Mahindra and Mahindra (M&M), the market leader in the utility vehicle (UV) segment, has reported a strong volume growth in its UV sales for yet another month. In August 2009 its UV sales registered a robust growth of 41.8% year on year (y-o-y) to 16,631 units and a year-till-date (YTD; April-August) growth of 36% y-o-y, which was better than our expectation.
The growth in this segment could be attributed to the incremental volumes of Xylo and the robust performance of the company’s key models, Bolero and Scorpio.
In August 2009 the company sold 3,032 units of Scorpio, indicating a growth of 12.3% over the August 2008 sales. Xylo’s volumes stood at 2,005 units as against 2,130 units in the previous month.
The demand in the three-wheeler segment remains subdued with a decline of 16.7% y-o-y in the YTD period (April-August). Although the company’s recently launched model, Alfa, has been very well received in the market, the volumes of its other brand, Champion, has been declining y-o-y.
However, the company is planning to launch one product each in the goods and the passenger carrier segment by the end of FY10; this could mitigate the decline in the three-wheeler sales going forward.
The management had earlier indicated that the deficient monsoon rains would not affect the sales of its UVs since most of the rural sales of UVs are linked to the commercial operators in the rural areas. Moreover, we expect most of the growth in the UV segment to come from the robust volumes of Xylo and the newly launched version of Scorpio that caters to urban demand.
Outlook and valuation
On account of the better than expected growth in the company’s UV segment (YTD growth of 36%) we have increased our volume estimates for the UV segment. We expect the UV segment to grow by 20% and 9% in FY10 and FY11 respectively.
Consequently, our new stand-alone earnings per share (EPS) estimates for FY10 and FY11 stand at Rs57 and Rs61.1 respectively. Furthermore, given the improving business environment in the information technology sector on the back of signs of recovery in the global economy, we have revised Tech Mahindra’s valuation in our sum-of-the-parts (SOTP) valuation for M&M.
Consequently, our new SOTP based price target stands at Rs897. However, we see limited upside at the current level. Hence, we maintain our HOLD recommendation on the stock.
At the current market price, the stock is trading at 14.1X its FY11E earnings and an enterprise value/earnings before interest, tax, depreciation and amortisation of 8.2X.