With rural market recovery underway and pro-rural policies in run-up to the elections, the brokerage house believes M&M is the best play on the rural markets.
Utility vehicle-to-tractor maker Mahindra & Mahindra shares rallied more than 2 percent after research house Motilal Oswal has maintained Buy rating on the stock with a target price of Rs 889, implying 22 percent upside.
With rural market recovery underway and pro-rural policies in run-up to the elections, the brokerage house believes M&M is the best play on the rural markets.
It said M&M would be one of the biggest beneficiaries of rural market recovery, as both of its core businesses are heavily dependent on rural markets.
Estimate suggests around 70 percent of MM’s profit can be attributed to rural markets, it feels.
Motilal Oswal said second consecutive year of normal monsoons and higher MSPs, and resumption of infrastructure investments (around 10 percent tractor demand) would boost tractor demand over the long term.
It expects around 11 percent CAGR in tractor volumes over FY17-20. Further, it expects continued ramp-up in non-tractor mechanisation (implements, harvesters, etc), which should result in stronger revenue growth over FY17-20.
Key takeaways from M&M's Investor Day at Chennai:
The Tractor business is launching its third brand, Trakstar, focusing on undercutting lower-priced competitors by 5-10 percent, with the objective of gaining 3-5 percent market share.
Even in the utility vehicle segment, there would be three new launches by CY18-end, which are largely developed at its global centers. With two of these launches (compact SUV and premium SUV) coming from existing Ssangyong products, core product quality is well-established.
The utility vehicle business would be fuel-agnostic by FY20, with petrol versions of all models. M&M has fungible engine capacity between diesel and petrol, de-risking its investments.
Motilal Oswal said the sharp recovery in utility vehicle business is expected to continue in pick-ups and passenger UVs are expected to benefit from rural recovery and new launches.
Pick-ups (around 43 percent of FY17 volumes) are back on growth path, though still below the previous peak of FY14. With 48 percent market share in light commercial vehicle (LCVs) <3.5ton, MM's pick-up volumes are estimated to grow at around 14 percent CAGR over FY17-20, driven by economic recovery, the research house said.
Passenger UV volumes declined at a compounded annual rate of 6 percent over FY13-17, impacted by emergence of compact SUVs (MM was absent in this segment) and rural weakness (around 50 percent of volumes).
Further, its launches in the compact SUV segment failed. With expected recovery in rural markets and one new product launch each in FY18/19, Motilal Oswal expects around 9 percent CAGR in passenger UVs. Successful upcoming launch would drive volumes higher, it feels.
According to the brokerage house, the UV segment is expected to outgrow the PV industry over the next 3-5 years. However, growth in UVs would be driven by increasing acceptance of compact SUVs by car buyers, while traditional UVs (MM's forte) could show cyclical recovery in volumes.
MM is responding to changing industry dynamics – it is this time challenged by market leaders like Maruti and Hyundai in the compact SUV segment, where M&M is a weak player.
Motilal Oswal estimates profitability of M&M’s UV business to be under pressure in the medium term, as it will have to shorten product refresh cycle and adopt very aggressive pricing.
At 13:59 hours IST, the stock price was quoting at Rs 748.50, up Rs 13.65, or 1.86 percent on the BSE.