Will M&M's smooth UV ride continue?

New launches and aggressive competitors could dent the sales growth trajectory for the king of the utility vehicles segment

Buoyed by continuing good performance in the utility vehicles (UV) space, which roughly forms almost 60 per cent of its standalone revenues, the Mahindra and Mahindra (M&M) stock touched record highs (Rs 964.45) on Monday. The scrip has been one of the star performers in the auto space this year giving investors a 40 per cent return. However, the pace of growth in UV volumes is likely to come down, going ahead, which could cap upsides for the stock.

Say Jatin Chawla and Akshay Saxena of Credit Suisse Securities Research, “M&M has enjoyed a super-normal 25 per cent plus volume growth in UVs in the past few years driven by a very favourable product cycle and an increasing trend towards UVs. Going forward, with no significant launches by the company and competition in the UV space intensifying, we expect company’s UV growth to significantly slow down.”

While most analysts believe that there will be a dent in the company’s share in the UV space, the company continues to be a on a strong wicket as of now. Says an analyst with a foreign brokerage house, “Given their presence across the UV value chain, M&M’s position is much stronger than competition whose product portfolio is limited to one-two models at best.” The issue thus, will be the pace of growth. “Don’t expect M&M to grow as fast as they did in the past. The UV business will probably grow at 12-15 per cent, going ahead,” says the analyst.
 

SLOWER GROWTH
In Rs crore	FY12	FY13E
Net sales	31,853	39,720
% change y-o-y	35.6	24.7
Ebitda	3,770	4,482
% change y-o-y	9.1	18.9
Ebitda (%)	11.8	11.3
Net profit	2,878	3,019
% change y-o-y	8.1	4.9
Standalone financials                             Source: Credit Suisse

The company, however, expects to maintain the growth streak. Says Pravin Shah, chief executive, automotive division, M&M, “Each of the brands in our portfolio is well differentiated with a distinctive proposition. Hence, each brand has done well and we have outperformed most of the industry. We expect them to continue the excellent performance.”

On the valuations front, while most analysts have a positive stance on the stock, the sharp run-up in the recent past has led to a couple of downgrades recently. Say Hitesh Goel and Vinay Kumar of Kotak Institutional Equities Research, “We downgrade the stock to add (from buy earlier) as we believe it is fairly valued after a sharp outperformance versus the Sensex. We think risk-reward hangs in balance.” Rerating, according to them, is restricted due to limited scope of earnings surprises, risk associated with tax on diesel passenger vehicles and its reported bid for Aston Martin, which could raise concerns about capital allocation of the group. Sum of parts valuation pegs the target price for the stock on one-year forward multiples between Rs 858 and Rs 1,000.

Super show, hurdles ahead?
The UV segment, which contributes about 45 per cent of its overall auto sales volumes, grew 22 per cent last year and is expected to top 26 per cent in FY13. Aided by new product launches and sales in the festive season, the company registered 38 per cent year-on-year increase in November while year-to-date fiscal volumes were up 32 per cent year-on-year. In addition to the company’s product line-up and an excellent distribution network, one of the reasons for the sales uptick has been the preference for UVs and diesel vehicles. From 14 per cent in FY11, the share of UVs in passenger vehicle sales for the industry has crossed the 20 per cent mark. This, believe Kotak Securities analysts, is not sustainable.

Secondly, given the rapid growth, multinational majors have also introduced a number of offerings in this space. In the current year, some of the launches in the MUV/SUV space include Ertiga (Maruti), Duster (Renault), Evalia (Nissan) and Safari Storme (Tata Motors) with the first two grossing 5,000-7,000 units per month since launch. In 2013, while Ford is likely to launch its Ecosport, GM is aiming to introduce its MUV Enjoy. Given that the Ecosport is sub-four metres, thus getting taxed at 10 per cent versus 24 per cent for the Duster, it could be priced lower than Duster. Credit Suisse analysts expect the Ecosport to do better given lower pricing than Duster and superior distribution of Ford as compared to Renault. The two vehicles (Duster and Ecosport) could prove a formidable challenge to M&M, they add.

While competitive intensity could increase, M&M’s Shah says that as of now the company has not been impacted by any of the new launches. While the company refused to divulge product launch details, analysts expect the next launch (after its recent small MUV, Quanto) to be a new Scorpio in 2014.

Tractors: Slow start
While the UV segment has done well, poor demand, especially in the southern region, has played spoilsport with its farm equipment volumes (30 per cent of standalone revenues); tractor sales down four per cent year-on-year for the fiscal year-to-date. Brics Securities’ Umesh Karne and Manashwi Banerjee expect tractor makers to report a three per cent fall in FY13 sales due to lower rise in MSPs and high finance cost. Tractor makers (including M&M) believe the second half of the fiscal will be better than the first as delayed rains will lead to a better rabi crop.