M&M - Operating performance in-line; Maintain Neutral - Centrum

Mahindra and Mahindra's (M&M) excluding MVML's 3QFY13 operating results were largely in line with our expectations with EBITDA margins at 11.2% compared to our estimate of 11.4%. The Automotive segment witnessed pressure on profitability with EBIT margins contracting 90bps QoQ at 8.5%, while EBIT margins for FES segment, despite 27% volume growth QoQ, stood at 15.5%,an improvement of merely 70bps. While standalone margins stood at 11.2% (down 45bps YoY and 16bps QoQ), combined margins for M&M+MVML stood at 13.5% (flat YoY but 40bps lower QoQ). Reported PAT for M&M was Rs.8.36bn compared to our estimate of Rs.8.39bn. We believe the product cycle in utility vehicles (UVs) will now peak (Excluding XUV500, YTDFY13 volume growth stands at 7-8%; competition is increasing in the UV space; Scorpio is facing pressure in a few pockets, no new model launch is expected except for refresh variants in FY14E) and our thesis of higher-than-expected decline in tractors has played out (YTDFY13 down 5% vs. earlier guidance of flattish volume growth for FY1;. also guidance of 4-6% volume growth on a low base of FY13 is not encouraging).We continue to maintain our Neutral view on the stock with a target price of Rs.918.

Realization led revenue growth: Revenues combined for M&M and MVML stood at Rs.102bn registering a YoY growth of 25% and QoQ growth of 10%. Combined margins on the automotive side stood at 11.2% contracting by 104bps QoQ while the FES margins were 15.5% expanding by 72bps. Overall EBITDA margins for the quarter stood at 13.5% (flatYoY but lower by 40bps QoQ). Reported PAT was higher at Rs.9.1bn, a growth of 35% YoY but a drop of 6% QoQ.

Management interaction: Key highlights: 1.) the management expects 4-6% tractor volume growth for FY14E 2.) Inventory is at optimum levelsboth in Auto and Tractor segments (dealer level inventory at 3 weeks for automotive segment and less than 5 weeks for tractor segment) 3.) Price hiked by 1-3% on the automotive segment from Jan'13, but not for tractors4.) Tax rate for the FY13E is likely to be at 24.3% compared to 25.3% in FY12 5.) The new tractor manufacturing plant at Zaheerabad is likely to be operational by the end of FY14E; the company is likely to launch a brand new tractor in FY14E (the last was in 2001 ( Arjun) and Yuvraj ( 2011) 6. Overall capex of Rs.75bn has been maintained over FY13E-FY15E (Rs.50bn for M&M+MVML and Rs.25bn for investments).

Valuations and Recommendations: At the CMP of Rs885, the stock is trading at 12.8x FY14E core EPS of Rs49 and 11.5x FY15E core EPS of Rs54. We continue to maintain our Neutral rating with a revised target price of Rs918, valuing the stock at 13x Sept 2014E Core EPS + subsidiary value of Rs246 and assign 25% holding co discount.

Source : Equity Bulls

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