Mahindra & Mahindra (Q3 FY14)

Q3 FY14 was the third consecutive quarter wherein Passenger UV segment de-grew for M&M. All categories in its automotive segment registered steep declines in volumes except 4W pickups.

Feb 18, 2014 09:02 IST India Infoline News Service

CMP Rs906, Target Rs1,041, Upside 14.9%

  • Revenues fall by 2% yoy on back of 13.4% yoy volume and 1.1% yoy realization decline in automotive segment, 21% yoy growth in tractors volume restricted the fall to some extent, Net sales were in line with our expectations

  • Including MVML, OPM was higher by 150bps yoy driven by strength in EBIT margins in farm equipment segment which rose 211bps yoy; automotive segment EBIT margins (incl MVML) were higher by 74bps yoy

  • PAT at Rs9.3bn was higher than our estimates on back of better than expected operational performance

  • Sustained tractor segment growth will remain key for FY14 earnings as UV segment slows down

  • Retain BUY with a 9-month TP of Rs1,041

Result table
(Rs m) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Net sales 105,557 107,743 (2.0) 89,296 18.2
Material costs (75,970) (81,791) (7.1) (63,825) 19.0
Personnel costs (5,483) (4,982) 10.1 (5,024) 9.1
Other overheads (10,181) (8,858) 14.9 (8,997) 13.2
Operating profit 13,923 12,113 14.9 11,449 21.6
OPM (%) 13.2 11.2 195 bps 12.8 37 bps
Depreciation (1,948) (1,790) 8.8 (1,970) (1.1)
Interest (633) (466) 35.9 (623) 1.7
Other income 946 742 27.5 3,606 (73.8)
PBT 12,288 10,599 15.9 12,463 (1.4)
Tax (2,847) (2,238) 27.2 (2,568) 10.9
Effective tax rate (%) 23.2 21.1 20.6
PAT 9,441 8,362 12.9 9,895 (4.6)
PAT margin (%) 8.9 7.8 118 bps 11.1 (214) bps
Ann. EPS (Rs) 64.0 56.7   12.9 67.0   (4.6)

Segmental performance
Revenue (Rs mn) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Automotive 64,532 73,605 (12.3) 57,805 11.6
Farm equipments 40,987 34,040 20.4 31,476 30.2
Others 55 144 (62.1) 59 (8.1)
Total 105,573 107,789 (2.1) 89,341 18.2
EBIT (Rs mn) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Automotive 6,111 6,254 (2.3) 5,418 12.8
Farm equipments 7,214 5,274 36.8 5,345 35.0
Others 8 12 (39.0) 6 25.0
Total 13,332 11,540 15.5 10,769 23.8
EBIT Margin (%) Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Automotive 9.5 8.5 97 9.4 10
Farm equipments 17.6 15.5 211 17.0 62
Others 13.7 8.5 519 10.1 364
Total 12.6 10.7 192 12.1 58
Source: Company, India Infoline Research

M&M Standalone + MVML quarterly performance
(Rs m) Q3 FY14 Q3 FY13 % yoy Q2 FY14 % qoq
Net sales 102,416 102,426 (0.0) 86,604 18.3
Material costs (70,683) (73,747) (4.2) (59,358) 19.1
Personnel costs (5,877) (5,320) 10.5 (5,364) 9.5
Other overheads (10,531) (9,565) 10.1 (9,338) 12.8
Operating profit 15,325 13,795 11.1 12,544 22.2
OPM (%) 15.0 13.5 150 bps 14.5 48 bps
Depreciation (2,235) (2,054) 8.8 (2,244) (0.4)
Interest (883) (725) 21.9 (892) (0.9)
Other income 975 758 28.7 3,628 (73.1)
PBT 13,182 11,774 12.0 13,036 1.1
Tax (3,181) (2,625) 21.2 (2,759) 15.3
Effective tax rate (%) 24.1 22.3 21.2
PAT 10,001 9,149 9.3 10,276 (2.7)
PAT margin (%) 9.8 8.9 83 bps 11.9 (210) bps
Source: Company, India Infoline Research

20.4% jump in tractor revenues offset 10.4% yoy fall in auto segment revenues

Q3 FY14 was the third consecutive quarter wherein Passenger UV segment de-grew for M&M. All categories in its automotive segment registered steep declines in volumes except 4W pickups. Fall in UVs segment was steepest with a 24.5% yoy slump. While 3-W segment saw declines of 3.1% yoy, 4-W pick ups registered a marginal rise of 0.7% yoy. With overall volume decline of 13.4% and realization fall of 1.1% yoy revenues for the automotive segment fell 12.3% yoy. However strong volume growth in tractor segment (+21% yoy) during the quarter, helped it offset the decline in automotive segment revenues to a large extent. Tractor segment revenues at Rs41bn improved 20.4% yoy. Realizations were flat on a yoy basis but fell by 2% on a sequential basis.

