Mahindra & Mahindra (Q4 FY12)

CMP Rs657, Target Rs766, Upside 16.6%
 

• Revenues  increase 38% yoy driven by strong volume growth in both automotive segment, offset by decline in sales volumes for farm equipment segment
• OPM at 10.3% was lower than our estimates, OPM declined 253bps yoy and 188bps qoq driven by higher raw material costs
• Including MVML, OPM was lower by 191bps yoy and 166bps qoq at 12.1%
• Exceptional items and tax credit results in better than estimated PAT of Rs8.7bn
• Volume growth for auto business to outpace growth in the tractors business
• We value M&M at Rs766/share (9-month target), which includes Rs601 for its automotive business (11x P/E for FY14E) and Rs165 for its subsidiaries

Result table

Revenues increase on back of improvement in volumes

Mahindra & Mahindra (M&M) reported a net sales growth of 38% yoy driven by a strong automotive segment volume growth of 25% yoy. However, tractor segment volumes were lower by 12.3% yoy leading to an overall volume growth of 10.9% yoy. In the automotive segment, passenger UV sales were higher by 27% 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 33% yoy. Realizations for the automotive segment were higher by 34% yoy owing to substantially higher realizations of XUV 500, while that of the tractors increased by 12.7% yoy. On a qoq basis, volumes for automotive segment were higher by 7% while farm equipment segment witnessed a fall of 12% in sales. Additionally, the company merged with itself the automotive business of Mahindra Automobile Distributor Private Ltd (MADPL) which manufactures and sells Verito (previously Logan). The revenue impact was about Rs7.4bn, while EBIDTA impact is minimal.

Higher raw material costs lead to yoy decline in OPM

During Q4 FY12, M&M reported an OPM of 10.3%, lower than our expectations. Operating profit was higher by 11.3% yoy but declined 5.2% qoq, while OPM was lower by 253bps yoy and 188bps sequentially. EBIT margins for automotive and tractors segment fell 186bps and 130bps on yoy basis. 479bps 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 191bps yoy and 166bps qoq to 12.1%. Benefits of operating leverage were seen as both staff costs and overheads declined as a percentage of net sales.

Exceptional items and tax credit results in better than estimated PAT

M&M reported a better than expected PAT of Rs8.7bn. This was owing to an exceptional item of Rs1.1bn for reversal of impairment of assets done in MADPL. Furthermore there were tax savings of Rs1.5bn on account of unabsorbed losses and deferred tax positions at MADPL.

Key takeaways from the analyst meet

• While the company has reported tractor volume growth in line with the industry during the quarter, automotive segment volume growth surpassed industry growth by a substantial margin. For FY13E, the company has guided for 1) 10-12% growth in passenger vehicle TIV, 2) faster than passenger vehicle TIV growth for UVs, 3) CV growth of 9-11%, 4) Two wheeler TIV growth of 12%, 5) Flat volumes for three wheelers and 6) 5-6% growth for tractor industry.
  

• The company has completed deliveries for the initial two rounds of bookings. The third round of bookings will be opened on a nation-wide basis as compared to 19 cities in the earlier round.
  

• For FY13, the company has lined up 6-7 launches in the automotive space which includes 1) the sub 4,000mm Verito, 2) New electric car under Reva brand. For the tractor segment the company has plans to launch 3-4 models.
  

• MVML is currently producing at a run rate of about 15,000 units a month. Going ahead the company expects a steady increase in the production.
  

• In the construction equipment business the company is currently selling about 100 backhoe loaders per month. Going ahead, the company has plans to launch other equipments as well.
  

• Fall in tractor volumes for M&M is mainly driven by declining demand from the infrastructure space which accounts for nearly 20% of its volumes.
  

• Fall in tractor volumes was mainly driven by 21% fall in Maharashtra volumes, 40% slump in AP sales, 25% decline in Orissa volumes and 22% dive in Orissa volumes. With correction in the inventory levels, the company is back to the normal working as against a two-day production cuts in February and March 2012.
  

• Q1 CY12 has been the first EBIDTA positive quarter for Ssangyong under the M&M management. Although, the company does not expect to report profit at PBT levels in FY13 but it anticipates an improvement at the EBIDTA level.
  

• After reporting a fall in Powerol revenues in FY11, the company has reported a 15% growth in the segment sales.
  

• MNAL sold 1,567 units in Q4 FY12 as compared to 849 units in Q3 FY12. It has seen a steady increase in its market share in the HCV 25T and above category from 1.3% in Q1 FY12 to 3% in Q4 FY12.

Maintain BUY

We value M&M at Rs766/share (9-month target), which includes Rs601 for its automotive business (11x P/E for FY14E) and Rs165 for its subsidiaries. We believe, M&M’s automotive business is highly dependent on rural India, which is currently witnessing strong consumer sentiment. This is backed by government initiatives to improve agricultural productivity and credit availability, rising MSP prices for food grains and improving non-agriculture income through government impetus. Although margins are expected to decline on account of higher raw material prices, company’s cost cutting initiatives are likely to restrict the fall. We maintain our BUY rating.