Stock Pick From The Automobile Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is from the automobile sector and has carved a niche for itself in the auto sector through its consistently good performance.

Mahindra & Mahindra: A Smooth Drive

HERE IS WHY

• M&M has been maintaining high growth rates even in times of an economic slowdown.
• The company’s presence in tractors and utility vehicles has been dominant and unshakeable for quite some time now.
• M&M has been increasing its presence in Commercial Vehicles and two-wheelers, making it a less risky investment and providing strong scope for widespread growth.

The auto sector has been slowing down since the beginning of FY11. However, there have been some exceptions, the most striking among them being Mahindra & Mahindra (M&M). The company has carved a niche for itself in the auto sector through its consistently good performance.

M&M’s business is divided into two divisions, the Farm Equipment Sector (FES) and Automotive. Business in the FES segment has been pressured for the past few months, but the company’s automotive segment has been outperforming to compensate for it. M&M is a market leader in tractors, with a market share of over 40 per cent. Factors like high interest rates, rising fuel prices, a delayed monsoon, labour shortage as well as weak industrial and agricultural output have led to a slower demand for tractors since November 2011. The YoY monthly domestic sales volume for tractors has reported a median growth of -4.71 per cent. Though the monsoon revived, the demand did not see much of a change. We expect it to pick up once the macroeconomic situation improves.



[PAGE BREAK]

In CY2012, the Utility Vehicle segment, in which the company had a market share of 55.1 per cent at the end of FY12, has seen a YoY sales growth of over 30 per cent in most of the months. The company has fully utilised the opportunity offered by the fast growing UV segment, with its existing product range and the success of the XUV500. The company also performed well in the four-wheeler pickups and LCV segments. On the Passenger Cars front, the recent launches of the New Look Verito and the Mini-Xylo are expected to boost its presence in this segment.

Apart from the core business of M&M, its complex network of 117 subsidiaries can be scaled up to add value in the coming years. This business structure has a simultaneous risk of increased investments in unrelated businesses keeping the return ratios lower. With increasing products and volumes, the company’s subsidiary, Mahindra Vehicle Manufacturers, which was launched with a capacity of 300000 units, will see a ramp up in production, thus boosting revenues.

The company’s presence in the M&HCV segment through Mahindra Navistar Automotive has been strengthening, and it has a range of products to be able to compete well. On the two-wheelers front too, it has laid out elaborate plans for new launches to capture the growing motorcycles and scooters market. M&M’s performance has been mirrored in the financial results of the company. Over the past five years, its revenues have grown steadily in the range of 14 per cent to 41.55 per cent YoY. Over the past five quarters itself, the company’s revenues have increased by 39.12 per cent. For Q1FY13, on account of higher efficiency, the OPM and the NPM stood at 11.84 per cent and 7.75 per cent respectively, which is way higher than the margins seen by its competitors.

The company’s strategic partnerships, its unwavering presence in key segments and its expansion into other segments are what give us the conviction to have a positive outlook on M&M. We believe that the company will start growing in profitability at a faster rate with the revival of the tractor industry and once its subsidiaries start yielding returns. In terms of valuations, the scrip is currently trading at a PE of 15.06x, which is far cheaper than Maruti Suzuki and Tata Motors, which are valued at 22.53x and 61.43x respectively. Thus, we recommend that investors buy the stock at the current levels to garner gains over time.

LAST FIVE QUARTERS (Rs/CR)