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Mahindra & Mahindra poised for a surge; analysts bullish

The firm's long-term prospects are set to triumph the short-term challenges, the latter resulting in its attractive pricing.

, ET Bureau|
Last Updated: Jul 02, 2012, 08.42 AM IST
 Mahindra & Mahindra poised for a surge; analysts bullish
Mahindra & Mahindra, the largest manufacturer of tractors and utility vehicles, comprising 40% and 50% of the market share, respectively, is facing multiple headwinds in the short term. However, analysts are bullish on it because its long-term prospects are bright and it is available at a reasonable valuation.

Weak monsoon:

Though it is early to predict how the monsoon season will end this year, its progress so far has been weak. The rains, which started from 1 June, are 23% below the long-term average. If the rains don’t pick up in the main sowing months of July and August, Mahindra & Mahindra’s farm segment growth is likely to be muted in 2012-13.

The deceleration in the tractor segment has already started, with the volumes having declined by 12% in the fourth quarter of 2011-12, compared with the same period last year. The demand slowdown in key markets like Andhra Pradesh, Maharashtra and Karnataka has led to this fall. Since the farm equipment segment is a high margin business—though it contributes only 22% to the consolidated revenues—its contribution to the EBIT is 40%. Hence, any slowdown here will be crucial.

Diesel tax:

While the automotive segment is doing well and has already clocked an average volume growth of 28% in April and May 2012, it may face problems in the form of policy decisions. The proposal to impose a higher excise duty on diesel cars/SUVs, which is yet to be implemented, is like a Damocles sword hanging over the company. The differential in diesel pricing, which means charging less for transport trucks and more for diesel cars/SUVs, is another proposal that can make life difficult for Mahindra & Mahindra.

Growth strategy:

Though the company cannot do anything about the monsoon, the management is taking several steps to revive growth in the farm segment and maintain a high growth rate in the automotive segment. With this in mind, Mahindra & Mahindra is set to launch six new products, which will cover both the segments, during 2012-13.

 Mahindra & Mahindra poised for a surge; analysts bullish

Though the tractor sale is dull now, the company continues to build new capacity for the coming years and is setting up a new tractor facility at Zaheerabad, Andhra Pradesh, with an initial capacity of 50,000 units.

Attractive valuation:

The main attraction for this counter is the cheaper valuation triggered by the above-mentioned problems. It should also be noted that Mahindra & Mahindra’s subsidiaries—Tech Mahindra, Mahindra Life Space, M&M Financial Services—are doing well and, therefore, should act as a cushion against these challenges.

Selection methodology:

We pick up the stock that has shown the maximum increase in consensus analyst rating during the past month. The consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in rating indicates that the analysts are becoming more bullish on the stock. To make sure that we pick only companies with a decent analyst coverage, this search will be restricted to stocks which have been covered by at least 10 analysts.

 Mahindra & Mahindra poised for a surge; analysts bullish
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