Event update: Mahindra & Mahindra (Outperformer) - Implementing growth plans

M&M organised an analyst meet on the Farm Equipment Segment (FES). Management remained positive on the growth prospects of the tractor industry in India. In addition, the company is looking to boost revenues through farm equipment sales and global expansion. Key takeaways:

• Domestic market remains robust: Management indicated 8-10â„… CAGR of (inline with historical averages) in the domestic market over the next 5 years, as the company is of the view that the total market remains 60% under penetrated. The company hopes to gain market share on the back of (a) increased penetration in states where it is weak (b) roll out of a new price-competitive brand, the Trakstar (priced 5-10% below competitors). Trakstar has its own dealership network – it currently has 80 dealers which will increase to 200 dealers across 6-7 states by end of FY19.
• Focus on implements segment: Management expects strong growth in the implements segment, as mechanisation could rise on the back of labour shortage and a focus on farm productivity (lower mechanization levels). M&M has developed products for India in conjunction with acquisitions made abroad (Turkey, Poland and Japan).Farm equipment machinery currently generates revenue of ~US$340m, which management believes could increase to ~US$1bn. Management expects global business to comprise 50% of FES revenues (37â„… currently). The company has made acquisitions in Turkey (Erkunt and Hisarlar), Japan (with Mitsubishi) and Poland (Sampo for equipment).  
• Financials – robustness expected to continue: On a standalone basis, the company has consistently maintained high PBIT margins (19% in FY18) and hopes to maintain it, going forward. Segment RoCE is 107% (up from 56% in FY15). The standalone business has an asset turnover ratio of 5.4x (from 3.8x in FY15). International subsidiaries are currently loss making with negative PBIT margin of -1.7% in FY18. Management hopes to turnaround the subsidiaries to achieve 3-5% PBIT over the medium term. In FY18, PBIT margins for consolidated FES (including subsidiaries) stood at 13.9%.

Valuations & view

M&M will be a key beneficiary of the thrust in the rural segment. It remains extremely well positioned in tractors. Company’s aggressiveness in the implement segment and focus on global expansion could add to revenues in the long term While we remain concerned on the UV portfolio, the company’s strong product pipeline should boost volumes in FY19. Reasonable valuations (ex-subsidiaries ~14xFY20E EPS) provide comfort. Maintain Outperformer with a target price of Rs 963.