Buy M&M; target of Rs 1310: Prabhudas Lilladher

Prabhudas Lilladher's report on M&M

“We attended the analyst meet of M&M addressed by Dr. Pawan Goenka and his team. Overall, the company is of the view that tractors would remain under pressure in H1FY16, albeit factoring a decline, but better than our estimates. For PVs, the new products planned should be able to drive‐up volumes, but timely launches are the key to capturing demand. M&HCVs are expected to be robust in FY16, while LCVs and pick‐ups are likely to be relatively weaker. FY16 is likely to be a year of reboot for M&M, and if this is successful, they can expect a kick‐start in growth in FY17.”

“The extent of tractor sales slowdown was unanticipated by the industry. For farmers, affordability of tractors has been impacted by poor monsoons, decline in kharif yields and no increase in MSPs. All these factors led to the farm incomes decreasing significantly. In addition, the rabi yields are also expected to be lower. As a result, demand for tractors from farmers is expected to emerge only after the kharif season of 2015.” “M&M plans to launch three new platforms (two compact UVs and one SCV), three major refreshes and three new variants in Q1/Q2/Q3FY16. Coming off a low base, these should help volume recovery for M&M. However, guidance on exact product launch dates has not been specified. On the existing UV platforms, Bolero, XUV, Scorpio, which are successful models, should witness 0‐ 5% volume growth. Industry growth in this segment is expected to be muted. M&M’s expectation for the domestic PV industry is for 10% growth (our expectation is 10% domestic sales growth and 10.5% total PV volume growth including exports). We expect volume growth of 11% in FY16e and 16% in FY17e for M&M’s UV portfolio.”

“While the UV portfolio comes off a lower base, the tractor segment likely to witness a decline in H1FY16. In the near‐term, tractors will now be faced with a higher base and the possibility of a lower crop output due to adverse weather conditions. Thus, while the long‐term outlook for M&M remains good due to need for agri‐mechanisation, new launches in UV1 segment in FY16, recovery in CV cycle, etc., from a near‐term perspective there appear to be few positives. Our target of Rs1,310 is based upon a core target PE of 12x FY17e (Rs821) and value of investments and subsidiaries at Rs489”, says Prabhudas Lilladher’s research report.

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