Morningstar initiated equity research coverage on conglomerate Mahindra & Mahindra.
Equity Analyst Manish Vaswani has pegged the firm's fair value at Rs 906 per share, which makes the stock undervalued on the basis of recent trading price.
He believes that even as the firm has presence in diverse businesses and multiple end markets, it is well positioned in only of its main business segment--the farm equipment segment.
"Even as Mahindra derives more than one third of its operating profits from this segment, the company's positioning in other businesses dilutes overall profitability and constrains its ability to generate sustainable economic profits," Vaswani writes.
"Even though we do not expect the tractor industry to grow at the historical CAGR of 20%, we believe Mahindra is best positioned in the domestic market owing to its solid reputation, strong dealership network of over 1,000 dealers (20% more than the nearest local competitor) and healthy relationship with end users, to benefit from the estimated 10% growth in our forecast," he adds.
Mahindra has a presence in the Indian automotive industry--it is the leader in the diesel powered passenger utility vehicle segment, with a market share of 53% in fiscal 2012, but the segment itself accounts for only about 14% of the total Indian passenger vehicle market, thereby affording Mahindra only 8% of the overall domestic passenger vehicle market. Additionally, continued losses at the company's 2011 acquisition, the bankrupt Korean automaker Ssangyong, may also weigh on operating margins in the near term.
Modeling an overall annualised revenue growth of above 25% for the next five years (see the complete Stock Analyst Report for details), our analyst arrives at Rs 906 per share as M&M’s intrinsic value.
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