Mahindra & Mahindra - Beats estimates, tractor margins to remain under pressure - Centrum

Mahindra and Mahindra's (M&M) 1QFY13 operating results were better than our expectations with EBITDA margins at 11.8% compared to our estimate of 10.4%. Surprisingly, despite increased news flow of discounts in the tractor industry, aggressive pricing by competitors (management also indicated that not all players had increased prices) and 3% QoQ decline in average realizations, EBIT margins for the FES segment remained flat QoQ at 15.7%. The management has downgraded its tractor volume growth guidance to 0-2% YoY in FY13E compared to the earlier guidance of 5-7%. This is in line with our view after interaction with tractor dealers suggested flat volume growth. We continue to believe that though the company has not resorted to price cut and discounts, aggressive pricing by competitors could put pressure on FES margins going ahead. Based on dealer interaction, we also understand that >51HP segment is facing increasing pressure (contribution of >51HP, lowest in last 5 qtrs). We continue to remain cautious on FES profitability going forward and maintain our Neutral rating on the stock with a revised target price of Rs.817.

Realization led revenue growth: Revenues stood at Rs.94bn compared to our estimate of Rs.95bn. Net realization for the automotive segment increased by 1.1% QoQ, while for the FES segment it registered a drop of 2.6%. EBIT margins for the automotive segment stood at 8.8% compared to that of FES at 15.7%. Overall EBITDA margins for the quarter stood at 11.8%, up 152bps QoQ. Reported PAT stood at Rs.7.3bn compared to our estimate of 6.0bn.

Management interaction: Key highlights: 1.) The management has scaled down volume growth for tractors from 5-7% earlier to 0% now; this is broadly in line with our estimates. The management also indicated that all players did not increase prices. During the quarter, M&M increased price by 2-3% for tractors but also indicated that RMC would go up by 2-3% during the same period. 2.) Inventory is at optimum levels. The management indicated that plant inventory for the Auto segment stood at 15 days (dealers' end 26days), while the inventory for tractors inched up at plant level to 22 days and at the dealers' end to 27-28days. While there was no change in inventory levels for the Auto segment QoQ, marginal increase was seen for the tractor segment. 3.) XUV500 continued to remain strong. YTD since its launch, M&M has sold 32,000 units and currently has an order booking of 20,000 units. M&M is planning to increase the current capacity of 4,000/month to 5,000/mionth over the next 5-6 months. 4.) The company will launch three new models - Mini Xylo, an electric vehicle and a new model from Ssangyong range in 2QFY13.

Valuations and Recommendations: At the CMP of Rs744, the stock is trading at 13.6x FY13E core EPS of Rs40 and 11.5x FY14E core EPS of Rs47. We continue to maintain our Neutral rating with a revised target price of Rs817, valuing the stock at 13x FY13E Core EPS + subsidiary value of Rs206 and assign 25% holding co discount.

Source : Equity Bulls

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