In a ruling on Wednesday the Supreme Court of India banned registration of diesel cars and SUVs larger than 2000cc in the National Capital Region (NCR) until 31 March 2016. This is to address concerns of high air pollution in Delhi. The decision will affect M&M as 2% of its auto sector volumes in FY15 came from vehicles that would be covered by the ban. The auto sector contributed ~60% of M&M’s standalone revenues in FY15, thus the revenue impact we estimate will be ~1.2%.
However, larger concerns are which way the policy and market fuel preferences will head. Currently the diesel vehicle mix in India stands at 42%. For M&M nearly all its volume is from diesel vehicles currently. As per the company, there is no particulate matter (PM) emission difference between a 2L or 2.2L engine. Thus, we believe there needs to be a holistic and multi-pronged approach to solving this problem.
With the stock is already down 5% on this news today and core auto business trading at ~11.3x FY17F EPS for M&M+MVML (Rs 69.9) we believe that above concerns are priced in. We maintain our Buy rating on the stock.
However, the stock is likely to remain volatile in the near term as further news emerges on this topic. The company will present its detailed case when the court re-convenes on January 5, 2016 after which more updates may be available.
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