Mahindra & Mahindra- Margin surprises positively, Raise TP to Rs 880 : Emkay

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Mahindra & Mahindra Ltd.

Margin surprises positively, Raise TP to Rs 880

BUY

CMP: Rs 732                                       Target Price: Rs 880

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n     Adj. EBIDTA at Rs 8.5bn (above est. of Rs 7.9bn) Margins at 15.8%against est.14.6%. APAT at Rs 7.1bn (est. Rs 6.4bn) due strong operating performance & other income

n     H2FY11 to see volume traction as capacity constraints addressed. Upgrade FY11E/FY12E volumes by 5.8%/8.4% to 529,762mn/581,175mn units, with upward bias

n     Ssangyong acquisition on course, expected to be completed by February/March 2010. Maintain our view that there could be surprises as and when the details are shared

n      Upgrade TP to Rs880 (up 13%). Valuing standalone business at Rs 706 (+11%)-9x EV/EBIDTA, listed subsidiaries at Rs 174 (+22%)-20 disc to market cap. Maintain BUY

Net Sales – In line after adjusting for Octroi refund of Rs 726mn

Net sales at Rs 53.6bn was in line with est. of Rs 53.9bn Volume grew by 19.1% YoY

and 3.1% QoQ. Avg. realization per vehicle stood at Rs 404,697 against expectation of

Rs 407,934. There was an Octroi refund to the tune of Rs 726mn (considered the same

as extraordinary) in other operating income.

Adj.EBIDTA above est., Margins surprises positively

EBITDA at Rs 8.5bn was above expectation of Rs 7.9bn. EBIDTA margins at 15.8%

(est. 14.6%) surprised positively. Margin expansion was due to lower RM cost (68.0% of

sale against est. 69.5%). There was a Rs. 259.2mn VRS cost included in staff cost

during the quarter in FES business segment which is considered as extraordinary.

APAT at Rs 7.1bn above est. of Rs 6.4bn

APAT at Rs 7.1bn was above est. of Rs 6.4bn driven by strong operating performance

and higher other income. Other income stood at Rs 2.0 bn (dividend from subsidiary –

Rs1.2bn) against est. of Rs 1.2bn (dividend from subsidiary Rs 833mn).

Segmental performance- FES reports subdued performance

FES automotive segment reported subdued operating performance. Margins (17.1%) in FES

segment declined 330 bps YoY and flat QoQ due to higher RM cost and VRS cost of Rs

259.2mn (1.2% of FES sales). However, the automotive segment reported strong operating

performance with margin of 13.5% expanding 40bps YoY and 130bps QoQ.

Valuations and View

At CMP of Rs 732, the stock trades at PER of 16.9x and 15.3x and EV/EBIDTA of 10.4x and

9.0x our FY11 and FY12 standalone estimates respectively. We have revised our standalone

EPS estimate by 11.2% and 12.3 % to Rs 43.3 and Rs 47.8 for FY11 and FY12 respectively

due to higher volume assumption. We have valued the company on SOTP basis. We have

upgraded our TP by 13.5% to Rs 880. We have valued the standalone business at Rs 706

(up by 11%) (FY12E EV/EBIDTA of 9x). We have valued the listed subsidiaries and Tech

Mahindra at Rs 174 per share (up by 22%).