1、,840.00,886.00,-3.8,1.4,Bangalore,Associate,Company report,IndustrialsAutosEquity India,abcGlobal Research,Mahindra & Mahindra (MM IN),UnderweightTarget price (INR)Share price (INR)Forecast dividend yield (%)Potential return (%)Note: Potential return equals the percentagedifference between the curre
2、nt share price andthe target price, plus the forecast dividend yieldMar 2012 a 2013 e 2014 eHSBC EPS 48.80 57.84 54.11HSBC PE 18.2 15.3 16.4,UW: Growing headwinds for both Auto & Tractor businesses Falling profits for farmers, existing high credit ratios, lowercapacity utilisation for OEMs and high
3、channel inventory/dealer incentives do not bode well for tractor outlook In Auto, 40% of M&Ms UV/SUV portfolio is exposed tosevere competition, particularly with the impending increasein diesel prices, skewing earnings risk to the downside,PerformanceAbsolute (%)Relative (%),1M-7.0-9.8,3M7.60.3,12M3
4、4.912.6, We remain UW with a TP of INR840; higher subsidiary valuesand increase in government spending are the upside risks,Note: (V) = volatile (please see disclosure appendix)Tractor business: Demand weakness persists across agrarian and non-agrarianbuyersIn our report, Multiple roadblocks ahead,
5、published on 11 October 2012, we envisaged moreprolonged weakness in the tractor industry than was expected by the Street. Recent trends reinforceour bearish view. For the agrarian buyer, not just the weak monsoon but also the steep cost increases,21 January 2013Yogesh Aggarwal*AnalystHSBC Securitie
6、s and Capital Markets(India) Private Limited+9122 2268 1246yogeshaggarwalhsbc.co.inKarthik Subramaniam*View HSBC Global Research at:http:/*Employed by a non-US affiliate ofHSBC Securities (USA) Inc, and is notregistered/qualified pursuant to FINRAregulationsIssuer of report: HSBC Securities andCapit
7、al Markets(India) Private LimitedDisclaimer &DisclosuresThis report must be readwith the disclosures andthe analyst certifications inthe Disclosure appendix,and with the Disclaimer,which forms part of it,(such as complex fertilisers) have left lower surplus cash and a resultantly weaker appetite for
8、tractors. Channel inventory has remained persistently high in the past few months and, hence,should impact growth in the coming quarters as inventory normalises.Building stress in the channel as dealer discounts and credit ratios run highWeaker demand has resulted in persistently high discounts on t
9、ractors. With discounts restricted todealers, margins for OEMs may remain stable in the near term, but funding channel partners arenow passing through an uncertain phase. Institutional credit has grown significantly in the past fewmonths, and with high interventions by dealers and lower profitabilit
10、y of farmers, the risk ofdelinquencies run high in the coming months. Finally lower capacity utilisation across the industryis not comforting either.UV/SUV business highly exposed to growing competition, particularly in light of thelikely lower fuel price differentialM&M has already lost c10% market
11、 share in the past five quarters owing to growing competition inthe market. With the likely increase in diesel prices, the seemingly insatiable appetite for dieselvehicles should also moderate. A likely market slowdown, shifting bias for petrol vehicles andhigher competition in the UV/SUV market put
12、 at risk nearly 40% of the M&M portfolio, skewingthe earnings risk to the downside. Valuation: We remain UW with a TP of INR840 based on SOTPvaluation (page 10). No material changes to our FY14 estimates. Higher subsidiary valuation and arise in government spending are the upside risks. We are 7% be
