Mahindra & Mahindra reported adjusted PAT growth of 17%, i.e., 3% ahead of our expectations.
While we share Street?s concern on near-term weakness in SUV demand, we believe the growth potential of M&M?s UV portfolio is very strong in the medium term. M&M?s tractor sales have recovered and we believe demand is likely to sustain on back of good monsoon, higher crop acreage and price hikes. We upgrade M&M to ?outperform? from ?neutral? and raise our target price to R1,100 from R995.
Most of the drivers for near-term tractor demand for agricultural usage ? good monsoon (86% of country has received excess or normal rainfall), increases in support prices (5-14%), Kharif crop acreage and outlook for next Rabi crop ? remain positive.
Tractor sales have recovered this year after healthy cash-generation for farmers from the previous rabi crop. We expect M&M?s tractor sales to grow 15% in FY14.
After four years of strong growth (26% CAGR), we expect M&M?s UV sales to decline 10% in FY14. Demand has been impacted due to weak sentiment, slow income growth, rise in diesel prices and excise duty hike. SCV sales growth has moderated due to economic slowdown and we expect sales growth of 4% in FY14. We expect M&M?s margin to improve 30 bps to 11.9% on account of faster growth in high margin farm equipment segment.
Macquarie