Mahindra & Mahindra (Q1 FY13)

CMP Rs723, Target Rs800, Upside 10.7%

• Revenues  increase 39% yoy driven by strong volume growth in automotive segment; Revenues ahead of our expectations on higher than estimated realizations
• OPM at 11.8% was better than our estimates of 11%, OPM declined 147bps yoy but rose 152bps sequentially
• Including MVML, OPM was lower by only 39bps yoy but increased 181bps qoq to 13.9%
• Higher interest and depreciation resulted in a restricted PAT growth compared to rise in operating profit
• While auto segment volume growth will continue to remain strong, poor monsoons entail a grim outlook for the tractors segment
• We value M&M at Rs800/share (9-month target), which includes Rs592 for its automotive business (10x P/E for FY14E) and Rs208 for its subsidiaries 

Result table

(Rs m)	Q1 FY13	Q1 FY12	% yoy	Q4 FY12	% qoq
Net sales	93,674	67,271	39.2	93,872	(0.2)
Material costs	(70,354)	(48,336)	45.5	(70,894)	(0.8)
Personnel costs	(4,516)	(4,017)	12.4	(4,294)	5.2
Other overheads	(7,710)	(5,964)	29.3	(8,990)	(14.2)
Operating profit	11,094	8,954	23.9	9,694	14.4
OPM (%)	11.8	13.3	(147) bps	10.3	152 bps
Depreciation	(1,548)	(1,099)	40.9	(1,997)	(22.5)
Interest	(460)	(262)	75.4	(709)	(35.1)
Other income	599	550	8.7	956	(37.4)
Extra ordinary items	-	-	-	1,083	-
PBT	9,684	8,143	18.9	9,026	7.3
Tax	(2,428)	(2,095)	15.9	(281)	764.0
Effective tax rate (%)	25.1	25.7		3.1
Adjusted PAT	7,256	6,049	20.0	8,745	(17.0)
Adj. PAT margin (%)	7.7	9.0	(125) bps	9.3	(157) bps
Ann. EPS (Rs)	49.3	41.2	19.6	59.5	(17.2)

Source: Company, India Infoline Research

Segmental performance

Revenue (Rs mn)	Q1 FY13	Q1 FY12	% yoy	Q4 FY12	% qoq
Automotive	62,787	38,559	62.8	66,137	(5.1)
Farm equipments	30,783	28,571	7.7	27,611	11.5
Others	170	205	(17.3)	196	(13.3)
Total	93,739	67,335	39.2	93,944	(0.2)
EBIT (Rs mn)	Q1 FY13	Q1 FY12	% yoy	Q4 FY12	% qoq
Automotive	5,528	4,139	33.5	5,759	(4.0)
Farm equipments	4,824	4,574	5.5	4,342	11.1
Others	40	21	91.3	31	26.8
Total	10,392	8,734	19.0	10,132	2.6
EBIT Margin (%)	Q1 FY13	Q1 FY12	bps yoy	Q4 FY12	Bps qoq
Automotive	8.8	10.7	(193)	8.7	10
Farm equipments	15.7	16.0	(34)	15.7	(5)
Others	23.5	10.1	1,333	16.1	742
Total	11.1	13.0	(189)	10.8	30

Source: Company, India Infoline Research

M&M Standalone + MVML quarterly performance

(Rs m)	Q1 FY13	Q1 FY12	% yoy	Q4 FY12	% qoq
Net sales	88,785	67,537	31.5	91,188	(2.6)
Material costs	(63,493)	(47,491)	33.7	(65,855)	(3.6)
Personnel costs	(4,810)	(4,206)	14.4	(4,550)	5.7
Other overheads	(8,132)	(6,183)	31.5	(9,754)	(16.6)
Operating profit	12,350	9,658	27.9	11,029	12.0
OPM (%)	13.9	14.3	(39) bps	12.1	181 bps
Depreciation	(1,800)	(1,313)	37.1	(2,264)	(20.5)
Interest	(714)	(532)	34.1	(1,101)	(35.2)
Other income	662	550	20.4	1,015	(34.8)
Extra ordinary items	-	-	-	1,083	-
PBT	10,498	8,363	25.5	9,762	7.5
Tax	(2,713)	(2,180)	24.5	(650)	317.6
Effective tax rate (%)	25.8	26.1		6.7
Adjusted PAT	7,785	6,183	25.9	9,113	(14.6)
Adj. PAT margin (%)	8.8	9.2	(39) bps	10.0	(123) bps

Source: Company, India Infoline Research

Revenues increase on back of improvement in automotive volumes
Mahindra & Mahindra (M&M) reported a net sales growth of 39.2% yoy driven by a strong automotive segment volume growth of 28.7% yoy (in Q1 FY12 Verito volumes were not a part of M&M Auto segment). However, tractor segment volumes were lower by 1% yoy leading to an overall volume growth of 17.2% yoy. In the automotive segment, passenger UV sales were higher by 32% yoy on account of continued success of Scorpio and Bolero and also on account of an outstanding launch of the XUV 500. 4W pick up volumes jumped by 26.9% yoy. Realizations for the automotive segment were higher by 29% yoy owing to substantially higher realizations of XUV 500, higher proportion of UVs and price hikes implemented over the last one year. Realizations of tractors increased by 8.8% yoy on the back of price hikes implemented. On a qoq basis, volumes for automotive segment were lower by 14.8% (Q4 FY12 had full FY12 volumes of Verito) while farm equipment segment witnessed a rise of 14% in sales. Additionally, the company had merged with itself the automotive business of Mahindra Automobile Distributor Private Ltd (MADPL) in Q4 FY12 which manufactures and sells Verito (previously Logan).

