M&M: Key growth triggers only in 2015

Analysts are bullish due to steady tractor growth & attractive valuations; volume growth in compact UV space likely next year, after new launches

The Mahindra & Mahindra (M&M) stock has been on the rise, touching record highs last week, driven by attractive valuations and a likely increase in rural consumption. It has gained 14 per cent since the beginning of February. M&M’s tractor and utility vehicle (UV) portfolio is likely to get a boost from rural spending, as well as the coming elections.

While volume growth in FY14 has been a disappointment, especially in the case of utility vehicles, the M&M management has indicated eight-10 per cent growth in the UV and tractor segments in FY15. Growth in the UV segment is expected to return due to the coming elections, a cut in excise rates (applicable till June-end) and a lower base. Interim Budget 2014-15 had done away with the excise duty anomaly on large sports utility vehicles (SUVs), bringing it at par with other SUVs. While there was a duty of 30 per cent for vehicles such as the Bolero, three percentage points more than those such as Renault’s Duster, now, all SUVs pay 24 per cent. New products aren’t expected before 2015. These will help the company bridge the gap with rivals in the compact SUV segment.

  In the near term, the stock lacks fresh triggers, as most new product launches are still a year away. Valuations, at attractive levels will, however, work in the company’s favour. Nomura’s Kapil Singh and Nishit Jalan, say, “With new product launches due in 2015, we think there is attractive value on the table for investors looking beyond this year.” Analysts believe at 8.5 times the FY15 earnings per share (less than its five-year average of 10 times), the core automobile business is being traded cheap, and this is likely to protect investors from steep downsides.

According to Bloomberg estimates, 45 analysts have a ‘buy’ rating, 11 have a ‘hold’ and three have a ‘sell’, with a consensus target price of Rs 1,057. Given the current price (Rs 957), the upside potential is 10 per cent. Therefore, investors are advised to buy on dips.

Dry UV pipeline
Rising fuel prices, a slowing economy and lack of options in the small UV segment have cost the company market share in the UV segment. So far this financial year, the company’s share has fallen to 41.4 per cent from 47.9 per cent in the year-ago period, a 650-basis-point drop. During the same period, volumes have fallen 18 per cent to 196,000 units.

The company plans to launch two new compact utility vehicles in 2015; this will help stem some of the loss in market share, as this high-growth segment accounts for about 30 per cent of the sales in the sector. Additionally, it  plans to launch a small commercial vehicle. This year, the company is considering two major upgrades in the UV space.

Tractor sales to stay buoyant
While UV sales have been disappointing, the tractor segment, expected to end FY14 with 20 per cent volume growth, is likely to grow 8-10 per cent in FY15. In FY14, tractor sales have been good, owing to a good monsoon, a low base and higher disposable income in the hands of farmers. Analysts at J P Morgan say as this is a high-margin segment, the healthy growth estimate will be supportive of profitability. However, growth estimates could be scaled down a tad due to the unseasonal rains in March and the impact of the El Niño phenomenon on the monsoon.

In terms of its subsidiaries, Tech Mahindra continues to do well and in FY15, is likely to see growth higher than the sector’s. M&M Financial is also expected to sustain healthy growth. The two arms account for about a third of M&M’s subsidiary valuations.