>MAHINDRA & MAHINDRA (CLSA)

FULLY VALUED

M&M’s UV sales have improved in recent months boosted by election buying and a good response to the ‘Xylo’. While the former factor will not sustain, the latter will continue to boost sales. Tractor demand however remains lacklustre due to financing issues. M&M is trying hard to cut capex and is aiming at limiting total capex over FY10-12 at Rs80 bn. Outlook for subsidiaries like Tech Mahindra and Mahindra Forgings remains weak. We upgrade EPS estimates 6-12% factoring in higher UV volumes and the PTL merger. Post recent run-up, we see valuations as rich. Maintain U-PF.

UVs – volume outlook has improved
The recently launched ‘Xylo’ has received a good response and currently has a waiting list of ~8 weeks. M&M expects to exceed its initial target of 25,000 annual ‘Xylo’ sales and is in the process of increasing production. ‘Scorpio’ volumes have improved post the 5-10% price-cut in March but profitability would have got impacted. Pre-election buying has been a factor boosting UV sales since Feb but is not likely to sustain since the elections have come to an end this week. Overall,
our view on UV growth has improved and we now factor in 15% growth in FY10.

Tractors - no signs of recovery; PTL doing better
Tractor demand remains weak. Lack of financing is one reason for the same. Also, 15-18% of tractors are used in pure non-agricultural work like haulage and this demand has been impacted with the slowdown in infrastructural spend. M&M expects “low single digit” growth in tractors in FY10. We factor in 0%. M&M is also working on developing a new low cost tractor in the sub-25HP range. No timeline has been indicated for this product yet but is not likely before end FY11. Tractor
sales in erstwhile PTL are doing better; we factor in 7.5% growth there.

Subsidiaries – rising pressures
M&M’s European forging subsidiaries have turned loss-making and will impact consolidated profits in coming quarters. CLSA’s technology sector team has a negative view on Tech Mahindra. Mahindra Holidays is seeing de-growth in membership addition. We believe that M&M’s foray into 2Ws and CVs in FY10 is not going to be easy and could drag down consolidated performance in FY10.

Maintain U-PF
As we stand today, we are positive on M&M’s UV business (~17% of consolidated PAT); negative on tractor business and Tech Mahindra (~67% of consolidated PAT) and neutral on the balance ~16%. A strong market has boosted value of M&M’s listed subsidiaries and has resulted in holding company discount going down to ~25% versus historical average of 44%. We see M&M’s stock vulnerable to market correction and view risk-reward as unfavourable. Maintain U-PF with Rs440 TP.

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