Higher raw material costs lead to yoy decline in OPM
During Q1 FY13, M&M reported an OPM of 11.8%, higher than our expectations. Operating profit was higher by 23.9% yoy and 14.4% qoq, while OPM was lower by 147bps yoy but improved 152bps sequentially. EBIT margins for automotive and tractors segment fell 193bps and 34bps on yoy basis. 325bps yoy increase in raw material costs as a percentage of sales was the key reason for the fall in margins. The company attributes this, especially for the automotive segment, to the fact that the standalone company earns only marketing margins on incremental production from MVML. Including MVML, OPM was lower by only 39bpsbps yoy and improved 181bps qoq to 13.9%. Benefits of operating leverage were seen as both staff costs and overheads declined as a percentage of net sales.

Cost analysis

As a % of net sales	Q1 FY13	Q1 FY12	bps yoy	Q4 FY12	bps qoq
Material costs	75.1	71.9	325	75.5	(42)
Personnel Costs	4.8	6.0	(115)	4.6	25
Other overheads	8.2	8.9	(63)	9.6	(135)
Total costs	88.2	86.7	147	89.7	(152)

Source: Company, India Infoline Research

Cost analysis (M&M + MVML)

As a % of net sales	Q1 FY13	Q1 FY12	bps yoy	Q4 FY12	bps qoq
Material costs	71.5	70.3	120	72.2	(71)
Personnel Costs	5.4	6.2	(81)	5.0	43
Other overheads	9.2	9.2	0	10.7	(154)
Total costs	86.1	85.7	39	87.9	(181)

Source: Company, India Infoline Research

Key takeaways from the conference call

• In the tractor segment, the company lost some market share in Q1 FY13 as the company refrained from offering discounts to attract volumes. For FY13, the company has guided for a flat to 3% growth in tractor volumes.
• For XUV 500, the company so far sold ~32,000 units and currently has bookings for 20,000 units. The current production rate is 4,000 units per month. The company plans to raise the production capacity to 5,000 units over the next 3-6 months. Incremental investments would be minimal. The company currently has no plans to raise XUV 500 capacity beyond 5,000 units.
• The initial response to the new Verito has been good and the company aims to clock a monthly run-rate of 1,800 to 2,000 units in the near term.
• Until Diwali, M&M plans to launch three vehicles which include 1) the Mini – SUV, 2) a new electric car and 3) a model from the Ssangyong platform.
• Inventory for both automotive and tractor segment are at comfortable levels. For the automotive segment, while plant inventory is at 15 days, dealer inventory is at 26-28 days. In the farm equipment segment, the plant inventory is at 22 days and the dealer inventory is at 26-28 days.
• For Ssangyong H1 CY12 volumes and revenues have remained flat. However, in terms of EBIDTA the company has reported a profit of US$12.5mn as compared to a loss of similar magnitude in H1 CY11. The company has maintained its CY12 volume guidance of 123,000 units a growth of ~9% yoy. The company is confident of meeting its guidance in spite of flat volumes in H1 as Rexton-W which was launched a month back and Rodius whose emission norms issue has been sorted out will provide traction. Additional upsides would arise from export of CKD units to India.
• In terms of exports, tractor exports are likely to slowdown given the tough economic conditions in Bangladesh, which has been a major market for M&M. Automotive exports momentum is likely to sustain in terms of absolute volumes. Major export markets for auto segment include South Africa, Chile, Brazil (additional thrust on from last quarter), Sri Lanka, Nepal, Bangladesh, Australia (XUV launched last month).

Maintain BUY
We value M&M at Rs800/share (9-month target), which includes Rs592 for its automotive business (10x P/E for FY14E) and Rs208 for its subsidiaries. We believe, M&M’s automotive will continue to see robust growth as its UVs continue to be the market leader in their segments and its LCVs are well placed in the strong growth segments. Tractor volumes will continue to reel under pressure on the back of poor monsoons.

Financial summary

Y/e 31 Mar (Rs m)	FY11	FY12	FY13E	FY14E
Revenues	234,603	318,535	382,279	427,077
yoy growth (%)	26.1	35.8	20.0	11.7
Operating profit	34,543	37,707	43,816	50,993
OPM (%)	14.7	11.8	11.5	11.9
Pre-exceptional PAT	25,446	27,706	30,555	35,685
Reported PAT	26,621	28,789	30,555	35,685
yoy growth (%)	27.5	8.1	6.1	16.8
EPS (Rs)	43.3	47.0	51.3	59.3
P/E (x)	16.7	15.4	14.1	12.2
Price/Book (x)	4.1	3.5	3.0	2.6
EV/EBITDA (x)	12.8	11.9	10.0	8.4
Debt/Equity (x)	0.2	0.3	0.1	0.1
RoE (%)	28.1	24.6	23.1	22.9
RoCE (%)	28.8	25.0	25.7	28.0

Source: Company, India Infoline Research