13、low consensus on FY14e earnings.Index BOMBAY SE IDX Enterprise value (INRm) 473,162Index level 20,039 Free float (%) 66RIC MAHM.BO Market cap (USDm) 10,103Bloomberg MM IN Market cap (INRm) 543,987Source: HSBC Source: HSBC,Mahindra & Mahindra (MM IN)Autos21 January 2013Financials & valuationFinancial
14、 statements,Valuation data,abc,Year to,03/2012a,03/2013e,03/2014e,03/2015e,Year to,03/2012a,03/2013e,03/2014e,03/2015e,Profit & loss summary (INRm),EV/sales,1.6,1.2,1.1,1.0,RevenueEBITDADepreciation & amortisationOperating profit/EBITNet interestPBT,313,81141,613-6,69934,914-2,87436,775,383,80153,09
15、1-8,31944,772-2,84647,709,414,09949,915-8,28241,633-2,77844,304,445,90255,738-9,85345,884-2,77848,838,EV/EBITDAEV/ICPE*P/Book valueFCF yield (%)Dividend yield (%),11.79.018.24.44.21.4,8.97.215.33.63.01.4,9.35.816.43.12.11.4,8.04.814.92.73.41.4,HSBC PBTTaxationNet profitHSBC net profit,36,775-7,88729
16、,97029,970,47,709-12,18935,52035,520,44,304-11,07633,22833,228,48,838-12,21036,62936,629,Note: * = Based on HSBC EPS (fully diluted); This PE ratio includes the subsidiary valuation. Excludingsubsidiary valuation from the M&M EV and dividend income from the M&M earnings the PE ratio is nearly12.5x F
17、Y14.,Cash flow summary (INRm),Price relative,Cash flow from operationsCapexCash flow from investmentDividendsChange in net debtFCF equity,27,350-13,747-24,390-8,0082,10719,418,46,073-22,000-25,859-8,444-11,77013,823,43,811-24,000-24,000-8,444-11,3679,760,47,478-24,000-24,000-8,444-15,03415,754,11361
18、036936836736,11361036936836736,Balance sheet summary (INRm),636,636,Intangible fixed assetsTangible fixed assetsCurrent assetsCash & othersTotal assets,4,65564,16088,63612,909258,922,4,65577,84194,40324,679282,228,4,65593,559114,97436,046318,517,4,655107,706133,99251,080351,682,5362011Mahindra & Mah
19、indraSource: HSBC,2012 2013Rel to BOMBAY SE SENSITIVE INDEX,5362014,Operating liabilities,90,254,86,484,97,990,102,970,Gross debtNet debtShareholders fundsInvested capital,40,85327,944122,85954,289,40,85316,175149,93565,736,40,8534,808174,71879,153,40,853-10,226202,90392,303,Note: price at close of
20、18 Jan 2013,Ratio, growth and per share analysis,Year to,03/2012a,03/2013e,03/2014e,03/2015e,Y-o-y % change,RevenueEBITDAOperating profitPBTHSBC EPS,33.214.910.97.38.9,22.327.628.229.718.5,7.9-6.0-7.0-7.1-6.5,7.711.710.210.210.2,Ratios (%),Revenue/IC (x)ROICROEROAEBITDA marginOperating profit margin
21、EBITDA/net interest (x)Net debt/equityNet debt/EBITDA (x)CF from operations/net debt,6.758.426.513.813.311.114.522.70.797.9,6.455.526.013.913.811.718.710.80.3284.8,5.743.120.511.812.110.118.02.80.1911.3,5.240.119.411.612.510.320.1-5.0-0.2,Per share data (INR),EPS reported (fully diluted)HSBC EPS (fu
22、lly diluted)DPSBook value,48.8048.8012.26200.06,57.8457.8412.26244.15,54.1154.1112.26284.51,59.6559.6512.26330.41,2,Mahindra & Mahindra (MM IN)Autos21 January 2013Growing headwinds We think the tractor industry is heading for further weakness, versusa recovery expected by the Street in 2013 Lowering
23、 farmer profits, high financial leverage, lower capacityutilisation for OEMs and high channel inventory/dealer incentives donot bode well for the tractor outlook Separately, for Auto, 40% of the M&Ms UV/SUV portfolio isexposed to severe competition, particularly in light of the impendingincrease in
24、diesel prices, skewing the earnings risk to the downside,abc,Tractor industry remainsunder pressureThe tractor industry has grown impressively at+20% CAGR from FY10-12, eventually slowingdown to 11% growth in FY12 and likely flat-to-negative growth in FY13e (chart 1). As initiallyhighlighted in our
