pressure in the Automotive segment.
M&M share has underperformed Nifty over one year period. Being a diversified group with a good management and conservative approach, we believe the stock has been oversold by the investors. Stock has witnessed a sharp pull back rally over last 45 days outperforming the benchmark index by 30%. We expect the stock to continue this rally and achieve a target of Rs. 430 within next 3 months.
Stock Price movement versus Nifty.
Fairwealth Securities
Page 6
M&M - Buy
Investment Rational We rate M&M shares Buy, with a target price of Rs430. . Lowered excise duty, lowering of interest rates and defense segment orders are likely to be key triggers for the entire automotive pack. M&M's utility-vehicle business is benefiting from new product launches and strong product positioning for both Bolero and Scorpio brands. On the tractor business we remain positive as the business has been high margin business for the company and we expect strong growth on back of loan waivers by the UPA government, however curtailment of further credit by banks which are witnessing rising NPA’s will put some pressure on sector. Long term fundamentals remain solid. Improvement in capital markets will help company in unlocking value by delisting is Holiday and Resort business. Management will continue to make more efforts to leverage high dollar by focusing on exports in select markets. We believe maximum growth to come from Non-Core businesses of the company particularly Real Estate Division, IT-Telecom services arm(Tech Mahindra) and in M&M Financial Services which will provide downside support for the share.
TECHNICAL OUTLOOK M&M
M & M has given a fresh breakout above 310-320 levels .The stock is in a strong medium term uptrend & one could go long in the scrip at dips around 320 & then 290 for a price target of Rs.430.
Fairwealth Securities
Page 7
M&M - Buy
Annexure: 1. Income Statement:
Fund Flow Statement: 200803
Income Statement (Standalone Rs. Crore) 2008(12)
2007(12)
2006 (12)
Income : Net Sales
Share Capital Reserves Total
11281.73
9848.86
8105.23
Raw Materials
7725.91
(%age of sales)
6827.93
5713.77
68%
69%
70%
845.77
660.1
544.99
(%age of sales)
7%
7%
7%
Other Expenses
1615.57
1303.08
1013.22
Employee Cost
Total Shareholders Funds Secured Loans
Expenditure :
(%age of sales)
14%
13%
13%
Unsecured Loans
200603
239.07
238.03
233.4
4111
3314.88
2675.47
4350.07
3552.91
2908.87
617.26
106.65
216.67
1969.8
1529.35
666.71
Total Debt
2587.06
1636
883.38
Total Liabilities
6937.13
5189
3792
1814.45
1590.57
1375.26
546.45
280.6
179.19
4215.06
2237.46
1669.08
APPLICATION OF FUNDS : Net Block Capital Work in Progress Investments
Operating Profit
200703
SOURCES OF FUNDS :
1094.48
1057.75
833.25
10%
11%
10%
Depreciation
238.66
209.59
200.01
Inventories
1084.11
878.48
878.74
EBIT
855.82
848.16
633.24
Sundry Debtors
1004.88
700.89
637.97
EBIT(%)
8%
9%
8%
Cash and Bank
861.23
1326.07
730.31
Interest
87.59
19.8
26.96
Loans and Advances
705.15
842.73
502.04
493.22
Total Current Assets
3655.37
3748.17
2749.06
26411
5609
3293
7538
3198
2478
EBITDA %
Other Income
638.54
590.13
PBT
1406.77
1418.49
1099.50
Tax
Current Assets, Loans & Advances
Less : Current Liabilities and Provisions
303.40
350.10
242.40
Current Liabilities
Net Profit
1103.37
1068.39
857.10
Provisions
EO Items
150.06
93.42
174.87
Total Current Liabilities
33949
8807
5770
Adj Net profit
953.31
974.97
682.23
Net Current Assets
27518
9638
138
Source: Company Report, Capital Line
2. Cash Flow Statement: 200803
200703
200603
Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year
3916
989
779
Deferred Tax Liability
6371
1775
1771
-2454
-786
-992
6937.13
5188.91
3792.25
479.04
367.6
454.33
Net Deferred Tax Total Assets
Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities
Deferred Tax Assets
Contingent Liabilities
Source: Company Report, Capital Line
2085.16
1180.03
1052.51
698.87
-162.43
-458.87
-2688.52
1052.31
-881.82
1690.16
2119.87
1468.21
-299.49
905.13
127.52
Source: Company Report, Capital Line
Fairwealth Securities
Page 8
M&M - Buy
Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.
