 "Excise cut: Gains for M&M temporary")
The Mahindra & Mahindra scrip has seen a five per cent jump over last week, on expectation of a volume rise after the price cuts it made, as well as a good performance by the tractor division in the December 2013 quarter.
On Wednesday, M&M announced price cuts of Rs 13,000 to Rs 49,000 on its passenger vehicle portfolio, following the government’s excise duty reduction on Monday. The cuts should help sales, with M&M facing poor demand and rising competition in the compact utility vehicle (UV) segment. Pravin Shah. chief executive of its automobile division, said: “We are confident the reduction in prices would provide the much-needed fillip to the industry.”
M&M’s products, most of which were in the higher excise duty slab, including the Bolero, will now be more affordable. It was the high duties and falling demand that had pegged back the sales of its UV portfolio’; for year-to-date FY14, this is down 19 per cent as compared to the same period in FY13. Sales in this segment had grown 20 per cent in FY13. The management has forecast seven to eight per cent growth in FY15.
However, the duty cuts are applicable for only four months (till end-June), with the next government to take a decision. The uptick would, thus, be temporary and might normalise during the year, say analysts. “Consumers could advance their purchase decisions, especially the ones pushed back till the general elections but these are expected to even out in full-year numbers,” says an analyst with a foreign brokerage.
JPMorgan analysts add, “While price cuts will temporarily aid demand (for the sector), a revival in economic growth would ensure a sustainable recovery.”
What is holding up the ship for M&M is the strong demand for its tractors. These have grown 21 per cent over the year till date, due to a good monsoon, higher minimum support prices (for agri produce) and increase in farm mechanisation. Going ahead, however, with the high base, one expects the higher-margin tractors to grow in single digits, in line with the M&M management’s expectation for tractor industry growth in FY15 at eight to 10 per cent.
From a long-term perspective, though, M&M stands to gain, with its diversified business model, plans to boost the product portfolio in the compact UV space and its dominant position in the UV and tractors businesses. Due to these factors, a majority of analysts have a ‘Buy’ on the scrip. The consensus Bloomberg target price for the stock is Rs 1,052. Of this sum of the parts target, a majority comes from M&M (about Rs 790), while about Rs 120 is on account of its holding in Tech Mahindra. At the current price of Rs 930, the stock is trading at 14 times its FY15 earnings.
Major UV gains only in CY15
To improve its volumes in the UV segment, M&M plans to launch two new compact ones in 2015. It was the lack of a good portfolio of products in the compact segment that cost M&M a fall in market share from about 48 per cent a year earlier to about 41 per cent now. While duty cuts will help, significant gains are at least a year away.
Say Aniket Mhatre and Amit Kasat of Standard Chartered Equity Research, “M&M is fast losing market share in the UV segment, due to a slew of new launches from competitors in the sub-four metre compact category. With no new launches scheduled from M&M even in FY15 (it plans to launch three new platforms starting in 2015), its market share is likely to further decline in FY15.”
Volume guess
Excise duty has been cut by four to six percentage points. The largest benefit will be on large SUVs, defined as vehicles more than four metres in length, with an engine size above 1.5 litres, and ground clearance of more than 170 mm. The duty on this segment was increased to 30 per cent from 27 per cent last year; it has now been cut to 24 per cent. While vehicles such as the Bolero were paying a higher duty of 30 per cent, others such as Renault's Duster were taxed at 27 per cent. So, the disadvantage for M&M has come down sharply.
Overall, analysts are still in a wait-n-watch mode and have not raised their UV volume estimates for M&M for FY15, even as they hope for some revival in the second half of the financial year.
On Wednesday, M&M announced price cuts of Rs 13,000 to Rs 49,000 on its passenger vehicle portfolio, following the government’s excise duty reduction on Monday. The cuts should help sales, with M&M facing poor demand and rising competition in the compact utility vehicle (UV) segment. Pravin Shah. chief executive of its automobile division, said: “We are confident the reduction in prices would provide the much-needed fillip to the industry.”
M&M’s products, most of which were in the higher excise duty slab, including the Bolero, will now be more affordable. It was the high duties and falling demand that had pegged back the sales of its UV portfolio’; for year-to-date FY14, this is down 19 per cent as compared to the same period in FY13. Sales in this segment had grown 20 per cent in FY13. The management has forecast seven to eight per cent growth in FY15.
However, the duty cuts are applicable for only four months (till end-June), with the next government to take a decision. The uptick would, thus, be temporary and might normalise during the year, say analysts. “Consumers could advance their purchase decisions, especially the ones pushed back till the general elections but these are expected to even out in full-year numbers,” says an analyst with a foreign brokerage.
JPMorgan analysts add, “While price cuts will temporarily aid demand (for the sector), a revival in economic growth would ensure a sustainable recovery.”
What is holding up the ship for M&M is the strong demand for its tractors. These have grown 21 per cent over the year till date, due to a good monsoon, higher minimum support prices (for agri produce) and increase in farm mechanisation. Going ahead, however, with the high base, one expects the higher-margin tractors to grow in single digits, in line with the M&M management’s expectation for tractor industry growth in FY15 at eight to 10 per cent.
From a long-term perspective, though, M&M stands to gain, with its diversified business model, plans to boost the product portfolio in the compact UV space and its dominant position in the UV and tractors businesses. Due to these factors, a majority of analysts have a ‘Buy’ on the scrip. The consensus Bloomberg target price for the stock is Rs 1,052. Of this sum of the parts target, a majority comes from M&M (about Rs 790), while about Rs 120 is on account of its holding in Tech Mahindra. At the current price of Rs 930, the stock is trading at 14 times its FY15 earnings.
Major UV gains only in CY15
To improve its volumes in the UV segment, M&M plans to launch two new compact ones in 2015. It was the lack of a good portfolio of products in the compact segment that cost M&M a fall in market share from about 48 per cent a year earlier to about 41 per cent now. While duty cuts will help, significant gains are at least a year away.
Say Aniket Mhatre and Amit Kasat of Standard Chartered Equity Research, “M&M is fast losing market share in the UV segment, due to a slew of new launches from competitors in the sub-four metre compact category. With no new launches scheduled from M&M even in FY15 (it plans to launch three new platforms starting in 2015), its market share is likely to further decline in FY15.”
Volume guess
Excise duty has been cut by four to six percentage points. The largest benefit will be on large SUVs, defined as vehicles more than four metres in length, with an engine size above 1.5 litres, and ground clearance of more than 170 mm. The duty on this segment was increased to 30 per cent from 27 per cent last year; it has now been cut to 24 per cent. While vehicles such as the Bolero were paying a higher duty of 30 per cent, others such as Renault's Duster were taxed at 27 per cent. So, the disadvantage for M&M has come down sharply.
Overall, analysts are still in a wait-n-watch mode and have not raised their UV volume estimates for M&M for FY15, even as they hope for some revival in the second half of the financial year.