This Nifty 50 stock is available at dirt-cheap valuation. Should you Buy?

This Nifty 50 stock is available at dirt-cheap valuation. Should you Buy?

In our previous article Is it the right time to shift to value stocks? – Must Read, we had mentioned how we believe that value stocks would outperform going forward led by economic revival and valuation comfort. Therefore, here is our first value pick and that too from Nifty 50 index.
Please read our disclaimer before investing.

This company has truly been one of the wealth creators for its investors over the last 25 years. The company started its operation way back in 1945 with steel business and has expanded into 22 key industries to date. It is the flagship company of the Mahindra Group, Mahindra & Mahindra Ltd. better known as M&M. Its core business includes farm equipment and the automotive business, wherein the company enjoys a leadership position in the tractor and the utility vehicle (UV) segment. M&M is also the holding company of other Mahindra group companies some of them including Tech Mahindra, M&M Financial Services, Mahindra Life Spaces, Mahindra Holidays, Ssangyong, Mahindra CIE Automotive, CIE Automotive Spain, Mahindra Logistics and Swaraj Engines.

Why is it trading at a discount?

The stock has witnessed sharp correction of nearly 50% in the last 1-1.5 years because of a sharp slowdown witnessed in its key segment viz. tractor, CV and UV segment. The liquidity crisis amongst NBFCs, overall economic slowdown, limited increase in MSP has resulted in slowdown for the overall auto sector. M&M being one of the prominent players in each segment (especially PVs, CVs and Tractor) of the auto industry is obviously affected by the industry slowdown. Going forward, the regulatory changes with respect to BS-VI transition is likely to take a toll on the company’s CV and UV portfolio due to substantial price increase. Further, increase in competitive intensity from new entrants and existing players in the UV segment has also raised concerns over the sustainability of market share. Therefore, uncertain future growth outlook in the tractor segment and headwinds due to regulatory changes has led the stock trading at a discount to its historical averages.

However, the worse seems to be priced in.

Firstly, for the tractor segment, we believe that the worse is over for the industry as late revival in monsoon augurs well for the growth of traction industry. The recent surge in food prices is also positive for rural income. Additionally, easing conditions amongst NBFCs and lower interest rates bodes well for growth prospects. Further, we expect the government would to continue to focus on increasing rural income through MSP or higher subsidies. Therefore, we expect a gradual recovery in the tractor segment and M&M being the market leader with over 40% market share is likely to be a key beneficiary. M&M’s automotive business faces several headwinds as mentioned above, but we believe these factors are largely priced in the stock. Further, the company has active plans to cope with increase in competition and fill product gaps and better inventory management would ensure smooth transition to BS-VI.

On the valuation front, the company standalone business trades at 13.9x on 1-year forward earnings which is way lower compared to historical 10-year and 5-year averages of 17.5x and 20.2x. Further, on a consolidated basis even after placing a 40% holding co. discount on its listed subsidiaries, we believe that the stock has tremendous potential to yield 12-17% CAGR over the next 3-4 years. Therefore, at this price of 509, there is definitely valuation comfort and we believe the downside would be limited from hereon.

Please read our disclaimer before investing.

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