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Mahindra & Mahindra - Powering Ahead

The company has sound prospects. Accumulate on dips

Mahindra & Mahindra (M&M) is the flagship company of the Mahindra group. Through it Mahindra group controls seven other listed companies, including Tech Mahindra and Mahindra and Mahindra Financial Services. M&M is a leading player in utility vehicles (UVs) and tractors. It is making forays into newer segments like three- and two-wheelers; medium and heavy commercial vehicles (MHCV) through its joint venture with Navistar International, USA; and electric vehicles through its acquisition of Reva.

Growth initiatives
Acquisition spree: M&M has been on an acquisition spree this year. The obvious question is: what synergies will these acquisitions create?
Ssangyong: With this acquisition, M&M got access to product technology. Ssangyong’s SUVs are placed a segment higher than M&M’s current products. Secondly, this will create significant opportunities for cross-selling as the fomer has significant presence in European and South Korean markets. Scaling up Ssangyong’s operations will also be easy as it is already operating with excess capacity.
Mahindra Navistar JV: This joint venture will give M&M a shot at the MHCV (trucks) space. It is establishing a separate dealership network just for selling MHCV and LCVs like Maxximo and Gio. Given its vast experience of selling in rural markets, M&M does have a distinct advantage here.
Reva: With this acquisition, M&M got both the technology and a tested product for the technology of the future. M&M hasn’t been very successful in the small car segment so far; its journey has been fraught with break-ups. But Reva gives it not only a second chance but a product that many of its competitors are still trying to develop.
Tractors still its mainstay: The tractor division’s contribution to total revenue is second to that of the automotive segment. However, it still has a dominant 41 per cent market share in the Indian tractor market. Due to this, M&M has strong pricing powerwithin the tractor market.

Risks
Utility vehicles: M&M is aiming to become a specialist in the UV segment. But the world over UVs are being perceived as gas guzzlers — vehicles that are an environmental hazard. Many governments (including the Indian) are mulling laws to tax UV owners. If this comes about, it will dent the company’s prospects.
Too diversified: Mahindra group is in itself highly diversified. Now M&M has diversified into almost every segment of the automotive industry. Managing such a diversified company and integrating many of the smaller segments within it into its overall strategic framework will be a challenging task.

Valuation
Over the past five years M&M has posted an average RoE close to 30 per cent. According to BRICS Research’s estimates, the company is likely to post a RoE of 25 per cent in FY11 and 22 per cent in FY12. It is currently trading at a price-earnings (PE) ratio of 20.43 (December 2). This is slightly above its five-year median PE of 18.54.
Over the past five years, the company’s earnings per share (EPS) has grown at a compounded annual rate of 25.3 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.81. While the company has sound prospects, its valuation is not inexpensive. Investors may accumulate this stock gradually on dips.