MAHINDRA & MAHINDRA LTD : Showing Signs of strong growth !!

Scrip Code: 500520 / M&M

CMP:  Rs. 765.10; Buy  Rs. 730
Short term Target: Rs. 780, 6 month Target – Rs. 814; STOP LOSS – Rs. 670.00; Market Cap: Rs. 46,975.21 Cr; 52 Week High/Low: Rs. 826.70 / Rs. 585.00

Total Shares: 61,39,74,839 shares; Promoters : 15,26,37,105 shares –24.86 %; Total Public holding : 98,93,422 shares – 62.30 %; Book Value: Rs. 167.64; Face Value: Rs. 5.00; EPS: Rs. 44.05; Div: 230 % ; P/E: 17.39 times; Ind. P/E: 15.40; EV/EBITDA: 11.91.

Total Debt: Rs. 2552.90 cr; Enterprise Value: Rs. 50,619.76 cr.

MAHINDRA & MAHINDRA LTD: The Company was formed in 1945 as Mahindra & Mahindra and renamed as Mahindra & Mahindra Ltd in 1948, based in India. Mahindra & Mahindra Limited operates in the Motor vehicles and car bodies sector. The Company operates in nine segments: automotive segment comprises of sales of automobiles, spare parts and related services; farm equipment segment comprises of sales of tractors, spare parts and related services; information technology (IT) services comprises of services rendered for IT and telecom; financial services comprise of services relating to financing, leasing and hire purchase of automobiles and tractors; steel trading and processing comprises of trading and processing of steel; infrastructure comprise of operating of commercial complexes, project management and development; hospitality segment comprises of sale of timeshare; Systech segment comprises of automotive components and other related products and services, and its others segment comprise of logistics, after-market, two wheelers and investment. In November 2009, BAE Systems entered into a joint venture agreement with Mahindra & Mahindra Limited to create a land systems focused joint venture Defense Company, based in India. During the fiscal year ended March 31, 2011, the Company acquired a 70 % stake in Ssangyong Motor Company Limited - a manufacturer of sports utility vehicles in Korea. The company has a distribution network of over 130 dealers in Korea and exports to over 90 countries through 1,200 dealers. With the support of M&M, SMC is working on a revitalization plan with strong focus on cost reduction along with new product development and market expansion.

Investment Rationale: M&M gained market share by launching new models which drove volume & revenue growth in automotive sector, company’s market share in Utility Vehicles (UVs) rose by 4.50 % to 56.2 % and in tractors by 2.30 % to 43 %. Its domestic tractor numbers grew 14 % in Q1 to 1,33,103 units. New product launches in the pickup segment has helped M&M maintain its demand momentum. In the UV segment, the company expects to launch a new SUV by December 2011 end. SsangYong Motor Company a part of US$ 12.5 billion Mahindra Group unveiled the concept of crossover vehicle, which is targeted for the global market. The car will make its debut at the 64^th Frankfurt International Motor Show to be held in Germany this month. This SUV will be first launched in India & South Africa while several others countries around the world will be targeted later. M&M’s global SUV project codenamed W201 was christened as the XUV500. Consumer research for the Mahindra XUV500 was carried out in various western markets, South Africa & India, with testing of the product done across Europe, Australia & South Africa among others. The SUV will be manufactured at M&M’s plant in Chakan near Pune in Maharashtra. Mahindra is likely to price the SUV in Rs. 12 – Rs. 20 lakhs range. Demand for small commercial vehicles (SCV’s), the fastest growing commercial vehicles (CV) segment, remains strong and M&M has been successful in grabbing 20 % market share in the segment in less than 2 years of launch. M&M is working on turning around its recent acquisition of Ssangyong, Korea. In CY11, M&M targets revenue of US$3 billion from Ssangyong against US$ 2 billion in CY10. Two SUV’s from Ssangyong Motor’s portfolio (Rexton and Korando) would be assembled at M&M Chakan facility. Through its JV with Navistar, M&M continues to expand its sales network for commercial vehicles. M&M’s Tractors segment is expected to sustain its demand driven by higher rural penetration, good monsoons, onset of festival season & increasing usage in haulage applications. Current demand scenario is similar to what was witnessed in Punjab during the green revolution. The difference is it is visible in larger parts of the country & hence, a sharp jump in growth numbers. M&M’s low segment product (15HP) Yuvraj is gaining popularity among farmers. Company is selectively opening up in new markets with the latest addition being Maharashtra & Karnataka  

