We carried out a state-level penetration evaluation for the tractor business. Whole penetration of tractors is within the vary of 4-5%, and extra importantly, penetration within the addressable land-parcels (medium and huge) is barely c30%. In our view, over the following 5-10 years, this penetration charge will proceed to go up, and land consolidation (pooling) within the small-and semi-medium holdings will improve tractor demand. Excessive earnings states like Punjab and Haryana have tractor penetration charges of about 20% adopted by states like Gujarat and Rajasthan at 8-10%. A lot of states, particularly the South Indian states, have a protracted technique to catch-up. Admittedly, within the near-term, tractor volumes could also be hit from the cyclical downturn, however our medium- to long-term outlook stays bullish. Moreover, the monsoon miss thus far in 2021 is restricted to few states whereas M&M’s stronghold states have had higher monsoons.
Auto enterprise (SUV and CVs) seems under-rated: In our reverse sum-of-the-parts evaluation of the present inventory worth, we estimate the SUV enterprise has a adverse worth of Rs 107 though its fundamentals have improved considerably within the latest quarters. M&M now has a strong presence throughout 4 product strains: Bolero, Scorpio, Thar and XUV300. Success of the upcoming XUV700 may additional strengthen portfolio. The outlook for the pickup enterprise (medium to long run) can also be strong.
Valuations undemanding: The previous yr has been eventful for M&M. Amid the outbreak of COVID-19 in April 2020, M&M’s inventory was buying and selling at historic backside valuations of 4-5x core P/E. Since then, the divestment of SsangYong and the numerous restructuring of US farm enterprise have helped to revive the consolidated earnings. The corporate has additionally restricted investments in non-core areas (GEMs). Most significantly, the SUV enterprise has emerged a lot stronger, in our view, with the success of Thar whereas expectations run excessive for XUV700. The inventory is buying and selling at 10x core FY23 PE, which is the least costly valuations within the sector amid our FCF estimate of Rs c40 bn for FY23e.
Non-core subsidiary investments: As mentioned in a Jan’21 be aware and in addition strengthened by the administration within the Q1FY21 name, non-core investments are capped at Rs 11-12 bn per yr. Based mostly on the enterprise momentum within the subsidiaries, the corporate is ready to convey down these investments. With TechM beginning to do properly, we consider bulk of the investments shall be funded from TechM dividend itself, thereby not impacting the FCF of core enterprise.