Reliance Securities has a buy call on Mahindra Mahindra with a target price of Rs 835.The current market price of Mahindra Mahindra is Rs 659.35.Time period given by the brokerage is one year when Mahindra Mahindra price can reach the defined target.
Investment rationale by the brokerage-New launches to drive growth: Mahindra Mahindra (MM) has delivered a muted performance in 3QFY19 amid challenging environment led by subdued festive season and intensifying competitive intensity.
Its (MM+MVML) revenues grew by 12 per cent YoY and 1 per cent QoQ to Rs128.9bn as against our estimates of Rs131.8bn.
Volume grew by 11 per cent YoY and 2 per cent QoQ led by 10 per cent YoY and 11 per cent YoY growth in Tractor and Automobile volumes respectively.
However, its EBIDTA margin contracted by 151bps YoY and 125bps QoQ to 13.2 per cent as against our estimates of 14 per cent due to competitive pricing pressure.
Its RM/Sales shot up 298bps YoY/156bps QoQ to 69.2 per cent, due to limited ability to pass on cost escalation.
From segmental perspective, EBIT margin fell by 130bps YoY to 19.2 per cent and 260bps YoY to 5.8 per cent in FES segment respectively.
Its net profit adjusted for extraordinary loss of Rs0.8bn surged by 60 per cent YoY (-10 per cent QoQ) to Rs14.7bn.
Its PAT was benefitted from higher non operating income, led by dividend from subsidiaries of Rs2bn and write back of tax provision to the tune of nearly Rs 4bn in 3QFY19.Govts rural thrust to boost sales: Looking ahead, we expect MM to sustain positive momentum on the back of governments strong rural thrust and new product strength.
As MMs key product portfolio continues to be rural-focused, it would enjoy the benefit of likely improvement in rural economy.
MMs new products, particularly upcoming XUV300 and Marazzo are its stronger products in UV portfolio.
We are positive on companys XUV300 for FY20.
We believe that incremental volumes of XUV300 and Marazzo would compensate for likely slowdown in tractor segment going forward.
It also plans few launches in MPV, LCV and FES segment over next one year.
Moreover, MM plans to focus on new technology and EV platform.
The Management plans to spend Rs150bn (Capex: Rs100bn Investment: Rs50bn) in next 3 years.
Major chunk of the capex would be spent towards product development, technology and RD including BS-VI technology.
Focus on core products in UV space would help MM to regain lost market share to some extent, in our view.Outlook valuation: Looking ahead, we expect MMs volume to clock 9 per cent CAGR over FY18-FY21 on the back of rural recovery and new launches.
Factoring ongoing slowdown and pricing pressure, we lower our volume and revenue estimates for (MM+MVML) by 0.6 per cent/1.3 per cent and 2.5 per cent/4.8 per cent for FY20E/FY21E respectively.
We reduce our EBIDTA margin estimates by 118bps/45bps and cut our EPS estimates by 7.5 per cent/3.6 per cent for FY20E/FY21E.
Expecting meaningful improvement in rural demand, strong product pipeline and attractive valuation post stock price correction, we reiterate our BUY recommendation on the stock with a revised SOTP-based target price of Rs835 (from Rs875 earlier), valuing MM+MVML at 6.5x FY21E EBIDTA at Rs572 and subsidiary at Rs263 post-30 per cent discount to mkt cap.