For tractors, we factor in volumes to improve from -7% in FY20F to +10% in FY21F. For UVS, we factor in -20% growth in UVs in FY20F and +1% in FY21F.
By Nomura AEJ
We hosted Mahindra and Mahindra (M&M IN, ‘buy’) at our India Corporate Day in Hong Kong on December 2. The management indicated that the rural demand outlook is improving and expects the tractor segment growth to turn positive by Q4FY20F. The company also expects it will have a cost advantage in the diesel segment under the BS-VI regime, which will be an advantage. It does not see a major shift in the diesel preference in the 2L engine category after BS-VI. The firm plans BS-VI upgrades starting Q4FY20 and three new launches starting Q1FY21F, and most of its models will see significant upgrades along with BS-VI transition.
For tractors, we factor in volumes to improve from -7% in FY20F to +10% in FY21F. For UVS, we factor in -20% growth in UVs in FY20F and +1% in FY21F. The stock is trading at 7xFY20F core EPS; adjusted for subsidiaries, we believe this is attractive. We value the company at 12xFY22F core EPS, discounted to Sept20F and add `368 for its subsidiaries to arrive at our target price (TP) of Rs 704. Rural revival and the success of new launches in the UV segment will be a key catalyst to watch out for.
Tractor sector: Tractor financing availability is not much of an issue now. The overall financing scenario has also improved. Rabi crop is expected to be good. The company expects an improvement in demand from February-March. Q3FY20 may see a fall, but Q4FY20 should be positive. For the full year, it could be a negative 7-8% growth, structural factors supporting tractor demand have improved.
Market share: Every brand has core market share. It has been fairly stable across brands. M&M is using the technology platform and its multifaceted brand position. The Trackstar brand is attracting marginal farmers at the lower end while the Swaraj brand is focussed on value for money.