Investors with a one-to-two year perspective can buy the Mahindra and Mahindra (M&M) stock. The strong demand for utility vehicles (UVs) at a time when the rest of the auto industry is going through a slowdown puts the company in a sweet spot. At the current market price of Rs 762, the stock trades at about 15.5 times its estimated standalone earnings for FY2013.

Utility vehicles rule

After growing at 26 per cent in each of 2009-10 and 2010-11, the auto industry growth slowed to 12 per cent (year-on-year) in 2011-12. However, utility vehicles have outperformed the industry during this period, growing by 16.5 per cent. Growth in this segment was also much higher than the other two passenger segments — cars and vans. The superior performance has continued into this year (2012-13) too, with UVs volumes growing by a whopping 53 per cent Y-o-Y in April-July 2012.

One reason for this growth is the availability of diesel models in these vehicles. The widening gap between petrol and diesel prices in the last one year has encouraged customers to opt for diesel vehicles. For example, diesel price was around Rs 40 a litre in April 2011 in Chennai, This has moved up only to Rs 43.9 currently. Whereas, petrol prices have marched way ahead from about Rs 61.2 in April 2011 to over Rs 72 now, widening the price differential.

The absence of the much-expected additional duty for diesel vehicles in the Budget has also encouraged higher sale of UVs in the first four months of 2012-13.

In the coming months, while a continuation of this 53 per cent growth for the UV segment may not be sustainable, they will continue to outpace other segments. For one, diesel deregulation is not expected to happen anytime soon. Two, even if diesel prices are hiked, the gap between petrol and diesel prices is unlikely to be fully bridged. SIAM (Society of Indian Automobile Manufacturers) projects that UVs will grow at 29-31 per cent in 2012-13, compared with 9-11 per cent growth expected for cars.

Market leader

M&M, being the market leader in this segment with a 50 per cent share, will be a beneficiary of these trends. It has introduced the refreshed versions of the Bolero, Xylo and Scorpio and has launched XUV 500 in recent times. Though the company is yet to launch the XUV in more than 40-50 towns in India, it already has a booking of about 20,000 vehicles and a five-six month waiting period.

Thanks to the strong demand, M&M is increasing the production capacity of the XUV 500 to about 5,000 vehicles a month shortly. The company’s UV sales grew by 32 per cent in April-July 2012. The launches lined up in this segment such as the compact SUV coupled with the upcoming festival season will ensure continuation of volume growth for the company.

Ssangyong too has turned profitable at the operating level in the first half of 2012 (calendar year). While volume growth in the first six months has been flat for Ssangyong, M&M expects to finish 2012 with a 9 per cent volume growth there, thanks to the successful launch of the Korando Sports and Rexton. The Rexton will be introduced in India shortly and this will also help bring additional volumes.

Growth despite tractor slowdown

For the quarter ended June 2012, net sales( standalone) grew by 39.5 per cent Y-o-Y to Rs 9248 crore and net profits, by 20 per cent to Rs 726 crore. Improved product mix and higher realisations due to price hikes helped top-line growth.

The company took a price hike of 2-3 per cent in both the auto and farm equipment segments put together during the quarter. Operating margins stood at 12 per cent vis-à-vis 13 per cent in June 2011 quarter.

Notably, this growth was achieved despite a slowdown in the tractors segment. After growing at 20-30 per cent in the last two years, tractor industry volumes grew by only 12 per cent in FY12. This has further slowed to 2.3 per cent in the first quarter. M&M’s tractor volumes fell by about one percent in April-June 2012.

Despite moderating volumes, the company maintained margins at around 15 per cent in the farm equipment segment due to cost-control measures. Besides, the company has held on to its pricing, thanks to its market leadership position here too (41.5 per cent share).

However, the company expects tractor volumes to at best be flat during the year, considering the base effect and weak monsoons. But the automotive division is expected to compensate for this. Currently, automotive segment brings in 67 per cent of the revenues.

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