Mahindra & Mahindra - Good consolidated automotive results, tractors still stuck; Hold - Anand Rathi

In its consolidated results, M&M displayed sustained buoyancy in the automotive division, driven by strong domestic performance. However, the tractor division continued to lag in terms of growth. Other business segments posted strong show, except Systech. Also, Tech Mahindra became an associate company during the quarter. M&M's 2QFY13 consolidated income grew 16%, while profit rose 13% yoy to Rs.7.5bn.

- Good standalone performance. Higher other income, strong 11.4% EBITDA margin and blended realizations up 21% resulted in M&M's 2QFY13 profit growing 22% yoy to Rs.9bn, on income growth 33%. The automotive segment continued to be robust with 58% revenue growth and healthy 9.4% EBIT margin. The tractor segment EBIT margin was 14.8% (lowest since 4QFY09) on lower operating leverage.

- Consolidated automotive segment recovers. The automotive segment EBIT margin recovered 270bps yoy on improved performance in India and overseas to 6.1% (flat qoq). However, the unfavourable tractor cycle resulted in revenue dip of 1.3% and 380bps yoy decline in EBIT margin (with EBIT down 30.8% yoy).

- Tech Mahindra ceases to be a subsidiary. Due to disposal of shares by its JV partner, Tech Mahinda became an associate company w.e.f. 1 September 2012. This resulted in revenue consolidation till August only. Hence, yoy results are not comparable.

- Other subsidiaries do well. Major group companies like Mahindra Finance, Mahindra Satyam, and Mahindra Holidays improved their performance yoy. However, the Systech division moved from profit to loss qoq and yoy, dragging down profitability.

- Valuation. We maintain Hold with SOTP-based target of Rs.953. The stock trades at ~12x FY14 consolidated earnings; valuations appear fair from an FY14 perspective. Risks. Upside - recovery in tractor demand. Downside - delay in recovery at Ssangyong, competition in PVs.

Source : Equity Bulls

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