The Hindu Business Line : Mahindra and Mahindra: Hold

SHAREHOLDERS of Mahindra and Mahindra (M&M) can continue to hold on to the stock at the current Rs 475 level. At this price, the stock discounts its current annualised per share earnings by about 12 times. Shareholders, however, need to be cautioned that expectations about any near-term uptrend in the stock price can only be moderate, since many of the company's fresh investment proposals are unlikely to be bear fruit in the short term.

The recommendation takes into account M&M's dominating position in the tractors and utility vehicles segments and its emerging presence in the three-wheelers and specialty auto businesses. It also takes into account the near doubling of post-tax profits that the company recorded during the first half of this fiscal. After setting a commendable pace for its utility vehicles segment, with the massive success of its sports utility vehicle, Scorpio, and, relatively speaking, the equally successful run for its pick-up trucks, M&M is now gearing to corner a bigger wedge of the tractors business pie, not just in the domestic market, but globally. Whereas all the while the utility vehicles segment was expected to be the dominant contributor to M&M's performance, the parameters of the tractor division seem to suggest otherwise. Tractors sales in the first half of this fiscal jumped 46 per cent compared to the corresponding six months of last year. Further, with the monsoon successful in terms of precipitation and spread, the second half of this financial year is also expected to be good for tractor sales.

M&M's higher tractor sales also indicates the benefit the company has been able to glean out of the excise duty exemption provided by the Budget. The company is likely to be one of the biggest beneficiaries, since it manufactures a number of components in-house, unlike many other tractor manufacturers, which outsource sub-assemblies.

However, one of the other important factors that will benefit the company's tractor division and be a stepping stone to M&M's plans to be a global player in the tractors business, is its recent announcement about a setting up a joint venture company in China which, along with India, is one of the biggest markets for tractors.

To mark its foray into China, M&M has signed a memorandum of understanding for entering into a joint venture agreement with Jiangling Motor Co Group (JMCG) of China. The proposed JV will acquire the tractor manufacturing assets from Jiangling Tractor Company, a subsidiary of JMCG. Jiangling Tractor Company has a capacity of 12,000 tractors. Under the agreement, M&M will have an 80 per cent stake in the JV. The transaction value is estimated at $10 million and M&M will invest about $8 million. M&M has already started test marketing its products in the province of Henan in China.

The overseas investment plans are in keeping with M&M's strategy to go global with many of its products and to apply its expertise in other fields of manufacturing where it has gained specific insight in the past. As a result, sports utility vehicles and tractors are high on the list of products that the company is keen on sending overseas. In the past few years, M&M has had some success in penetrating the small tractors segment in the American market. With the new JV, the company will gain a toehold in the highly lucrative Chinese market.

However, while the investment in this JV gives M&M that much-needed boost in terms of reach in fresh markets, pay-back is likely to be slower, despite its entering into an agreement with an existing manufacturer. Another persistent cause of worry is the continued increase in input costs both from the surge in steel prices and the spiralling price of oil.

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