Fairwealth Securities
Page 9
M&M
India Automobiles
CMP:
Sovid Gupta +911243024840 Equity Analyst: Fairwealth Securities Private. Ltd.
Target set on
Rs. 430
M&M’s 3QFY09 performance was below our expectation. Reported net sales at Rs 25.2 bn were as expected down by 17%. EBIDTA margins dipped to 3.4% led by high raw material costs, and Foreign Exchange losses. Company’s automotive segment posted margins of 1%, which was much below our expectation. We expect the company to post much good Q4 numbers on back of reduced raw material prices, reduced inventory write downs, improved price realization and higher sales.
Key Financial Numbers
+25%
FY06
12th Mar09
Net sales
Market Data
FY07
FY08
8105
9848
11281
EBITDA
833
1058
Adj. PAT
682
975
FY09E*
FY10E*
11620
13014
1095
705
1350
953
560
905
Margins (%)
Beta 12M hi/lo Market cap, INR Crores Shares in issue (mn.) Reuters Bloomberg
Target:
Future Estimates:
Priced on March’12, 2009 ±% potential
Rs. 344
721/236 10500 259 MAHM.BO MAHM: IN
EBITDA
10.3%
10.7%
9.7%
6.1%
10.4%
8.4%
9.9%
8.4%
4.8%
7.0%
EPS
26.43
37.79
36.94
21.71
35.08
P/E
13.05
9.13
9.34
15.89
9.84
NPM Per Share Data
Source: Fairwealth Securities Research Estimates, Company data
Share Holding Pattern(%) Promoters FII Institutional Public & Others
Fairwealth Securities
26.5 32.0 26.7 15.0
Page 1
M&M - Buy
Quarterly Result Round up:
Standalone operations reported PAT of Rs 1.2 crore as against 405 crores same period last year. Production M&M reported a 23% Y-o-Y decline in volumes to 61225 units. PBIT Margin(%) Automotive Segment Farm Equipment Segment Other Segments TOTAL
Q3’09
ROCE(%)
Q3’09
Automotive Segment Farm Eqiup. Segment Other Segments TOTAL
Q3’08
-0.76
9.4
10.7
13.7
14.5
1.4
4.5
10.5
Sales:. Automotive segment registered net sales of Rs. 1370 crores a fall of over 24% over last year. Farm Equipment segment registered sales of Rs. 1138 crores a jump of 7% over Q3 FY08. PBIT: Automotive segment posted a net loss of Rs.11 crore for Q3 FY09 versus a profit of Rs. 162 crore for same period FY08. Profits for the division fell as sales plummeted sharply in the quarter and also because of inventory write downs. Margins for the business were -0.8 percent as against 9.4% in Q3FY09.
Q3’08
-0.51
11.4
10.7
16.8
17.1
5.6
3.5
13.3
Q3 FY09
Q3 FY08
% change
Automotive Segment
1370.22
1800.4
-23.89
Farm Equipment Segment
1138.97
1065.95
6.85
Sales
Other Segments TOTAL
Source: Capital Line
16.94
162.97
-89.61
2526.13
3029.32
-16.61
PBIT
M&M’s automotive segment ran at negative PBIT margins for Q3 FY’09 as sales dropped by 24%.
Automotive Segment
-10.43
168.74
-106.18
Farm Equipment Segment
121.39
146.47
-17.12
2.46
2.3
6.96
Reduced raw material prices and increased sales in Q4, will help the company turnaround its main business in Q4
TOTAL
113.42
317.51
-64.28
Other Segments Capital Employed Automotive Segment
2055.62
1483.51
38.56
Farm Equipment Segment
1138.79
870.56
30.81
14.42
41.03
-64.85
3208.83
2395.1
33.97
Other Segments TOTAL Source: Company Data
Fairwealth Securities
Page 2
M&M - Buy
Highlights:
XYLO has received good response from customers.