EBIT margin better than expectations for both segments

Operating profit for the M&M standalone expanded by 14.9% yoy in spite of a 2% fall in overall revenues mainly led by sharply improved performance in the tractor segment. In fact, EBIT margins for both automotive and tractor segment were better than our expectations. For Automotive segment, EBIT margins were at 9.5% compared to our estimate of 9.4%, increase of 100bps yoy and 10bps on qoq basis. In the tractors segment, EBIT margins were at 17.6% as compared to our estimate of 17.4% a growth of 150bps yoy and 60bps qoq. Benign commodity costs in the quarter also helped as gross margins looked better by 385bps yoy.

PAT 3.7% ahead of estimates

Other income jumped 27.5% yoy but this was offset by 8.8% higher depreciation and 35.9% rise in interest expense. Tax rate inched up from 21.1% in Q3 FY13 to 23.4% in Q3 FY14. PAT growth of 11.7% was much better than estimates. PAT came in at Rs9.3bn as compared to our estimate of Rs9bn.


Cost analysis
As a % of net sales Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Material costs 72.1 75.9 (385) 71.5 59
Personnel Costs 5.2 4.6 57 5.6 (43)
Other overheads 9.6 8.2 142 10.1 (43)
Total costs 86.9 88.8 (185) 87.2 (27)
Source: Company, India Infoline Research

Cost analysis (M&M + MVML)
As a % of net sales Q3 FY14 Q3 FY13 bps yoy Q2 FY14 bps qoq
Material costs 69.0 72.0 (298) 68.5 48
Personnel Costs 5.7 5.2 54 6.2 (46)
Other overheads 10.3 9.3 94 10.8 (50)
Total costs 85.0 86.5 (150) 85.5 (48)
Source: Company, India Infoline Research

Key takeaways from the conference call
  • Management increased their FY14 growth guidance in tractor industry from 15-18% to 18-20%. Key drivers of the robust outlook on this segment are 1) Better than expected monsoons 2) Good quantum of increase in MSP prices. For FY16, the company has guided for 8-10% growth.
  • Beginning CY15, the company has plans to launch two new platforms for the UVs and 1 new platform for CV. While the model designing has been in-house engine for one of the two UV platforms has been designed along with Ssangyong.
  • During FY14-16, the company has lined up a capital expenditure plan of Rs75bn and investments of Rs25bn.
  • For Ssangyong the volumes grew 21% yoy highest amongst five domestic manufacturers in Korea and the company has guided for sales volume of 160,000 in CY14.
  • For 2-Wheelers the company expects to sell 250,000 in current year and expects to double it in next year on the back of success of Centuro and new scooter launch in Q1 FY15.
  • For the tractors division, plant inventory levels currently are substantially lower when compared with September end levels after a successful festive season.
Maintain BUY

With good monsoon and increased MSP's, we become more confident of robust growth in tractor industry and expect M&M to benefit from this growth in FY14. We expect M&M tractor volumes to grow 21% in FY14. This growth will help in countering the expected slowness in the UV segment in FY14. We maintain our BUY recommendation with 9-month price target of Rs1,041.


Valuation summary
Y/e 31 Mar (Rs m) FY13 FY14E FY15E FY16E
Revenues 404,412 405,036 456,890 520,717
yoy growth (%) 27.0 0.2 12.8 14.0
Operating profit 47,093 52,338 58,068 64,121
OPM (%) 11.6 12.9 12.7 12.3
Pre-exceptional PAT 32,622 38,405 41,566 46,694
Reported PAT 33,528 38,405 41,566 46,694
yoy growth (%) 16.5 14.5 8.2 12.3
         
EPS (Rs) 54.7 63.8 69.0 77.6
P/E (x) 16.6 14.2 13.1 11.7
Price/Book (x) 3.7 3.1 2.7 2.3
EV/EBITDA (x) 11.8 10.6 9.3 8.1
Debt/Equity (x) 0.2 0.1 0.1 0.1
RoE (%) 24.4 23.9 21.9 21.0
RoCE (%) 26.0 26.4 26.1 25.5
Source: Company, India Infoline Research

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