Mahindra and Mahindra

Investors with a long-term perspective can consider an exposure in Mahindra and Mahindra (M&M). The company ended FY-10 on a strong note, posting a growth of 40 per cent in revenues and a whopping 120 per cent in profits over the previous year. Given the high base over which volumes need to grow this year, higher commodity prices and short supply of some auto components, the growth this year (2010-11) is expected to moderate to 12-13 per cent, according to SIAM (Society of Indian Automobile Manufacturers).



Despite these, the long-term growth story for M&M appears intact. This view is supported by three factors. One, M&M has presence in almost all segments of the auto industry. This would provide enough cushion in case of subdued growth in one of the segments.

Two, the company has lined up a handful of launches and plans to enter new markets, which could support volume growth. Three, initiatives on the farm equipment front hold promise.

The current market price of Rs 638, offers an attractive entry point. At this price, the stock trades at about 17 times its trailing twelve month standalone earnings, at a discount to the BSE Auto Index .

Firming up on UVs

Thanks to its presence in the utility vehicles (UV) segment, M&M had managed to tide over the slowdown in 2008, giving it better leverage to consolidate its position during the revival.

It launched the Xylo, an MUV (multi-utility vehicle), priced strategically to take on Innova and Tavera, yet not eating into the sales pie of its own Bolero and Scorpio. This positioning paid off as M&M ended FY-10 with 63 per cent market share, a gain of 6 percentage points over FY-09. .

The year also saw a lot of activity on the commercial vehicles (CV) front. The company seems to have used the hub and spoke model as a strategy to further growth.

Hence, from being a marginal player in this segment, M&M has taken competition head on by concentrating on these two ends of the CV segment.

At the lower end, M&M has launched the Gio and Maxximo, both sub-one- tonne trucks, the market for which is huge, going by the demand for vehicles like Tata Ace.

For HCVs ( trucks and tippers), M&M has entered into a joint venture with Navistar of the US. Coming at a time when the economy has bounced back and the CV market has rebound convincingly, these initiatives bode well for volume growth.

Going green

A third sweetener is the belief that alternative technology will drive a large part of vehicle growth in future. In May this year, the company bought 55 per cent stake in the electric car company, Reva.

The company expects to sell about 50,000 vehicles from the Reva stable in about seven years. It is also working on developing electric scooters (post acquiring Kinetic Motors) and CVs. Besides, M&M has developed an in-house micro hybrid technology that saves fuel. While it may take time for the Indian market to mature in terms of demand for green vehicles, access to this technology will help in a big way as the company plans to enter developed markets like the US this year.

Buying out Renault's stake in the Logan JV this April indicates that the sagging sales of Logan could get a fresh lease of life. This rounds off the company's presence in every major segment of the auto industry.

Bright prospects for tractors

With Swaraj Tractors turning around, M&M has become the largest tractor maker in the world in terms of volumes.

Two aspects of their approach to the farm equipment division inspire confidence. One, the company has introduced the ‘Yuvraj', a 15 HP tractor for small and marginal farmers, a chunk of the untapped market for tractors in India.

At the other end of the spectrum, through their JVin China, it has access to tractors of much higher horse power, which can be used for haulage and commercial material handling.

Besides, they are also focussing on agricultural implements such as harvesters and rice transplanters, which have a growing market.

M&M had a dream run in FY-10, doubling its operating profit margins to 16 per cent. However, it may be difficult for the company to do a repeat as commodity prices are no longer benign.

While a part of the rise has already been passed on, it remains to be seen how much more would be.

Profitability concerns

This may not be an easy decision as the country readies itself for a deregulated fuel price regime and a possible hike in interest rates.

Besides, given the shortage of components like tyres, fuel injection equipment and castings, the company has faced production losses of about 6,500 vehicles since January.

But there seems to be a case for cost-management initiatives, given that the Chakan plant has become a one stop shop for most of its production lines. This may help M&M consolidate its vendor base and implement just-in-time inventory.

M&M expects global vehicle sales to contribute to about 20 per cent of its total business by 2012 (about five per cent in 2008-09).

While this may throw up some anxiety on currency fluctuations, that the company expects to hedge 50 to 60 per cent of its projected exports brings in some comfort.