June sales +26%Y/Y

Strong UV sales (+34% YoY), offset weak growth within the tractor segment. UV sales across product segments were strong, with both Scorpio and non-Scorpio volumes up 32% and 35% respectively. Export initiatives within the auto sector continue – growth was strong at +89% YoY, albeit off a modest base.

Tractor Sales Decline 3% YoY

Domestic tractor sales were flat YoY; credit growth to the agriculture sector has tapered off sharply, due to concerns on rising inventory levels and escalation in NPAs. Over 1Q, tractor sales growth has been flat – this is an area of concern, given the significant profitability in this segment. Management reiterated its guidance of 6-8% growth over FY08e.

Other Initiatives

The initial response to the Logan has been fairly positive – especially given that the Logan was launched in only 11 cities. Management plans to expand capacity from 90 vehicles/day to 180 vehicles / day over the next two months. As volumes rise and localization increases, we reckon vehicle prices will decline, further spurring demand.

PTL Open Offer

Management indicated that the PTL open offer has been completed, with around 50% of the offer subscribed. MM holds 55% stake in PTL following the offer.

Maintain Buy

Key downside risks are: rising interest rates, which could curb volume demand, rising input costs, and decline in the market value of principal subsidiaries (on which our sum-of-the-parts target price is derived).

Valuation

Our target price of Rs 1032 is based on a sum-of-parts methodology. We value M&M's core business at Rs 543 (11x FY08E core CEPS). We also incorporate value for M&M's listed subsidiaries (Rs 402 per share), its auto component business (Rs 57 per share) and M&M's investments in other subsidiaries (including Mahindra Holidays at Rs 30 per share). Our core multiple of 11x, is supported by an 18% CAGR in core cash earnings (excluding dividends from group companies) for M&M over FY07E-09E. We value the key subsidiaries / associates / auto component initiatives at Rs 459 per share. At our core target price (of Rs 543) the stock would trade at around 13.6x FY08E core EPS (excluding dividends from subsidiaries) and should be supported by 16% CAGR in earnings over FY07E- 09E. We have chosen to use P/CEPS as our primary valuation metric to ensure proper comparison with historical trading bands — the company is undertaking a significant product development and capital expenditure program, and also undertook a restructuring of the balance sheet in FY02. We believe valuations will also be supported by: a) management’s continued efforts to unleash value from investments in group concerns (we believe that the listing of the group's hotel / resorts venture is next on the anvil); and b) new initiatives announced in the passenger cars, commercial vehicles and auto components segments, which should fructify over the next 2-3 years.