DSIJ Mindshare

Mahindra & Mahindra: Recommendation Review

Hold The Counter

Despite sales being in the slow lane, there is optimism about the auto sector all around. The Indian automobile sector has come a long way from being dominated by one state-held company to a host of brands and variants, including foreign ones. Among those companies that have managed to carve out a niche for themselves is Mahindra & Mahindra. We had recommended this stock in DSIJ Vol. 27, Issue No. 19 (dated September 9, 2012), when it was trading at Rs 783 apiece. Optimism about the future prospects of the company, thanks to the robust growth in sales volumes owing to the success of its new launches, has catapulted the stock to newer heights. Since our recommendation, the stock has yielded a return of 21.88 per cent.

Our recommendation was based on the consistently strong past performance of the company, the bright prospects of the various segments in which it operates including Utility Vehicles, Light Commercial Vehicles and pickup trucks, and the value unlocking potential of its subsidiaries. While it was predominantly known to be a manufacturer of tractors, it hasn’t been seeing much traction in the sales of tractors and Medium and Heavy Commercial Vehicles due to subdued macroeconomic trends over the recent past. However, we expect these segments to pick up with an improvement in the macro trends and to eventually add to the performance of the company. Moreover, for now, this drop in demand is being offset by the other segments in which the company is growing by leaps and bounds.

The automobile industry as a whole had been facing pressures and was expecting the festive season to reverse the sales trend in its favour. M&M’s sales figures for September and October 2012 have been sturdy, with a YoY growth of 9.53 per cent and 28.75 per cent respectively. We expect a good set of numbers to be posted for the quarter ending December 2012 as well.

M&M is heard to be bidding for a 50 per cent stake in British luxury car maker Aston Martin. If it does succeed, Aston Martin would significantly strengthen M&M’s position in terms of geographical presence, product portfolio and R&D. The company is fully equipped to fund this acquisition without having to leverage itself extensively.

Since the stock has already yielded a return of 21.88 per cent and the Aston Martin deal is yet to materialise, relatively conservative investors can book profits in the scrip. However, we expect to see an additional upside of five-eight per cent on account of a good set of Q3FY13 results. Thus, investors can continue to hold the scrip till the results announcement.
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