Farm equipment segment of the company registered a strong growth of 40% y-o-y to 9,123 vehicles in Feb’09 as against 6,522 vehicles in the same period last year.
Product mix % UV's Three Wheelers Tractors Export
3QFY09
3QFY08
48% 14% 33% 5%
51% 11% 31% 7%
Source: Company Data
M&M reported a forex loss of Rs 1.4 bn on cancellation of forward contracts for exports due in 3QFY09.
In Q3 FY’09 entire industry came out with bad set of number as global economic gloom had its effect on Indian economy as well, which clocked only 5.3% growth in Q3. M&M reported a 23% Y-o-Y decline in volumes to 61225 units. Net sales however decreased by only 14% as price realization increased by 7%. Although volumes decreased by 23%,corresponding decrease in raw materials was only 9%, as prices of raw materials fell only in later half of Q3(Raw material form approximately 67% of sales for the company) . First two months of Q4 FY09 has shown much better performance against last year. January sales at 24,500 declined by 19% Y-o-Y as against 23% drop in Q3 FY’09. Drop in sales was witnessed across all segments. All companies have had a favorable month of February having registered impressive growth led by improved lending, lower interest rates and reduced excise rates. M&M registered sales volume of 29000 units, 10% growth over previous year. Maximum growth was registered in farm equipment sales as domestic tractor sales rose by 48% to 8900 units against 6000 units in corresponding period last year. Utility vehicles witnessed 17% growth rate on back of new product launch Xylo, finding favour with the audience. Three wheeler segment registered a growth of 45% at 3400 units. PV sales remain dismal and its sad that M&M is not taking part in the rise of Indian middle class. Lone passenger vehicle Logan sales fell by 63% at 1000 units versus 2750 units for same period last year. Exports fell from 1800 units (combined for automotive and Farm Equipment) to 540 units a drop of 70%.
Industry Performance Industry performed badly in Q3 FY’09 and January’09, registering a sharp drop in volume. However February has been a turn around of sorts as voumes raised both on M-oM and Yo-Y basis fist time in four months. Passenger vehicles sales witnessed a huge jump in February. CV sales continue to struggle giving signs that economy is still into troubled waters.
There are reports that the Indian defence forces is planning to place immediate orders to buy vehicles to meet their requirements for two years. According to the report, if the government approves the plan, the auto sector is expected to get Rs 3,000 crore to Rs 4,000 crore worth of orders that will be spread over the next two quarters. Mahindra and Mahindra, Ashok Leyland, Maruti Suzuki, Tata Motors and state-owned BEML are the major vehicle suppliers for the three defence forces.
Fairwealth Securities
Page 3
M&M - Buy
Company Description: M&M is the flagship company of Mahindra Group that has a significant presence in several high growth sectors. Standalone: The company has two main divisions – automotive and farm equipment.
M&M Finance
Automotive: M&M is a dominant player in the UV segment with its ‘Scorpio’ and ‘Bolero’ models – main constituents of sales in the automotive division and currently accounts for about half of India’s market for utility vehicles. M&M controls a 55% share of the domestic utility vehicle market. The auto major hopes to close this year with a 8-10% growth over the past year. M&M is also engaged in the manufacture of three-wheelers and light commercial vehicles (LCV’s). It is also present in domestic passenger vehicle market and manufactures Logan in association with Renault. Going forward the company will also distribute Renault cars manufactured in India. Farm Equipment Segment: With a network of 800 dealers and capacity to produce more than 150,000 tractors a years. M&M is the largest manufacturers of Tractors in India. And one of the largest player globally through plants and JV’s in US, Europe, Australia, etc. Group Companies: Mahindra Finance: One of India’s leading non-banking finance companies focused on the rural and semi-urban sectors providing finance for Utility Vehicles (UV’s), tractors and cars. The company provides retail financing services in the rural and semi-urban areas of India, and strategy is to provide a range of financial products and services to our customers through our nationwide distribution network. Services provided by the company include vehicle and other Retail Financing, Insurance and Mutual Fund selling, etc. We believe that the company has huge growth potential and should grow at 10% compounded CAGR considering its presence in relatively un-served rural markets, Tech Mahindra: Tech Mahindra (TM) is India's eighth largest software services exporter with an extensive domain knowledge in the telecommunications industry. The company was formed in 1986 as a joint venture between Mahindra & Mahindra (M&M) and British Telecom Plc (BT).Conservative broker estimates value the company at 4x FY10E earnings. We have discounted Tech Mahindra by 30% from the broker estimates of Rs. 300 per share. Mahindra Lifespaces: Mahindra Lifespaces developer is a smaller player in real estate development segment. However it is one of the best managed companies and was the only player in the real estate segment to show increased revenues on Y-0-Y basis. It has low debt and is managing projects through internal accruals. We believe that the company has strong growth potentials and is trading at Rs. 125 which is huge discount to its broker consensus value of Rs 500 per share.
