We retain ‘add’ rating on Mahindra & Mahindra (M&M) with a one-year target price of Rs 1,520 per share. At 12x FY17 EPS, M&M is inexpensive versus peers pricing in the risks. M&M’s volume trajectory is set to be better over the next few quarters versus volume declines over the past 24 months. This will be driven by year-on-year
(y-o-y) growth in tractors helped by a low base as well as recovery in UV and LCVs, driven by new launches.
We believe that structural concerns for M&M remain – the rural economy may remain weak for an extended period.
M&M’s volume should see strong y-o-y growth over the next few quarters. Tractors will benefit from a low base of more than 25% decline in H2FY15–H1FY16. In UVs, M&M is likely to regain some market share on the back of two new compact UV models. In LCVs, multiple new models launches are driving volume growth.
We estimate rural India to account for two-thirds of M&M’s operating profits. While tractor sales are entirely driven by rural markets, around half of M&M’s UV volumes are also generated in rural India. An extended weakness in the rural economy due to weak agri commodity prices, low growth in rural wages and a tight fiscal policy would impact M&M the most among all auto OEMs.
M&M’s UV market share dropped from 55% to 33% over four years. We believe this is primarily attributable to urban markets, where customers are lapping up new models from competition.
By IIFL Institutional