We downgrade Mahindra & Mahindra (M&M) to ?reduce? (earlier ‘add’) and revise our target price to Rs 1,130 (earlier Rs 1,400) based on the sum-of-the-parts valuation methodology, as we see a limited scope of re-rating of the stock; subsidiary losses are unlikely to come down meaningfully in the next 2-3 years to improve consolidated return on invested capital. The standalone business trades at 15x FY16e EPS, which is at a 28% premium to its past five-year trading average. We believe multiple re-rating is contingent on improvement in consolidated return ratios and market share in the utility vehicle business. We have reduced our volume assumptions by 4%, mainly reducing the utility volume assumptions, as we factor in recent market share losses in the utility vehicle segment. We have cut our earnings estimates for the standalone business by 7-11% in FY15e and FY16e due to lower volume assumptions and lower ebitda margin assumptions.
M&M has lost 13% market share over the past two years in the utility vehicle segment due to negligible presence in the mini-SUV segment. The company has been unable to stem the loss in market share despite upgrades to its existing product lineup. We believe utility vehicle industry volumes will grow at a strong pace in FY16e (up 20% y-o-y) led by new launches and have built in stability in market share for M&M from FY16e onwards. We believe the Street is already factoring in stability in market share for M&M led by new launches in the mini-SUV segment despite new competitors with strong distribution networks launching mini SUVs.
Kotak Institutional Equities