Fairwealth Securities
Page 4
M&M - Buy Valuations: We have valued M&M on the basis of SOTP valuations.
Core business value: We value M&M's core business at Rs281/share (8x Mar10E EPS) Listed Subsidiaries Valuation basis
M.Cap (Rs. Crore)
Holding of M&M (%)
Holding of M&M (Rs. Crore)
15% discounted value (per share basis)
Mahindra Finance
CMP
1970
60%
1,182.0
39
Mahindra Forgings
CMP
300
60%
180.0
6
Mahindra Life
CMP
367
51%
187.2
6
Mahindra Ugine
CMP
60
51%
30.6
1
Tech Mahindra
CMP
3200
44%
1,408.0
Total
46 97.7
Unlisted Subsidiaries Mahindra Resort
0.5x PE Deal
1600
98%
1,568.0
Sum Total
51 149
We have valued listed subsidiaries conservatively and have discounted their valuations by 15%. Each of these companies has set ambitious growth targets for themselves, which would be EPS accretive for the parent company. On individual broker consensus companies like Tech Mahindra, Mahindra Life and Mahindra Finance have been valued at double their current market price. We believe that one year forward valuations of listed and unlisted subsidiaries would be upwards of Rs. 250 on per share basis. Combined value of the company comes at Rs. 430 per share. Rs. 281 for core operations and 149 for other listed and unlisted subsidiaries. Valuations are also supported by strong management and new initiatives of the company.
Fairwealth Securities
Page 5
M&M - Buy
Key Risks: Lower growth for Indian Economy could stiffle the Automobile industry, even 10% drop in Sales will lead to sharp drop in Margins, which will lead to downward revsion for the stock. More than expected Derivative losses and inventory write downs in Q4 are key risk areas. More disclosures are required from the company on the same. M&M drives almost all its sale from two segments UV’s and Tractors. High concentration and strong dependence on two segments is a key risk area for the company. M&M has already started witnessing cannibalization between its recently launched model Xylo and Scorpio. Company has reported 25% cannibalization since the launch of Xylo in February. Automotive segment already registered negative margins with the reduction in price of Scorpio in March (between 35000 and 70000) margins will continue to be under pressure in the Automotive segment.
M&M share has underperformed Nifty over one year period. Being a diversified group with a good management and conservative approach, we believe the stock has been oversold by the investors. Stock has witnessed a sharp pull back rally over last 45 days outperforming the benchmark index by 30%. We expect the stock to continue this rally and achieve a target of Rs. 430 within next 3 months.
Stock Price movement versus Nifty.
Fairwealth Securities
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M&M - Buy
Investment Rational We rate M&M shares Buy, with a target price of Rs430. . Lowered excise duty, lowering of interest rates and defense segment orders are likely to be key triggers for the entire automotive pack. M&M's utility-vehicle business is benefiting from new product launches and strong product positioning for both Bolero and Scorpio brands. On the tractor business we remain positive as the business has been high margin business for the company and we expect strong growth on back of loan waivers by the UPA government, however curtailment of further credit by banks which are witnessing rising NPA’s will put some pressure on sector. Long term fundamentals remain solid. Improvement in capital markets will help company in unlocking value by delisting is Holiday and Resort business. Management will continue to make more efforts to leverage high dollar by focusing on exports in select markets. We believe maximum growth to come from Non-Core businesses of the company particularly Real Estate Division, IT-Telecom services arm(Tech Mahindra) and in M&M Financial Services which will provide downside support for the share.
