Home and away

Besides joint ventures and diversification in India, Mahindra & Mahindra is making forays in the foreign markets too.

An Indian company leaving its mark on foreign soil, that's what Mahindra & Mahindra (M&M) is up to.

Apart from growing its business in the home market, M&M has been exploring the overseas market, South Africa being its latest hunting ground. Indeed, with the kind of effort that M&M is putting in to grow exports for both tractors and utility vehicles, they could touch 10-12 per cent or even 20-25 per cent respectively over the next three-four years, from a paltry five per cent at present.

Though competition in the automobile sector is as keen as ever, M&M's has entered into tie-ups with foreign auto majors such as Renault for its car project.

It has also snapped up Jiangling Tractors in China to create a manufacturing base for tractors. And it is continuously upgrading its utility vehicle (UV) range as to stay ahead of the market.

Exploring new frontiers
Beyond South Africa and Malaysia, M&M has announced plans to target other terrains like Spain, Egypt, Turkey, Russia and CIS countries.

In the competitive South African market, the company would bank on competitive pricing to make further inroads, after having sold over 2,600 vehicles in the past 18 months. The Scorpio Pik-Up 4X4 double cab diesel version is priced at about Rs 14.35 lakh, while the Scorpio Baakie 4X4 diesel version is priced at about Rs 15.05 lakh.

M&M exports tractors primarily to the US in the hobby farming segment. That's a sizeable opportunity which M&M explores through its subsidiary, Mahindra USA, where the products are assembled.

Vice-chairman and managing director Anand Mahindra says, "The sales figure has touched $150 million in that market and volumes have hit the 10,000 mark. We have plans for the CIS countries and Latin America for the tractor business."

Indeed, should M&M succeed in acquiring the Romanian company (Tractorul), it would get access to the higher horse power tractors, which would enable it to further penetrate the US and the European markets.

According to Kalpesh Parekh, AVP, research at ASK Raymond James, M&M will have the option to sell its own brands, along with a Chinese brand (from the Jiangling Tractor stable) in foreign markets. Exports account for about 8 per cent of the total tractor business in volume terms, while in value terms it would be in the region of 12-15 per cent.

Thriving at home
On the domestic front, the momentum in the UV segment, where it commands a 50 per cent market share and offers the consumer a fairly extensive range of 20 models, should continue.

Scorpio, which is a profitable product, should continue that way, given the strong demand for both segments. The demand for its utility vehicles like Bolero is robust on the back of greater road penetration in the countryside.

The automotive division contributes approximately 65 per cent to revenues while tractors account for the rest. Tractor margins have remained steady at about 12.5 per cent. Parekh expects a 10 per cent volume growth in tractor sales of M&M in FY07.

JVs and diversification
Apart from the acquisition of Jiangling Tractor, M&M has JVs with Renault for the C-segment car Logan and with International Truck. While M&M is believed to be toying with the idea of entering the two-wheeler space possibly by acquiring a domestic 2-wheeler company, it remains to be seen how the company goes about the new venture.

The segment is highly competitive, so M&M would need to ensure that it has top class technology backed by a strong distribution network in place. As for the auto ancillary business, which has been growing at a fairly good pace, M&M is looking to expand its presence through acquisitions.

Valuations
The March quarter results are expected to be good on strong volume growth. ASK Raymond James expects M&M's Q4 FY06 net profit to be around Rs 178 crore, which is a 15 per cent y-o-y growth, but a q-o-q decline of about five per cent.

Parekh estimates a sales growth of 17 per cent in FY06. Operating profit margins are expected to be maintained. According to Parekh, the consolidated EPS is expected to be around Rs 35 for FY06 and Rs 45 for FY07. 
 

FINANCIALS
Rs crore	FY05	FY06E*	Change (%)
Net sales	6530.70	8140.00	24.60
Operating profit	609.30	946.00	55.20
OPM %	9.30	12.00	"�
Net profit	512.70	674.00	31.50
EPS (Rs)	44.20	29.00	"�
P/E (trailing 12 months)			15.75x
*ASK Raymond James estimates

The movement of M&M stock over the past one year to Rs 680 at present, is a remarkable jump of 186 per cent. Tata Motors has appreciated by about 130 per cent, while Maruti Udyog has appreciated by 126 per cent, over the same period.

Parekh points out that Mahindra's holding in Mahindra GESCO can be valued at about Rs 50, while that in Mahindra & Mahindra Financial Services at Rs 60 and that in Tech Mahindra at Rs 100.

Deducting this from M&M's market price, the stock is valued at about 10.9 on the trailing 12 months EPS (15.75 times without deducting), which is attractive as compared to its peers like Tata Motors' 24.7 times trailing P/E and Maruti's 22.9.