Recommendation: Hold
Current price: Rs 371 (at the time of publishing this tip)
Price target: Rs 400
Key points:
- The outlook continues to be challenging for Mahindra’s automobile as well as farm-equipment segment. Apart from the ongoing economic downturn, the tightening of credit by banks and financial institutions has been negatively affecting the growth. Its Xylo car has been well received in the market, with sales of 4,100 vehicles up till February, while bookings remain strong.
- The roll-out of the new products from the M&M stable is likely to continue, with the company planning to launch the successor to Scorpio towards the end of FY2010. This is likely to be followed by the launch of another global SUV. In the tractor segment, Punjab Tractor Ltd’s volumes have been extremely good and driven the company’s overall tractor sales in the recent times. The growth of rural economy and the availability of credit remain the key to the future performance of the tractor segment.
- M&M has slightly reduced its capex plan to be implemented over FY2009-12 to Rs 8,500 crore; of this Rs 1,500 crore has already been spent. Also, out of this amount, Rs 5,000 crore has been earmarked for the automobile business while the balance has been set aside for investments in various other segments. In future the company’s margins will depend mainly on the volume behaviour. Though the company has been able to arrest the steep decline in volumes witnessed in Q3FY2009, the volumes remain subdued.
- I expect M&M to generate stand-alone earnings of Rs 32.8 in FY2009 and that of Rs 34.9 in FY2010. At the current market price of Rs 371, the stock is trading at 10.6x its stand-alone FY2010E earnings and an enterprise value/earnings before interest, depreciation, tax and amortisation of 6.6x.
- I still remain positive about M&M’s performance and hence would advise Hold option on it with a price target fof Rs 400 over next 7-8 months.
