Mahindra & Mahindra - Tractor Recovery to Cushion UV Slowdown - Karvy

Notwithstanding slowdown in tractor segment, Mahindra & Mahindra (M&M) has delivered strong operational performance in Q4FY13. Its operating margins rose 184 bps YoY (87 bps QoQ) to 12.1% vs. our estimate of 11%. Its revenues rose 12% YoY to Rs. 105 bn (vs. our estimate of Rs. 101 bn), while volume grew 7% YoY to 199,105 units. Price hike and better productmix resulted in 5% YoY rise in average realization per vehicle. Its RM/Sales ratio dipped 75 bps YoY (110 bps QoQ) to 74.8%. M&M booked Rs. 900 mn capital gain on stake sale of its investment in Mahindra Holidays, excluding which its adjusted PAT rose 28.6% YoY to Rs. 8 bn. Adjusted profit of combined entity (M&M+MVML) rose 8% YoY to Rs. 8.7 bn on revenues of Rs. 99.8 bn (up 9.6% YoY), while its EBIDTAM rose 239 bps YoY (91 bps QoQ) to 14.4% in Q4FY13.

Recovery in Tractor Segment Suffice to Offset UV Slowdown: We observed strong positive co-relation between tractor volume and election period during past decades. Farm segment always benefits from election money-flow in rural India, which coupled with relief to farmers from government would result in strong demand for tractors in FY15E. We expect UV growth to taper down from ~50% to 13.5% in FY14-15 due to high base, increase in excise duty coupled with declining fuel price differential. We believe that strong tractor volume would be more than enough to maintain profitability, as Tractor segment (EBIT margin of 16%) enjoys much higher operating margin than Auto segment (EBIT margins of 9%). We expect margin improvement of 50 bps over FY13-15 on account of increasing contribution from Tractor segment.

Outlook & Valuation

In view of UV growth tapering down, we lower our revenue and EPS estimates by 3% each for FY15E. Based on 8xFY15E EV/EBIDTA, we value M&M's standalone business at Rs. 820 (from Rs. 836 earlier). Based on 7xEV/EBIDTA, we value MVML at Rs. 67 and post-20% Hold Co discount, we value subsidiary at Rs. 263 per share (from Rs. 247 earlier). We reiterate our "BUY" recommendation on M&M and maintain our SOTP-based target price of Rs. 1,150 per share, primarily on account of increasing value of its subsidiary supported by their improved financial performance.

Source : Equity Bulls

Keywords