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MOSL: MAHINDRA & MAHINDRA (Buy)-Medium-term challenges priced in but catalysts lacking for re-rating

Mahindra & Mahindra: Medium-term challenges priced in but catalysts lacking for re-rating

(MM IN, Mkt Cap USD12.1b, CMP INR672, TP INR790, 18% Upside, Buy)

 

MM’s core business faces headwinds in the form of (a) an uncertain tractor demand outlook due to the cyclical downturn and the initial forecast of El Nino, (b) a weak product lifecycle in UVs, as no major launches are likely till BS-6, (c) a huge product skew toward diesel segment (~96%), wherein prices are likely to increase by ~10-12% and (d) a deteriorating margin profile, with the share of FES likely to decline over FY19-21. However, ~40% correction in its core business valuations from 18.4x in Aug’18 to 11x in Feb’19 largely factors in these challenges, in our view. We, thus, maintain Buy with an SOTP-based TP of INR790 (Mar’21). 

Tractor: Weak monsoon forecast, high base putting FY20 volume trajectory at risk

• The domestic tractor industry is in its third year of upcycle in FY19, with ~17% CAGR in volumes over FY16-19.
• While fortunes of the tractor industry are heavily influenced by monsoon, tractor cycles are generally four years long (three good years and one down year). Volumes will at best grow 7-8% in FY20.
• Further, monsoon forecasts have been mixed, with Skymet’s expecting below-normal monsoon and the IMD forecasting an easing El Nino impact in FY20.
• However, over the long term, MM is targeting a bigger play in the USD160b global farm equipment market – both in tractors (USD60b) and non-tractor equipment (USD100b). 

Tractor: Market share pressure from heightened competition

• Network expansion and product launches by competitors (such as Escorts) led to a 230bp contraction in MM’s tractor market share to 40.5% in FY19.
• The market share contraction is explained by the weak performance in key markets such as UP (-250bp to 38.4%), Bihar (-80bp to 48.1%), MP (-190bp to 33.3%) and Maharashtra (-50bp to 44.3%).
• It gained share in Punjab (+290bp to 44.1%) and Gujarat (+180bp to 41.6%).