MAHINDRA AND MAHINDRA : RIDING ON LAUNCHES & SUBSIDIARIES !!!

Scrip Code: 500520 / M&M

CMP:  Rs. 947.30; Buy at current levels.

Medium to Long term Target – Rs. 1053.40; STOP LOSS – Rs. 871.51; Market Cap: Rs. 58,162.39 Cr; 52 Week High/Low: Rs. 1026.00 / Rs. 674.30.

Total Shares: 61,39,80,756 shares; Promoters : 15,53,60,571 shares –25.31 %; Total Public holding : 45,86,20,185 shares – 74.69 %; Book Value: Rs. 197.18; Face Value: Rs. 5.00; EPS: Rs. 54.37; Dividend: 250 % ; P/E: 17.42 times; Ind. P/E: 18.44; EV/EBITDA: 11.91.

Total Debt: Rs. 3,174.22 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 comprising of sales of automobiles, spare parts and related services; Farm equipment segment comprising of sales of tractors, spare parts and related services; Information technology (IT) services comprising of services rendered for IT and telecom; Financial services comprising of services relating to financing, leasing and hire purchase of automobiles and tractors; Steel trading and processing comprising of trading and processing of steel; Infrastructure comprising of operating of commercial complexes, project management and development; Hospitality segment comprising of sale of timeshare and Systech segment comprising 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. The Group at the end of the March 2013 comprised of 123 Subsidiaries, 5 Joint Ventures and 12 Associates. A full summation of Gross Revenues and other income of all the group companies taken together for the whole year Fiscal 2013 was Rs. 88,093 crore (USD 16.2 billion). Mahindra & Mahindra Ltd is compared locally with Maruti Suzuki India Ltd, Ashok Leyland ltd, Tata Motors, Bajaj Auto in India and globally with Hino Motors Ltd of Japan, Great Wall Motor Company Ltd of China, Beiqi Foton Motor Company Ltd of China and Guangzhou Automobile Group Company Limited.

Investment Rationale:

Mahindra & Mahindra, India’s leading SUV manufacturer and the leader in the Indian Pick up segment has now entered into compact car segment, where Maruti & Hyundai are dominant players with introducing M&M's Verito Vibe a sub 4 meter vehicle based on the Verito (Logan) platform. M&M has invested around Rs. 60 Cr in the development of its new 'Vibe' and has launched three variants starting from Rs. 5.63 lakhs to Rs. 6.49 lakhs (ex- showroom Mumbai without octroi). M&M is targeting a niche segment by calling the Vibe a compact car not a Hatchback or sub 4-meter sedan. M&M had two launches in the month of April and May - first its new Bolero Maxi Truck Plus (BMY Plus) which is priced at Rs. 4.33 lakhs (BS3) ex showroom Thane and Rs. 4.43 lakhs (BS4) ex showroom Mumbai excluding octroi. This truck has been developed on Mahindra’s rugged Bolero Pick up platform and is conceptualized to carter to the needs of urban goods transportation. It is powered by Mahindra’s proven 2523 CC fuel efficient common rail engine which delivers 17.7 km per liter mileage. Second it launched its H- Series Xylo with the advance technology mHawk engine. The power pack h-series offers a range of variants starting with H4 (with ABS options), H8 (with ABS & Airbag option) and a fully loaded feature packed H9 version which includes several unique features like Voice Command Technology (VCT), Cruise Control, Digital drive Assist System etc. The new H series starts at an very competitive price of Rs. 8.23 lakhs ex showroom Mumbai. It will be notable to say here that Xylo was introduced in 2009 and from then on it has carved a unique identity for itself in the area of class leading space & comfort. Mahindra Vehicle Manufacturers Limited (MVML), located at Chakan near Pune, was set up as a 100% subsidiary of the company with a view to sourcing contemporary products for expanding the market offerings of the company. The overall performance of the standalone business has been good despite the tough operating environment, with the UV segment growing 23.4% YoY while the FES segment de-grew of around 1% YoY. Export markets volumes have been lower in the quarter as international markets like Sri Lanka and Bangladesh have witnessed slowdown. The consolidated Gross Revenues and Other Income for the year ended 31st March 2013 grew by 17.4 % to Rs. 74,403.0 crore from Rs. 63,357.8 crore in last year. On account of a change in the status of Tech Mahindra from a Joint Venture to an Associate effective 31st Aug 2012, the revenues reported above include M&M’s share of Tech Mahindra revenue only till end Aug 2012. On a like to like basis the growth in the consolidated revenues in the current year is 20.6% over the previous year. The consolidated profit after tax and after deducting minority interests for the year is Rs. 4,099.2 crore as compared to Rs. 3,126.7 crore in the previous year – a growth of 31.1%. During the year, some of the major group companies like Mahindra Finance, Mahindra Lifespace Developers and Tech Mahindra significantly improved their performance over the previous year. Mahindra Finance performed with a 41% growth in consolidated revenues and showed 44% increase in profits, and that of Tech Mahindra with a 22% growth in consolidated revenues and an 18% growth in profits. There was significant improvement in the performance of Ssangyong Motors, the group’s South Korean subsidiary, with a 29% reduction in its losses. During the current year there was also a deemed divestiture profit of Rs. 277 crore arising from the Qualified Institutional Placement of Shares by Mahindra & Mahindra Financial Services Ltd. In the Passenger Utility Vehicle segment, the Entity sold 72,076 vehicles in the current quarter - a growth of 23% over the numbers sold in Q4 last year. All the products of the entity’s UV portfolio continued to do well and the Entity continued its leadership position with a market share of 47.8%. In the Cars segment, the Entity sold 3,747 Verito Cars. The Entity also exported 7,766 Vehicles in the current quarter. In this quarter, the company sold 46,107 tractors under the Mahindra & Swaraj brands as against 48,517 tractors sold in Q4 last year. The company exported 3,767 tractors in Q4.

