We have reduced our estimates for Mahindra and Mahindra Ltd (M&M) on account of a sharper-than-expected slowdown in the sales volume growth because of the current global financial crisis. The total sales volume has fallen 8.2% y-o-y in the festive month of October to 30,139 units.
We believe the current economic slowdown and tight liquidity scenario will continue adversely impacting the automobile industry for the rest of FY09 and most of FY10.
Though interest rates are expected to decline in the coming months, credit availability will still remain tight, as banks are hesitant to provide loans in the current adverse macroeconomic environment.
Thus, we expect the Company’s sales volume to be in the range of 290–300k units in FY09 and FY10, supported by the launch of the Xylo in late Q3’09.
Further, M&M’s tractor sales are expected to get a boost from the farm loan waiver and the good monsoons during the year.
The slowdown in the global economy will also have an adverse affect on the Company’s subsidiaries. Mahindra Holidays and Resorts India Limited (MHRIL) will be negatively impacted by the current downturn in the global economy, as travellers would be forced to cut their travel and holiday expenses
However, we believe MHRIL will be able to restrict the effect of the current crisis due to its unique business model and a wide network of resorts. MHRIL’s base of 85,000 member families provides it with a recurring source of revenue.
We have valued M&M by using the SOTP method. We have valued the standalone Company by using the DCF methodology, with a WACC calculated at 12.2%. We have explicit forceasts for two years and a long-term growth of 5% from 2016 onwards.
M&M’s stake in Tech Mahindra has been valued at the stock’s fair value estimate of Rs433 per share. We have valued MHRIL based on its PE deal with SBI of Rs800 million for a 2% stake.
However, we believe valuations have declined since the deal took place in January 2008; hence, we have discounted the PE deal price by 40%. Based on our SOTP valuation, we arrive at a target price of Rs316 per share. Hence, we downgrade our rating from Buy to HOLD.