Mahindra and Mahindra

Investors can consider exposure to the Mahindra and Mahindra (M&M) stock. At the current market price of Rs 658, the stock trades at around 14 times the trailing 12 months standalone earnings. Planned product launches, capacity expansions, foray into new export markets and improved performance from the farm equipment segment present good earnings prospects over a two-three year timeframe. Besides, M&M shareholders may also benefit from value unlocking, if any, from the company’s 100 per cent subsidiary — Mahindra Holidays and Resorts — whose IPO is on the anvil.
Business

The company’s core business is the manufacture of automobiles and tractors. Under the automotive segment, it manufactures utility vehicles (UVs) and light commercial vehicles (LCVs) including three wheelers. The UV segment commands more than 50 per cent market share. The tractor division sells agricultural tractors with horsepower ratings ranging from 25 HP-60 HP and fuel-efficient direct injection diesel engines. The company is the market leader in this business.

Automotive division: Being a player in the UV and LCV segment, the company has been shielded from the slowdown in the medium and heavy commercial vehicle and two-wheeler sales in the last few quarters.

For the nine months ended December 2007, M&M’s revenues from the automotive division grew by 14 per cent year-on-year to around Rs 5,100 crore. The key driver of growth has been the UV segment, where the company recorded a growth of 18 per cent, driven mainly by the Scorpio and the Bolero, which grew at a scorching 44 per cent.

Passenger Car Foray

The company has made a foray into the passenger car segment with the launch of the Logan (through its JV with Renault) in FY-08. M&M’s decision to defer investment in the three-way joint venture with Renault and Nissan at Chennai is unlikely to have a damaging impact as the project is still at a very early stage. But in the same breath, it must be added that there were a few bright spots for the company in this venture.

One, the Greenfield plant is to have flexible assembly lines that would have provided additional production capacities for some of Mahindra’s new vehicles. Two, the joint venture of M&M and Renault (which currently uses the company’s Nashik facility to produce the Logan) was to use this joint plant to produce other vehicles on the Logan platform for the Indian market. With M&M pulling out, it remains to be seen how the two companies redraw their manufacturing plans for this otherwise new segment for M&M.

Three, Renault-Nissan had proposed setting up of a power-train manufacturing plant close to the new facility to supply engine and gearbox requirements for the Logan and its derivatives.

Given the French carmaker’s expertise in this area, M&M could have sourced future power-train requirements for its utility vehicles and other new launches from this facility. Whether M&M will still be able to do it despite backing out of the venture needs to be watched. Moreover, by aligning with the Renault-Nissan brand, M&M stood to gain much in terms of access to latest technology and design architecture. But the latest acquisition of the Italy-based auto design and engineering firm Grafica Ricerca Design indicates that M&M has decided to explore options beyond Renault-Nissan to strengthen its design capabilities and, hence, its access to Europe.
Launches

Going forward, M&M has planned few other launches to sustain its growth momentum. The Ingenio, a multi purpose vehicle (MPV), will hit the roads in FY-09. Priced between the Scorpio and the Bolero, the MPV will take on Toyota’s Innova.

The company is also looking at launching a mass market platform, similar to the Tata Ace in FY-10. The company has recently launched a variant of the Scorpio, the mHawk.

The excise duty cuts for hybrid vehicles in the budget is a shot in the arm for the company whose hybrid version of the Scorpio is also on the cards.
New Markets

Over the past year, the Scorpio has been launched in several markets, including Australia, Turkey, Sudan and Ghana. In January this year, M&M launched the Scorpio SUV in Egypt, commencing its first assembly operations outside India. The company has also launched the Scorpio and its Pick-up range of vehicles in Brazil where a state-of-the-art facility has been set up to assemble the vehicles. Besides, the company is also planning to enter the US markets in 2009.
Farm Equipment Division

For the nine months ended December 2007, the revenues of this division reported a subdued six per cent year on year growth due to rising interest rates and strict financing norms.

The limited growth in this segment also contributed to a fall in operating margins which declined by 1.1 per cent year-on-year to 11.9 per cent for the same period. This trend is expected to reverse, thanks to the budget bounty announced for the farmers.

Besides, Punjab Tractors ( PTL), in which the company acquired a 63 per cent stake in 2007, is expected to show healthy growth in the next two-three years.

PTL’s cash flows are expected to improve in FY-08 itself as, post-acquisition, M&M has brought down the dealer inventory by 50 per cent; the debtors period has also been reduced to 150 days from 260 days prior to the acquisition and 25-30 per cent of the outstanding debts have been recovered.

Synergies from the acquisition such as raw material procurement, shared dealer network and possible use of excess production capacities of PTL for M&M will provide an impetus to growth.

The company will also be able to leverage on the strong presence of the ‘Swaraj’ brand (which came into its fold from PTL) in the northern markets.