Analysts bullish on M&M on strong Q2, see good road ahead

Moneycontrol Bureau

Mahindra & Mahindra shares rose over 2% on Friday after UBS upgraded it to "buy" from "neutral" and several others like Nomura and Kotak Institutional Equities raised their target price following the utility vehicle maker's strong growth in the second quarter and analysts expect growth to only improve once tractor sales pick up.

"Despite weak tractor volumes, the company maintained margins quarter-on-quarter due to strong performance from the auto sector where margins improved 100 bps. High bookings for new products should help to continue deliver strong growth for the auto sector next year, we expect," Kapil Singh and Nishit Jalan of Nomura Financial Advisory and Securities India said.

UBS too pointed out that margin expansion despite tractor segment de-growth was key positive and any recovery in tractors would only improve margins.

M&M on Thursday reported a better-than-expected 22% year-on-year rise in second quarter net profit at Rs 902 crore, helped by strong automotive sales growth and higher other income. Its net sales during the three-month period were up 33% from a year ago to Rs 9,659 crore.

Its utility vehicle sales rose 32% in the quarter, but tractor sales tumbled 14%.

The core business trades "attractively" at 10 times FY14 earnings per share and multiples should improve with the revival in tractor volumes next fiscal year, the Nomura analysts said, maintaining a "buy" on the stock and raising target price to Rs 1,054 from Rs 934.

"We believe M&M has exhibited strong pricing power due to strong demand for its new products, which is likely to drive earnings growth over the next few years," Kotak Institutional Equities said. It too has a "buy" on the stock and raised its target price to Rs 1,000 from Rs 910.

The Kotak analysts believe due to the late arrival of the monsoon, tractor growth will likely pickup from November and they expect tractor EBIT margins to remain around 15%.

Ashish Nigam and Kunal Jhaveri of Antique Stock Broking also believe that downgrades in the tractor segment are behind us. Moreover, they say upcoming competitive pressures in the utility vehicle business are a far cry from the extent seen in compact cars and two-wheelers and as such M&M is "decades ahead" of competitors in terms of brand equity in rural areas, the primary UV market.

Antique too advises investors "buy" M&M with a target of Rs 945, raised from Rs 925 earlier.

However, not all analysts are as enthusiastic.

Yogesh Aggarwal and Karthik Subramaniam of HSBC Securities and Capital Markets India say that although Q2 was a good quarter, headwinds remain and going forward margin sustainability may be challenging.

"The tractor industry has remained weak in the past few months. In our view, continued weak demand and capacity additions will lead to pricing pressure. Our field checks suggest that incentives are already being offered by the competition with dealer margins coming down as well. For the automotive business, we see limited upside to the volume growth forecasts," the HSBC analysts said.

They have a "underweight" rating on the stock, with a target price of Rs 840.

Elara Capital too advises investors "reduce" M&M shares and have a target price of Rs 820 on the stock.

"M&M's share price has seen strong support recently, as the company successfully warded off margin pressures and auto segment momentum remained strong. However, we believe that both these factors are set to get challenged going forward, while the stock price, trading at 12 time core earnings (same as historic median valuations), is trading on optimistic  valuations, and lacks triggers," said Mohan Lal and Pooja Sharma of Elara Capital.

M&M shares were up 1.9% at Rs 873.85 on NSE in noon trade.