Buy Mahindra and Mahindra with a targe of Rs 1,049: Akash Jain

Mahindra & Mahindra | CARE reaffirmed long term credit rating at AAA with stable outlook for company's bank facilities.

Akash Jain

Mahindra and Mahindra (M&M), is the market leader in tractors with a share of 42.9 percent and is gaining market share for the last 3-4 years on new launches.

Rural penetration has improved by 14 percent on yoy basis and stood at 43 percent at the end of FY18. The Company would do well in case of a normal monsoon and improved rural sentiments. The management expects volume growth for the industry as a whole at 8-10 percent in FY19 and feels 8-9 percent yearly growth is sustainable in the long-term.

The Company reported good results in Q4FY18. PAT witnessed yoy rise to touch Rs.1,155 crores in Q4FY18. EBITDA shot up 70.4 percent to Rs 1,995 crore and margin expanded 400 basis points to 15.1 percent compared to same quarter last year. Farm equipment business, which contributed 28 percent to revenue, reported healthy 41.8 percent growth year-on-year at Rs 3,716 crore with its EBIT (earnings before interest and tax) growing 55 percent to Rs 723.4 crore and margin expanding 170 basis points to 19.5 percent for the quarter ended March 2018.

Mahindra and Mahindra sold 46,849 vehicles in May, registering a 12 percent growth compared to 42,003 units sold in same month last year. The growth was driven by commercial vehicles segment that showed 15 percent growth year-on-year at 18,748 vehicles in May 2018. The passenger vehicles segment (which includes utility vehicle, cars and vans) growth was muted. It sold 20,715 vehicles under passenger vehicles sector, a growth of 2 percent YoY. "May has relatively been a subdued month compared to April. On the back of a buoyant economy, medium & heavy commercial vehicle (MHCV) division continues to outperform. Exports have also been strong with a high growth," Rajan Wadhera, President, Automotive Sector said.

With the forecast of an upcoming normal monsoon the company is confident of good growth in the coming months, he added. Domestic sales grew by 8 percent to 43,818 vehicles in May 2018 while exports shot up 134 percent to 3,031 units compared to same month last year.

Meanwhile, its farm equipment segment registered a 14 percent growth in May 2018. Tractor sales for May 2018 stood at 29,330 units against 25,749 units sold in May 2017. Domestic sales during the month increased 14 percent to 28,199 units while exports rose 9 percent to 1,131 units YoY. "We hope that the announcement of record production estimates for food grains and horticulture crops will drive positive sentiments and boost tractor demand," said Rajesh Jejurikar, President - Farm Equipment Sector.

The Company will invest an additional Rs 500 crore at its Chakan plant in Maharashtra to expand its electric vehicles portfolio. The utility vehicle major today inked two pacts with the state government regarding EVs. M&M said it will make efforts to become fully electric ready by further investing in its Chakan plant for manufacture of EVs, e-motor, controller, battery pack and other electric vehicle components for multiple mobility applications. M&M has earmarked a total outlay of Rs 900 crore for EV vertical. Apart from Rs 500 crore investment in Maharahtra, the company also plans to put in another Rs 400 crore in its other plants across the country.

We believe the Company will do well on expectations of normal monsoon forecast by IMD and expectations of MSP hike. At CMP of Rs. 902 (Face value: Rs. 5), the stock trades at a P/E of 25x on FY18 EPS. We can expect a target of Rs. 1,049 by FY19 end (25x on estimated FY19 EPS of 41.94).

Disclaimer: The author is Vice-President - Equity Research at Ajcon Global. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.