Mahindra & Mahindra - Operating performance in-line ; Maintain Buy - Centrum

We retain Buy rating on M&M with a revised TP of Rs.1,009. Though the automotive portfolio continues to face headwinds, YTDFY14 tractor sales were significantly ahead of our estimates. We are now factoring in higher tractor growth of 12% (earlier 8%) and expect a drop in the automotive volumes (-3% vs. + 8%) for FY14E. Higher contribution from better realizations and margin from the tractor segment in FY14E will largely offset the drop in the automotive segment. Consequently, our FY14E/FY15E earnings forecast remains largely unchanged.

Operating results in-line: M&M + MVML PAT of Rs.9.1bn (17% YoY), stood 2.5% above our estimates. Net sales of Rs.97bn (+9% YoY) were 4% below our estimates due to lower tractor realizations. EBITDA of Rs.14bn (+13% YoY) was in line. Automotive revenues were flat YoY due to flat volume and realizations. Tractor revenues grew by 27% YoY aided by 25%/1.2% YoY volume/realizations growth. Automotive EBIT margin came in at 11.2% (flat YoY) while tractor EBIT margin at 16.7% (+100 bps YoY) surprised positively.

Automotive segment likely to decline in FY14E: We now expect the automotive segment to register a drop of 3% in FY14E vs. our earlier est. of 8% growth as there is no expectation of a recovery in 9MFY14. The company has a dealer inventory of five weeks and is likely to shut down its Chakan plant in August'13 for a few days to align retail demand with dispatches. Further, the company has not planned any launches over the next two years. Its first completely new model launch (on a new platform) will be in 4QFY15.

Tractor volumes revised upwards: We are now building 12% volume growth for tractors for FY14E (8% earlier) and 8% for FY15E (unchanged). Management revised volume guidance on domestic tractor industry to 10-12% YoY for FY14E (from 6-8% earlier) due to good monsoons and believes there could be upside risks. Better realizations and high margins should largely offset the expected decline in the automotive segment.

Valuation and Risks – Retain Buy: At the CMP of Rs874, the stock trades at 11.1x/9.9x FY14E/FY15E core EPS. We cut our TP to Rs.1,009 (from Rs.1,043 earlier) driven by earnings change and cut in target multiple to 12x for the core business (13x earlier) as revenue growth slows down further. Key risks: 1.) Slower than expected growth in the tractor segment 2.) Pricing pressure on automotive segment given the weak demand and increased competition.

Source : Equity Bulls

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