TECHNICAL OUTLOOK M&M
M & M has given a fresh breakout above 310-320 levels .The stock is in a strong medium term uptrend & one could go long in the scrip at dips around 320 & then 290 for a price target of Rs.430.
Fairwealth Securities
Page 7
M&M - Buy
Annexure: 1. Income Statement:
Fund Flow Statement: 200803
Income Statement (Standalone Rs. Crore) 2008(12)
2007(12)
2006 (12)
Income : Net Sales
Share Capital Reserves Total
11281.73
9848.86
8105.23
Raw Materials
7725.91
(%age of sales)
6827.93
5713.77
68%
69%
70%
845.77
660.1
544.99
(%age of sales)
7%
7%
7%
Other Expenses
1615.57
1303.08
1013.22
Employee Cost
Total Shareholders Funds Secured Loans
Expenditure :
(%age of sales)
14%
13%
13%
Unsecured Loans
200603
239.07
238.03
233.4
4111
3314.88
2675.47
4350.07
3552.91
2908.87
617.26
106.65
216.67
1969.8
1529.35
666.71
Total Debt
2587.06
1636
883.38
Total Liabilities
6937.13
5189
3792
1814.45
1590.57
1375.26
546.45
280.6
179.19
4215.06
2237.46
1669.08
APPLICATION OF FUNDS : Net Block Capital Work in Progress Investments
Operating Profit
200703
SOURCES OF FUNDS :
1094.48
1057.75
833.25
10%
11%
10%
Depreciation
238.66
209.59
200.01
Inventories
1084.11
878.48
878.74
EBIT
855.82
848.16
633.24
Sundry Debtors
1004.88
700.89
637.97
EBIT(%)
8%
9%
8%
Cash and Bank
861.23
1326.07
730.31
Interest
87.59
19.8
26.96
Loans and Advances
705.15
842.73
502.04
493.22
Total Current Assets
3655.37
3748.17
2749.06
26411
5609
3293
7538
3198
2478
EBITDA %
Other Income
638.54
590.13
PBT
1406.77
1418.49
1099.50
Tax
Current Assets, Loans & Advances
Less : Current Liabilities and Provisions
303.40
350.10
242.40
Current Liabilities
Net Profit
1103.37
1068.39
857.10
Provisions
EO Items
150.06
93.42
174.87
Total Current Liabilities
33949
8807
5770
Adj Net profit
953.31
974.97
682.23
Net Current Assets
27518
9638
138
Source: Company Report, Capital Line
2. Cash Flow Statement: 200803
200703
200603
Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year
3916
989
779
Deferred Tax Liability
6371
1775
1771
-2454
-786
-992
6937.13
5188.91
3792.25
479.04
367.6
454.33
Net Deferred Tax Total Assets
Cash Flow Summary Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities
Deferred Tax Assets
Contingent Liabilities
Source: Company Report, Capital Line
2085.16
1180.03
1052.51
698.87
-162.43
-458.87
-2688.52
1052.31
-881.82
1690.16
2119.87
1468.21
-299.49
905.13
127.52
Source: Company Report, Capital Line
Fairwealth Securities
Page 8
M&M - Buy
Disclaimer This publication has been prepared solely for information purpose and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, investors are advised to satisfy themselves before making any investments. Fairwealth Securities Pvt Ltd., does not bear any responsibility for the authentication of the information contained in the reports and consequently, is not liable for any decisions taken based on the same. Further, Fairwealth Research Reports only provide information updates and analysis. All opinion for buying and selling are available to investors when they are registered clients of Fairwealth Investment Advisory Services. As a matter of practice, Fairwealth refrains from publishing any individual names with its reports. As per SEBI requirements it is stated that, Fairwealth Sec Pvt Ltd., and/or individuals thereof may have positions in securities referred herein and may make purchases or sale while this report is in circulation.
Fairwealth Securities
Page 9
