Mahindra & Mahindra Ltd: “Improvement in market sentiment & government stimulus are crucial for the auto sector to revive”

Mahindra & Mahindra Ltd: “Improvement in market sentiment & government stimulus are crucial for the auto sector to revive”

Dated: 12th July 2019

Interview by Dr Pawan Goenka, Managing Director of M&M Ltd.
Key highlights:
1) According to him, the budget was good for the long-term vision for the government but expected short- term stimuli that the auto sector needed for the next 3-4 months were missing.
2) He said that it is hard to predict what will happen in the next 2-3 months in the auto sector. The sector has seen its worst quarter this year for passenger vehicles since 2001. The closest fall was in 3QFY09 which recovered at a faster pace.
3) The industry has the resilience to recover quickly from a sharp drop that has happened and they have proven the same 2-3 times.
4) Mahindra has performed better than the industry average performance for the 1QFY20. In the month of June M&M was the only company that had positive growth in the passenger vehicle segment. The fact remains that the quarter performance was not as per the Company’s expectation.
5) According to him, new launches in the coming quarters will cause a demand a spurt.
6) With the slowdown in the industry, the commodity prices have been showing a downward trend which will help the industry to revive. The industry is not expected to increase model pricing. Thus, this will help to create a demand for the new launches by giving customer incentives or reduce the model price.
7) 1QFY20 will have a high base effect as the same period last year had delivered the highest growth.
8) The safety norms that are coming in on 1st October 2019 & the BS-VI norms will lead to a significant increase in the prices of the vehicles. That will have a downward pressure on demand again.
9) In June M&M had a 20% shutdown where they worked for 25 days in that month to manage the inventory level. The Company was trying to correct down dealer inventory which had happened successfully. M&M expects that July will not be as bad but still have a couple of days of shutdown in July.
10) August- & September’19 are the festive seasons where he expects the plants to run at full capacity.
11) For the tractor segment growth, he has slightly lowered the growth estimate from the initial growth expectations of 5%. He would revise the downward estimates after July considering the monsoon conditions. He also said that in the same period last year there was a growth of 28% YoY which will add to the downward pressure on the growth.

Consensus estimates (Source: Marketscreener website):
M&M Ltd with a closing price (as on 10-04-2019) of Rs 668/- per share trades at a P.E of 12.6x/ 12.9x/ 13.3x its earnings per share estimates of Rs 50.1/ 49.0/ 47.4 for FY20E/ FY21E/ FY22E. The consensus price target is at Rs 791/- over the next 12 months.

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