M&M - "Slowdown in tractors leads us to cut estimates" - LKP Research

Robust topline growth offset by weak margin performance

M&M's Q3 FY12 standalone revenues were robust at Rs83.6 bn, a growth of 37% yoy and 14% qoq on solid performance on volume front. Volumes in the quarter grew by 24% yoy and 7% qoq, while the company remained market leader with market share of 57.8% and 42.9% in the UV and FES segments respectively. Auto volumes have grown by 31% yoy in the quarter, while FES volumes have grown by 12% yoy. M&M's topline was not a concern in the quarter, as its realizations also improved significantly. In line with the price hikes of 1-2% taken in this quarter in both the segments, realizations improved by 9% yoy and 5% qoq on better product mix as well. However, at the operating level, higher traded goods expenses in raw material costs led to margins to remain at 12.2% in line with the previous quarter. Higher traded goods were due to the accounting and supply arrangements done with MVML (Mahindra Vehicles & Motors Ltd). Although the traded good expenses moved up by 50% qoq, employee costs (5.36% v/s 5.84% qoq) and other expenses (8.12% v/s 9.42% qoq) were arrested through prudent cost management. Depreciation expenses increased by 45% yoy and 12% qoq as the new plant at Chakan is expanding. Adjusted PAT for the quarter came in at Rs6.62bn, a growth of 7% yoy and a fall of 13% qoq.

Slightly increasing UV sales estimates, while reducing tractor sales estimates on slowdown concerns

Strong demand in auto segment driven by SUVs Scorpio, Bolero and the goods carriers Maxximo and Genio have led to a continuous strength in the auto segment of M&M. Even when the PV industry has declined in the quarter, UV sales have grown by 33% yoy. The overwhelming response XUV 500 has received through the second round of bookings signifies that M&M's UV portfolio will be growing at a strong pace. The company has got 25,000 applications for XUV 500, while the company will allot to only 7200 applicants. We now expect UV sales to grow at 23%/18% in FY 12E/FY13E respectively. The company has maintained its market share of 57.8% in the UV segment. In the MPV Van segment, Gio compact cab and Maxximo mini Van excelled and scored a market share of 13.4%. However, on the tractor side, we believe the cycle is turning southwards as in the last three months, tractor business of M&M has grown by just 3%. With higher input costs, higher labour costs for farmers and higher interest rates, the tractor industry is in the midst of a slowdown. In line with this, we have reduced our estimates for tractors to 12%/3% for FY12E/FY13E.

Standalone Margins under pressure, incorporation of MVML to post a good margin performance

Although standalone margins have remained stagnant at 12.2% qoq, M&M+MVML margins which includes the vehicles manufactured at the low tax plant at Chakan came at 13.8%. Since we do not have a full year data for MVML, we are still analyzing the standalone M&M numbers, but will soon move on to value MVML in a quarter. On standalone basis, we expect margins to improve slightly from hereon as RM costs soften and the company is reducing costs both at employee cost level and other expenses level. However, occurrence of higher traded goods owing to expansion of capacities at Chakan will dampen the standalone margins. On the positive side again, higher inflow of the high margin XUV500 in FY 13 will help the MVML margins to improve and take the total MVML+M&M margins northwards. Currently, we expect standalone margins of M&M to be at 12.6/13.1% in FY12E/FY13E respectively.

Outlook and Valuation

In line with slowdown in tractor segment and dampening margins, we are cutting down our standalone earnings estimates for M&M from Rs45/Rs54 to Rs43/Rs52 for FY12E/FY13E. We arrive at a standalone value of Rs 648 valued @12.5 times FY 13E earnings and subsidiary value of Rs 145, thus coming at a total target price of Rs793. Although this is a cut in our target price from Rs890, we still maintain our BUY rating on the stock. Once we incorporate MVML numbers from next quarter, we may see some upside to our target.

Source : Equity Bulls

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