The Stock Analyst Note is a part of the Stock Analyst Report for Mahindra & Mahindra. Click here to go to the truncated version of the Analyst Report on the stock. Registered Morningstar users can read the complete PDF (which includes our take on the firm’s valuation, growth and profitability) here.
Mahindra & Mahindra reported a solid first quarter for fiscal 2013, thanks primarily to strong growth in the automotive segment. Both the top and bottom lines were in line with our expectations, and we are maintaining our fair value estimate.
First-quarter revenue grew an impressive 20% year over year owing to better product mix, rise in volumes and higher net average realization (revenue per vehicle) in the automotive segment.
Vehicle unit sales increased by 24% to just above 126,000 units, and strong demand for the company’s utility vehicles, especially-the newly launched XUV 500 utility vehicle, enhanced the company’s product portfolio while improving realizations at the same time.
Mahindra’s farm equipment segment, however, did not fare as well, as tractor volumes declined by 1% (to about 59,500 units) largely due to a slowdown in overall tractor market demand.
The company’s first-quarter operating margin declined by 50 basis points to 11.9% while net income declined by about 40 basis points primarily due to rising material costs.
As Mahindra refrained from engaging in a pricing war with its rivals in the tractor market even as the industry slowed down, it was able to hold on to the healthy margins, driven by rising contribution from the automotive segment.
Going forward, we expect Mahindra to benefit from a series of new product (diesel powered vehicle) launches slated for the current fiscal year, and from expected continued demand for diesel vehicles in India as diesel vehicles constitute 99% of the company’s overall product portfolio.
We also expect tractor demand to rebound and contribute to Mahindra's earnings growth before the end of this year; these assumptions drive our current INR 906 fair value estimate.
