Mahindra & Mahindra - Tractors to drive growth; Buy - Anand Rathi

Tractors the growth driver. After a robust performance in FY13, Mahindra & Mahindra's (M&M) automotive division volumes have been constrained in 9MFY14 (in 3QFY14 9.5% lower yoy). This was more than made up for by robust tractor volumes; in 3QFY14 (as in 1HFY14), these were prolific (growing 21% yoy). Among the automotive segments, pick-up sales were up 0.7% yoy, UVs were lower ~16% yoy, and three-wheelers were down 4.1% yoy). M&M's overall volumes in 2QFY14 dipped marginally, by 0.1% yoy.

3Q likely to be good. For 3Q, on yoy flat volumes, we expect 1% yoy income dip to Rs. 106.7bn and 14.5% EBITDA growth to Rs. 13.9bn. Our EBITDA margin expectation is 13.5% (up 230bps yoy, 70bps qoq). The higher share of tractors in the product mix qoq could result in EBITDA margin improving qoq. We expect the quarter's profit, at Rs. 9.4bn, to be up 12.4% yoy.

FES to drive EBIT margins. We expect 9% EBIT margin for the automotive division (50bps higher yoy, 40bps lower qoq) and 16.8% for the farm-equipment segment (130bps higher yoy, 20bps lower qoq). EBIT per tractor is expected to be 9.5% higher yoy, while EBIT per vehicle in the automotive division is expected to be 2.8% higher yoy.

Our take. Tractors have recorded a strong recovery in 1H, with a good trajectory in 3Q as well. For the segment, 1HCY14 should also be decent. The higher tractor-segment growth would also result in a better operating performance for M&M. The consolidated performance should also be good, but Systech, and the two-wheeler business would be drags on profitability. We have a Buy rating, with a sum-of-parts-based target of Rs. 1,037. The stock trades at ~10.6x FY15 consolidated earnings. Risks. Downside: Delay in rural demand recovery, keener competition, diesel price hike, negatives on the merger of the truck business.

Source : Equity Bulls

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