The outlook continues to be challenging for the company’s automobile as well as farm equipment segment.
Apart from the ongoing economic downturn, the tightening of credit by banks and financial institutions has been negatively affecting the growth.
Xylo has been well received in the market. It clocked sales of about 4,095 vehicles up till February 2009, while its bookings remaining strong.
The roll-out of the new products from the M&M stable is likely to continue, with the company planning to launch the successor to Scorpio towards the end of FY2010. This is likely to be followed by the launch of another global sports utility vehicle (SUV).
In the tractor segment, Punjab Tractor Ltd’s (PTL) volumes have been extremely good and driven the company’s overall tractor sales in the recent times.
The growth of rural economy and the availability of credit remain the key to the future performance of the tractor segment.
There are already positive feelers from the credit industry, which is expected to report a growth of about 3-5% in FY2010.
Mahindra and Mahindra (M&M) has slightly reduced its capital expenditure (capex) plan to be implemented over FY2009-12 to Rs8,500 crore; of this Rs1,500 crore has already been spent.
Also, out of this amount, Rs5,000 crore has been earmarked for the automobile business while the balance has been set aside for investments in various other segments.
The bulk of the capex (about Rs2,500 crore) earmarked for the automobile business shall be spent on setting up a facility at Chakan. Further, constant negotiations are taking place with equipment suppliers in order to further reduce the capex.
In future the company’s margins will depend mainly on the volume behaviour. Though the company has been able to arrest the steep decline in volumes witnessed in Q3FY2009, the volumes remain subdued.
We believe that operationally, the Q4FY2009 results will be much better than the Q3FY2009 results, mainly on account of better volumes.
In the automotive segment, we expect the volumes to decline by 7.3% in Q4FY2009E as against the 24.4% year-on-year (y-o-y) drop reported in Q3FY2009 that primarily affected the earnings.
We are fine-tuning our estimates for the company. We expect it to generate stand-alone earnings of Rs32.8 in FY2009 and that of Rs34.9 in FY2010.
At Rs369, the stock is trading at 10.6x its stand-alone FY2010E earnings and an enterprise value / earnings before interest, depreciation, tax and amortisation of 6.6x.
However, adjusting for the value of subsidiaries, the stock is currently trading at 6.5x its FY2010E earnings.
Based on our sum-of-the-parts valuations, we arrive at a price target of Rs405.3 for the stock, valuing the core business at Rs262.1 per share and the subsidiary at Rs143.2 per share.
Since the fair value is closer to the current market price, we are downgrading the stock to a HOLD and revising the price target to Rs405.