M&M’s volumes continue to be driven by strong demand in tractors and a cyclical recovery in the LCV segment. The UV business continues to be a drag with M&M losing 14% market share over last 3 years, but given the extremely low base, upcoming launches (MPV/Mahindra-branded Tivoli) and refreshes (KUV100/ TUV300) should boost volume growth over FY19E. Increased government focus on rural economy could accelerate growth for both farm and auto segments. The stock has underperformed Nifty by 5% over last 12 months and currently trades at 15x FY19 core auto PE. We upgrade from ‘accumulate’ to ‘buy’ with a target price of Rs 895.
Mechanisation to drive tractor growth
Tractors have seen a sharp recovery over FY17-FY18 and we expect this to continue on the back of a second consecutive year of good monsoon, healthy farm produce and rising MSPs. Skilled labour shortage has led to the need for increased mechanisation, which is in turn, is leading to a structural shift towards higher HP tractors, accelerating growth and improving profitability. With the success of tractor launches, we expect double-digit growth to continue for M&M in FY19E.
New launches and recovery in LCV key for auto segment
M&M’s UV business has been under stress for the past 4 years, but the 3 flagship UV products and pick-up segment continue to do well and could see some further benefit from an uptick in rural demand. Cyclical recovery in LCVs and the success of M&M’s recent launches would boost volume growth. New launches, especially MPV (FY18-end) and the Sub·4 meter UV (mid-2018), if designed and priced well, would give a much-needed boost.
Valuations attractive
We expect M&M to record an EPS CAGR of 24% over FY18-20E. The auto segment has been a drag on profitability, but new UV launches and reduced losses in the heavy truck segment would boost auto EBIT margins. For the farm segment, a shift towards mechanisation and higher HP tractors will further improve profitability.