Buy Mahindra and Mahindra; target of Rs 895: Prabhudas Lilladher

Prabhudas Lilladher's research report on Mahindra and Mahindra

M&M’s volumes continue to be driven by strong demand in tractors and a cyclical recovery in the LCV segment. The UV business continues to be a drag with M&M losing ~14% market share over the last three years. However, given the extremely low base, upcoming model launches (MPV/Mahindra branded Tivoli) and refreshes (KUV1oo/TUV3oo) should boost volume growth for M&M over FY19E. Increased government focus on rural economy could further accelerate growth for both, Farm and Auto segment. The stock has underperformed Nifty by ~5% over the last 12 months and currently trades at 15x FY19 core Auto PE. We upgrade our rating from Accumulate to ‘BUY’ with a target price of Rs895 (earlier Rs790).

Outlook

We expect M&M to record an EPS CAGR of ~24% over FY18‐20E. Auto segment has been a drag on profitability. However, new launches in the UV space and reduced losses in the heavy truck segment would boost auto EBIT margins. For the farm segment, a shift towards mechanization and higher HP tractors will further improve profitability. We rollover to Sep’19E from Mar’19 and upgrade the stock from ‘Accumulate’ to ‘BUY’. We value M&M’s auto business at 16x Sep’19E plus Rs243 as the value of investments to arrive at a TP of Rs895 (earlier Rs790). For all recommendations report, click here

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