Mahindra & Mahindra - Excise cut in UVs to spur demand - LKP Research

Steady state numbers in Q3

M&M's standalone Q3 FY14 revenues came in at Rs 104bn, which was a de-growth of 2.2% yoy on the back of competitive pressures in the UV segment, and a seasonal growth of 18% qoq on the back of festive Q3. Volumes in the quarter went down 1.8% yoy while growing by 17.1% qoq. Auto volumes have declined by 11.9% yoy and grown by 9.4% qoq in Q3, while FES volumes have shown a resilient growth of 21% yoy and 32.3% qoq from the strong tailwinds seen in the FES segment. M&M's realizations fell by 1% yoy while remaining flat qoq, on very minimal price hikes taken in the quarter on the back of competitive pressures. On profitability front, EBITDA margins went up to 13.1% increasing by 30 bps qoq and 190 bps from 11.2% yoy as the high margin tractors accounted for a good chunk of the volumes this quarter. RM to sales slightly moved up 72.1% from 71.5% qoq and moved down from 75.9% yoy. Other expenses however have gone down this quarter to 9.6% from 10% qoq. Depreciation expenses remained flattish qoq at Rs1.95 bn as Zaheerabad plant had commenced operations albeit on a small scale in Q2. Tax rate came at 23.4%, while interest costs grew by 36% yoy. Other income came in above our expectations at Rs946 mn. PAT increased 12% yoy and declined by 6% qoq to Rs9.4 bn, mainly on the back of higher other income in Q2.

Outlook and Valuation

Although the company is not launching any major vehicles in FY 14, in CY 15 we will see some major launches on both M&M as well as Ssangyong side, whose demand and profitability are on an upmove. Also with general elections coming up within next couple of months, we see a slight demand boost in FY 15E. We see the robustness in FES segment to continue hereon. With higher proportion of FES segment contributing to the EBITDA, we see margin picture improving for M&M. Also the recent comeback of high margin SUVs will help the cause. Softening of RM costs and stable ad spend will result in better margins. Depreciation increase coming from the Zaheerabad plant's expected ramp up in production may somewhat impact the bottomline. Management expects the FES industry to grow at 8-10% in FY 15, which we believe is a bit conservative and project 12% growth in FY15E. We maintain our FY14E earnings at Rs 61 and our FY15E EPS to Rs 66. This has resulted into standalone value of Rs 791 and a higher subsidiaries value of Rs 267 mainly due to the outperformance of its IT subsidiary Tech Mahindra. We maintain our BUY rating as well as our target price of Rs 1,058 on the stock with an upside of 14% from current levels.

Source : Equity Bulls

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