Mahindra & Mahindra (Q3 FY14)

• 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

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.

• 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.

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.