25、report, Multiple roadblocksahead, published on 11 October 2012, we envisagemore prolonged weakness in the tractor industry thanChart 1: Tractor industry growth trends,the Street is expecting. We maintain ourexpectation of a near-5% decline in FY13 andonly a modest 5% growth in FY14. M&M tractorvolum
26、es declined by nearly 5% YTD, and we do notsee any signs of any an imminent turnaround.Further, pricing (realisation) would remainweak as well, affecting M&M margins in thecoming quarters.,600,41%,50%,500400300200,26%,0%,-12%,11%,16% 18%,11%,15%,8%,-4%,-17%,16%,21%,9%,-5%,5%,-12%,-6%,10%,29%,16%,21%
27、,-5%,1%,32%,20%,11%,-2%,5%,40%30%20%10%0%-10%,1000,-25%,-20%-30%,FY84,FY86,FY88,FY90,FY92,FY94,FY96,FY98,FY00,FY02,FY04,FY06,FY08,FY10,FY12,FY14e,Tractor Volumes,y-o-y,Source: Industry data, HSBC estimates3,Mahindra & Mahindra (MM IN)Autos21 January 2013Chart 2: Capital employed and ROCE trends in t
28、he tractor business (INRm),abc,50%,46.1%,28,191,30,000,40%30%20%,10,316,35.4%12,927,19,40622.3%,19,83225.6%,23,33418.6%,23,54520.5%,13.9%,25,00020,00015,00010,000,10%0%,5,0000,4Q11,1Q12,2Q12,3Q12,4Q12,1Q13,2Q13,Source: Company data, HSBC,Tractor - ROCE,Capital employ ed in the tractor business - INR
29、 m (RHS),Increasing costs impacting surpluscash with farmersIt has been well acknowledged that last yearspatchy monsoon has impacted Kharif crop andfarmers profits and cash flows. However, we findthe cost increases are also impacting surplus cashin the agrarian community. For instance, theincrease i
30、n complex fertiliser prices in the past 12months, post deregulation in 2011, has impactedthe profitability of farmers. In our opinion,complex fertilisers are nearly 15-20% of the totalfarmers cost and the 2x price increase has leftfarmers with lower cash, impacting the purchasingpower for tractors.I
31、ncreasing inventory levels areconcerningChannel inventory remains persistently high in thepast few months and could impact M&Msgrowth in the coming quarters as inventorynormalises. Anecdotal commentary from tractordealers and the increasing capital employed (referto chart 2) in the business suggest
32、nearly a monthof inventory build-up. This increase in inventoryin a normalised state would be an 8% drag on thecompanys full-year growth.,Building stress in the channel asdealer discounts run highUnsurprising, weaker demand has resulted inpersistently high discounts for tractors. Interestingly,unlik
33、e in the car or 2W industry, it is dealers thatlargely offer these discounts and OEMs arerelatively isolated for now. Other than M&M, mostother competing large tractors are available atattractive discounts or on indirect offers. Withdiscounts restricted to dealers, margins for OEMsmay remain stable
34、in the near term, but fundingchannel partners are now in an uncertain phase.Institutional credit has grown significantly in the pastfew months and with high intervention by dealersand lower profitability for farmers, the risk ofdelinquencies is running high in the coming months.Increasingly industry
35、-level capacitiesare not comforting eitherSolid industry volume growth (15% CAGRFY08-12) and a favourable demand outlook overthe medium term have prompted major industryparticipants like M&M and TAFE to increasemanufacturing capacity.M&M has invested INR3bn in its new tractorplant at Zaheerabad, whi
