Brokerages raise M&M target price to above Rs 1,000 post Q2 results

MUMBAI: While maintaining their recommendations on India's largest utility vehicle maker Mahindra and Mahindra, brokerages have revised their target price upwards after the company announced its second-quarter results.

Mahindra & Mahindra reported 9.7 per cent increase in its standalone net profit to Rs 989.50 crore for the quarter ended September 30.

However, total income decreased for India's largest utility vehicle maker from Rs. 10135.85 crores for the quarter ended September 30, 2012 to Rs. 9290.20 crores for the quarter ended September 30, 2013.

“Contrary to our earlier expectation, MAHM’s margins in the UV business have remained stable despite weak volumes and increased competition. This resilience has removed a potential overhang on stock valuation and underpins our upgrade,” said Deutsche Bank report.

“Over the past 12 months, the stock has underperformed 10 per cent versus Sensex and trades at 10x FY15E core EPS assuming Rs 335 per share as value of its investments. This is closer to the lower end of its trading band. Our forecasts assume a revival in UV volume growth over the next two years,” the report added.

According to the brokerage, M&M needs to maintain its competitive position in the UVs, especially at the mid- and high-end levels, which could constrain improvement in automotive ROCE from the current low level of around 38 per cent.

It has increased the target price to Rs 1,025 from Rs 895.30 earlier.

Credit Suisse is of the view that the company decline in UV segment for for FY14 gets offset by increase in tractor growth. Better margin resilience leads to around 2 per cent upgrade to our FY15/16 earnings estimates, it says.

“Our target price increases to Rs 1,010 from Rs 970 on roll forward and stellar performance of M&M's listed subs. While the stock seems inexpensive; we would like to see core UV growth returning before turning positive.

The analysts at the brokerage are of the view that M&M does not expect a significant turnaround in passenger vehicles industry in 2H and expects it to continue to decline. Inventory remains slightly above comfort levels.

However, the management sees good growth in tractor industry.

“Except Tamil Nadu, all other states have seen strong growth this year; with positive sentiment from good rainfall and higher income levels at rural areas. Kharif harvest has been good and the company expects 4–5 per cent growth in farm output which bodes well going into the rabi season. The company is now guiding for 15–17 per cent growth for tractor volumes for FY14,” the report said.

Jefferies is of the view that the competitive dynamics in the UV market continue to remain challenging, for M&M and is likely to worsen over the next few quarters.

“M&M’s share in the segment has declined to less than 40 per cent in 2Q, down 550 bps YoY. M&M is at the wrong end of the product cycle, with multiple launches from competitors over the next few quarters and limited launches from M&M. Strong rural distribution will likely limit further share loss but growth in the segment remains challenging,” the report said.

“Tractor segment will likely see continued growth in the near term, though at a lower pace than seen recently. We increase our tractor volume forecasts marginally,” the report added.

The brokerage has made marginal changes to its earnings estimates by raising EPS by 5 per cent in FY14-16E on account of higher tractor estimates. It has raised its SOTP based target price to Rs 804 and maintained Underperform rating.

“We remain concerned on competitive and capital intensity of the auto business as well as cash calls from key subsidiaries. Strength in tractor demand is a key upside risk,” the report added.

At 2:35 p.m.; the stock was at Rs 927.00, up 3.51 per cent, on the BSE. It touched a high of Rs 929 and a low of Rs 906.50 in trade today.