Outlook and Valuation:

M&M continued its good performance in spite of the tight macroeconomic constraints that had tethered the Indian economy for the past several quarters and which seems to have somewhat eased in the last few months. The company’s market share during the quarter was 37.2%. Looking forward, the management expects the Indian economy to stage mildly, consumption-led recovery in Fiscal year 2014. Subject to a normal monsoon, as forecast by the Indian Meteorological Department, agricultural growth is likely to see considerable improvement in Fiscal year 2014, leading to a steady moderation in inflation and a bounce back in rural incomes, and consumer demand. At the same time, with the advanced economies expected to witness a recovery this year, exports are likely to maintain the momentum witnessed in Q4. Private investment demand, however, is likely to remain weak. It may show a significant pick up in case there is a concerted policy action by the government. Overall, our outlook on the economy, while more positive than six months ago, remains cautious and watchful. On SOTP (sum-of-the-parts) basis, the valuation of M & M on standalone business comes at Rs. 825/share and the value of its investments in other listed subsidiaries comes at Rs. 228.40/share after a 20% holding discount. Company has majority stakes in various listed companies in other sectors, including technology, property and finance, its Investments constitutes to 65% of the balance sheet. The high growth potential of M & M's subsidiaries is expected to unlock the actual value of the stock over the years to come. Listing of its subsidiaries has been supporting the company’s valuation in the recent past and will continue to do so in the long term as well. So holding on to M & M would be advisable for the long term players. In my view M&M could report EPS in FY14E & FY15E of Rs. 62.20 sh and Rs. 72.70/sh, respectively. I would buy M & M LTD for the medium to long term period with a price target of Rs. 1053.40 

SOTP VALUATIONS 

Business Subsidiary	Value Per Share (₹)
M&M Standalone	825.00
M&M Financial Services (Listed)	89.71
Mahindra Forgings (Listed)	3.60
Mahindra Holidays & Resorts Ltd(Listed)	20.80
Mahindra Lifespace Developers(Listed)	10.73
Mahindra Ugine Steel Co(Listed)	1.18
Tech Mahindra(Listed)	77.38
Ssangyong Motor Company	24.00
Other Investment (at BV)	1.00
TOTAL	1053.40

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (₹ Crs)	31,392.00	39,903.10	47,537.90	54,133.00
NET PROFIT (₹ Cr)	2,878.90	3,352.80	4,075.20	4,765.40
EPS (₹)	43.90	51.20	62.20	72.70
PE (x)	20.50	17.70	14.50	12.40
P/BV (x)	4.90	4.00	3.30	2.70
EV/EBITDA (x)	16.00	12.60	9.90	8.10
ROE (%)	23.80	22.90	22.90	22.10
ROCE (%)	20.90	22.40	24.20	24.60

I would buy MAHINDRA & MAHINDRA LTD with a price target of ₹ 1053.40 for Medium to Long term 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 ₹ 871.51 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

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