Outlook and Valuation:

Finance availability rather than interest rates, is the key parameter affecting demand. Not witnessing any constraints with finance availability M&M’s in-house financing arm - M&M Finance usually finances 35 % - 40 % of total vehicles sold. The company is prepared to handle any shift in demand for diesel/petrol vehicles with introduction of duty/price hike on diesel vehicles. MM expects share of Chakan in overall production to go up to 25 % in FY12. Currently, this plant produces Maximo, Genio and Navistar trucks. Management stated that all new products including W-201 and SMC products will come out from Chakan plant. Xylo and Scorpio are produced at Nashik plant, while Bolero is produced at both Nashik and Zaheerabad plants. The company is looking at new Auto plant in Chennai and new Tractor plant in Zaheerabad, as it operates at near full capacities at its existing units. Maharashtra government has withdrawn set-off of sales tax on sales outside the state from mid-March 2011. While it does not reduce the benefit, which is fixed as a % of total Capex, the benefit would now be realized over a much longer period. Impact of withdrawn of set-off of sales tax have contracted EBITDA margin by 0.6 % – 0.8 % in Q1 FY12. Management expects 25 % of auto sector volumes, as well as all new launches would be produced from Chakan plant. Due to higher volumes and revenues from Chakan plant, impact of withdrawn of set-off of sales tax would be higher in coming quarters. Capex could be some were about Rs 7,000 Cr over the next three years. M&M’s DEBT EQUITY RATIO AS ON JUNE 2011 stood at 0.22 X. In the automotive sector, M&M is expected to register a volume growth of around 17 % in FY12 and 13 % in FY13; in tractor sector at around 12 % in FY12 & 13 % in FY13 respectively. It is estimated that growth in M&M automotive sector would be lead by continued dominance of UV portfolio, launch of new SUVs and higher sales of Verito passenger car (earlier known Logan). Tractor sector to continue with its market share with expansion in capacity for Yuvraj tractor from 1,000 to 1,500 per month and normal monsoon this year. Any additional increase in excise duty on diesel vehicles would impact M&M as its UV portfolio is entirely diesel based (at around 97-98%). The valuation of M&M stock on SOTP (sum‐of‐the‐parts) basis, with the standalone business comes at Rs. 602 / share and subsidiary investments at Rs. 212 / share FY13E.  In my view M&M could report EPS in FY11 & FY12E of Rs. 43.70 / sh and Rs. 51.40 / sh, respectively. I would buy M & M LTD for the long term with a price target of Rs. 95o and for the SHORT TERM PLAYERS it would be Rs.814.00 

Business Subsidiary FY13E	Value Per Share (in Rs.)
M&M Financial Services	65.00
Mahindra Forgings	10.00
Mahindra Holidays & Resorts Ltd	34.00
Mahindra Lifespace Developers	13.00
Mahindra Ugine Steel Co	1.00
Tech Mahindra	65.00
Ssangyong Motor Company	24.00
Other Investment (at BV)	1.00
Total Subsidiaries	212.00
TOTAL	814.00

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	18,529.60	23,295.00	29,349.10	34,210.80
NET PROFIT (Rs. Crs)	2,018.10	2,519.80	3,019.70	3,492.40
EPS (Rs.)	36.30	43.70	51.40	59.50
PE (x)	18.40	15.30	13.00	11.20
P/BV (x)	4.70	3.70	3.20	2.60
EV/EBITDA (x)	13.60	12.50	10.20	8.70
ROCE (%)	30.90	27.80	26.50	25.50
RONW (%)	24.30	23.10	24.30	24.40

I would buy MAHINDRA & MAHINDRA LTD with a price target of Rs. 780 for the short term and Rs. 814 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 670.00 on your purchase.