Buy Mahindra and Mahindra; target of Rs 984: Prabhudas Lilladher

Prabhudas Lilladher's research report on Mahindra and Mahindra

M&M's performance over Q2FY19 missed our estimates, with operating margins at 12.4%, as against PLe of 13.3%. The recently launched Marazzo has been received well, with order book currently at ~13k units, however the overall decline in overall passenger car market especially in the UV segment has hampered M&M's existing UV portfolio. M&M's Tractor and Pick-up segment continue to do well, however the rural demand has been a little tepid in comparison to Q1FY19 and to factor that in we reduce our FY19E tractor volume estimates by 2% (earlier 17% YoY) as against the management's stated guidance of 12% for FY19E. In the near term we expect margins to be under pressure due to the upcoming UV launches (S201, Alturas) in H2FY19, however for the longer term up-tick in margins largely depends on the success of these models as they would not only boost volume growth but provide operating leverage benefits as well. Increased government focus on rural economy could further accelerate growth for both, Farm and Auto segment.

Outlook

We maintain 'BUY' with a price target of Rs984 (earlier Rs1156), based on a core PE of 17x Mar'20E and value of subsidiaries at Rs268. The stock currently trades at a core PE of ~14x Mar'20E .