Mahindra and Mahindra rated ‘Buy’; Edelweiss says UV launches to be make-or-break event

By: | Published: April 3, 2017 3:46 AM

At its recent analyst meet, Mahindra & Mahindra (M&M) Managing Director, Dr Pawan Goenka and senior management enunciated the group’s long-term strategy.

Mahindra & Mahindra, Pawan Goenka, Emission norm changes, digitisation, consumer preferences, UV product portfolio, globalisation, farm equipment business, Automotive, Electric vehicles, tractors, drones, IOTAt its recent analyst meet, Mahindra & Mahindra (M&M) Managing Director, Dr Pawan Goenka and senior management enunciated the group’s long term strategy.

At its recent analyst meet, Mahindra & Mahindra (M&M) Managing Director, Dr Pawan Goenka and senior management enunciated the group’s long term strategy. Over the next 5 years, the PV industry will have to deal with the change in emission norms from BSIV to BSVI, fast-changing consumer preferences and evolving digitisation.

Emission norm changes: The consequent expected spike in prices could well be a gamechanger for companies that are able to tackle the trinity of cost, fuel efficiency and performance. Maximum cost pressure of BSVI norms will be seen in small commercial vehicles (sub 1 tonne) in terms of costs involved, unless there is some relaxation in the norms applicable to the segment.

Fast-changing consumer preferences: In the past 2-3 years, there has been a complete change in consumer preference for products (type of products, extent of comfort, design and styling, etc), and the method of buying (digitisation and virtual dealer concept can become a reality). Management indicated that dealership viability in metros is already getting tough due to the high costs involved.

UV product portfolio: M&M’s market share in its traditional products remains >50%, but it has not been able to participate in the new cross-over models. Hence, M&M’s overall market share is 30%. Some of its recent launches have seen subdued performance so far. The company is pinning high hopes on U321 (launch in FY18) and S201 (FY19 – based on Tivoli platform) as it will be the culmination of learning from success and failures of recent times. We believe these 2 launches would be a make or break event for M&M. If it is unable to address the changing customer preferences, it runs the risk of being marginalised in the PV industry.

Rising focus on globalisation of farm equipment business: M&M will be looking at setting up manufacturing base in different locations, focus on increasing share of agri equipment across the globe with SAMPO and Mitsubishi Agri in its fold. Over FY17-19, M&M will identify 3-4 crop verticals and strive to become an end-to-end player – from soil testing and support to selling tractors/implements.

Outlook and Valuations: On track; maintain Buy
We estimate M&M to post core EPS CAGR of 16% over FY17-19, led by the recovery in rural demand and uptick in UVs with new launches. We maintain ‘BUY/SO’ with SoTP-based TP of `1,545 (from `1,542 earlier) to reflect change in value of subsidiaries. At CMP (adjusting for subsidiary value), the stock trades at FY19e PER of 11x.
Other key highlights

Automotive: Management believes the small commercial vehicles (SCV) segment can witness a shift in fuel preference from the current diesel/CNG to petrol/CNG/electric variants, due to huge cost pressures with the shift to BS-VI norms. Corrective measures in existing product portfolio: The sub 4 metre Bolero launch has seen good traction and Bolero volumes have now recovered to earlier levels. Several corrective measures have been taken in KUV100/TUV300 as well in the way of selling and branding. Management is hopeful of evincing positive response. For product R&D, Detroit, Ssangyong and the Indian R&D centre are working in an integrated manner.

Electric vehicles: There have been talks with the government for an electrification programme in the past few months. For the first time, M&M is hopeful that some positive collaborative action plan may be rolled out. The company is geared for mass market electric vehicles due its involvement with REVA. It already has offerings like e-Verito (car) and e- Supro (SCV).

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Farm equipment: historic high market share—It is the outcome of new launches (2 new platforms – Yuvo and Novo), dealer network correction, and changes in senior team members in past 2 years leading to new ideas. Management opined there are no weak players in the tractor industry as all players (except for M&M) have strong regional flavour. Non-tractor share in farm business is at 15% (up from 4% in 2015) and the company aims to take it up to 20% by FY19.

Over next 5 years, M&M expects tractor demand in India to move towards smart farm machinery (driverless tractors, drones, IOT, etc), micro irrigation, etc. Tractor aggregation business is also an opportunity. M&M aims to make some segments $1 bn businesses over next 5-7 years — agri, farm machinery, Africa, Mahindra USA and Power Solutions.

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