36、ch has an annual capacityof 100,000 units. TAFE has invested INR1bn in a,new plant at Madurai, which should increasecapacity by 60,000 units.4,Oct-11,Dec-11,May-11,May-12,Nov-11,Sep-12,Feb-11,Feb-12,Jun-11,Mar-11,Mar-12,Aug-11,Sep-11,Jun-12,Aug-12,Jan-11,Jan-12,Oct-12,Apr-11,Apr-12,Jul-12,Jul-11,Nov
37、-12,1,5% 1,5%,Mahindra & Mahindra (MM IN)Autos21 January 2013Chart 3: Institutional credit to Agri sector,abc,560540520500480460440420,21%,18%,11%,12%,13% 13%,2% 11%,8% 7% 7%,6% 6%,8%,14% 1,17%,19%,20%,21%,23%,24%,30%25%20%15%10%5%,400Source: RBI, HSBC,Institut ional credit t o agri sector(INRbn),y-
38、o-y growth(RHS),0%,Given the current demand weakness, we believeincremental supply cannot be absorbed entirelyand, therefore, expect industry capacity utilisationto decline to less than 70% in FY13e, comparedwith 84% in FY12. We expect M&Ms capacityutilisation to decline to 76% in FY13e from over95%
39、 in FY12, thereby affecting margins.Lower capacity utilisation, along with a likelyincrease in RM costs and pricing pressure, doesnot pose a favourable outlook for margin.,Key upside risksGovernment spendingA plausible recovery could be driven by an increasein government spending on rural India or a
40、 normalRabi crop output this year. Most direct subsidiesfor tractors are state-level funded and in that regardthe impending assembly elections in some statesmay revive demand in those states (refer to table 1).A national rural incentive programme, before thenational elections in 2014, could lift ove
41、rallsentiments and rural spending as well.,Rabi cropAccording to the latest releases by the Ministry ofAgriculture, the total Rabi sown area is expectedto increase by 1.2% y-o-y to c56m hectares.Acreage of wheat, the main Rabi crop has seen a1.6% increase on a y-o-y basis.Chart 4: Capacity utilisati
42、on to decline for M&M and across the industry,1,200,0001,000,000800,000600,000400,000200,0000,95%90%85%80%75%70%65%60%55%50%,FY07,FY08,FY09,FY10,FY11,FY12,FY13e,Total industry capacity,Tractors Capacity Utilization (%) - RHS,Source: Industry data, HSBC estimates5,Mahindra & Mahindra (MM IN)Autos21 J
43、anuary 2013Table 1: Tractor subsidy is a state-level subject and therefore highly influenced by the Assembly elections,abc,State,% share of tractorsmarket (FY12),CAGR FY10-12 YTD Growth(y/y),Monsoon (%departure from,Subsidy per tractor Assemblyelections,normal Jun-Sep2012),UPMPRajasthanGujarat,13.9%
44、8.5%8.9%9.5%,5.9%23.0%29.3%52.5%,5.3%37.3%25.2%-25.4%,-20.0%6.0%12.0%-31.0%,INR 40,000-80,000INR 45,000-75,000,Mar 2017Nov 2013Nov 2013Dec 2012,Bihar,4.9%,0.2%,26.4%,-21.0% Up to INR 60,000 for 40HP tractor,Nov 2015,AP,7.0%,9.4%,-36.4%,2.0%,Max of INR 45,000 per unit for,April 2014,tractors up to 40
45、HP,MaharashtraPunjab,9.6%4.4%,28.9%-5.1%,-25.3%7.2%,-16.0%-46.0% Up to INR 200,000 for purchase of,Oct 2014Jan 2017,tractor,Haryana,4.4%,-4.9%,8.4%,-39.0%,Nov 2014,KarnatakaTotal,5.3%100.0%,14.7%16.2%,-27.8%-5.5%,-30.0%-7.6%,Up to INR 75,000,July 2013,Source: CRISIL, HSBCHowever, the recent cold wav
46、e in the northernpart of India also raises some concerns on theoverall Rabi crop production, in our view, despitethe fact that Rabi crop sowing has increased by2.6% y-o-y. Though the presence of highermoisture in the weather augurs well for the wheatcrop, dealers remain sceptical of any near-termpic
47、k-up in demand post the Rabi sowing season.Disbursements in the existing rural schemeshave come down as government runs a tightfiscal shipRecent commentary about budgetary cuts in keyflagship programmes like the NREGA scheme bythe rural development ministry does not bode wellfor the FY14 rural spend outlook.6,
