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M&M 2QFY11: Above estimate; Margins of 15.8%; Higher other income boosted adj PAT growth of 23%; Maintain Buy
M&M (MM IN, Mkt Cap USD9.4b, CMP Rs732, Buy) standalone 2QFY11 results are above estimates with EBITDA margins of 15.8% (v/s est 15.5%). Further, higher other income boosted adj. PAT to grow 23% to Rs7.27b (v/s est Rs6.85b). Key highlights include:
- Net sales grew by 19% YoY to Rs53.1b (v/s est Rs53.5b), driven by volume growth of 20.1% YoY (~3.1% QoQ).
- Adverse product mix (increasing share of 3W to 14.4% in 2QFY11 v/s 10.7% in 2QFY10 and rising contribution of low cost Yuvraaj in tractor sales) and significant decline in engine revenues led to decline in realizations by 0.5% YoY (~0.8% QoQ increase), despite price increases in 1HFY11.
- EBITDA margins increased by 80bp QoQ (~140bp YoY decline) to 15.8% (v/s est 15.5%) benefiting from RM cost saving (~150bp QoQ).
- Auto segment PBIT margins improved by 160bp QoQ (+70bp YoY) to 13.8%. Tractor business PBIT margins improved by 120bp QoQ (~210 YoY decline) to 18.3%.
- Higher interest income boosted Adj PAT to Rs7.3b (v/s est Rs6.85b) – a growth of 22.9% YoY.
- The management indicated that all the supply constraints, which resulted in loss of ~5,000 units in 2QFY11, have eased which should drive volumes in 2HFY11. However, it expects some cost push in 2HFY11 which would be off-set by higher operating leverage.
Robust volumes drive revenues…
- 2QFY11 revenues grew by 19% YoY (~3.7% QoQ) to Rs53.1b, driven by 20.1% YoY (~3.1% QoQ) volume growth to 131,285 units.
- Volume growth was driven by 61.3% growth in 3Ws, 17% growth in UV’s and 12.6% growth in tractors.
- Volumes in both tractors and UVs were impacted due to supply side constraint. Supply side constraints, due to shortage of tyres, fuel injection equipments and castings impacted production by ~4,000-5,000 units in 2QFY11. However with easing of supply constraints, the volumes are expected to improve in 2HFY11.
- Realizations declined by 0.5% YoY (~0.8% QoQ improvement), due to 0.2% YoY (~1.1% QoQ up) decline in Automotive segment realizations driven by increasing share of 3Wh (14.4% in 2QFY11 v/s 10.7% in 2QFY10) and 0.2% YoY (~1.2% QoQ up) decline in farm segment realizations driven by increasing share of Yuvraaj tractors and significant decline in engine sales (~57% YoY and 67% QoQ).
…with QoQ RM cost savings driving margin improvement
- EBITDA margins improved by ~80bp QoQ (~140bp YoY decline) to 15.8%, driven by ~150bp QoQ saving in RM cost (~280bp YoY inflation) reflecting softness in commodity prices.
- Auto segment PBIT margins improved by 160bp QoQ (+70bp YoY) to 13.8%. Farm equipment PBIT margins improved by 120bp QoQ (~210 YoY decline) to 18.3%.
- Adjusting for Mahindra Vehicle Manufacturers (MVML), a 100% subsidiary where new Chakan plant is placed, EBITDA margins would be higher by 30bp.
Improvement in subsidiaries performance, notably MMFSL and Systech
- M&M consolidated revenues were grew by 12.7%YoY (~8.9% QoQ) to Rs86.8b, driven by continued improvement in both core and subsidiaries performance. Consolidated performance is not comparable on YoY basis due to change in treatment for Tech mahindra, which was considered a subsidiary in 2QFY10, but a 42.8% JV since 1QFY11.
- Consolidated PBIT margins improved by 150bp QoQ (~190bp YoY decline) to 13.7%, due to improvement in core business PBIT margins (~90bp QoQ improvement, but 170bp YoY decline) as well as improvement in performance of key subsidiaries.
- Subsidiaries PBIT were driven by 920bp YoY (~900bp QoQ) improvement in financial services and 260bp YoY (~230bp QoQ) improvement in Systech.
- The Systech group is on a recovery path with QoQ revenue growth since last 6 quarters and positive PBIT since 1QFY11.
CV business JV - plans for product launches through exclusive dealership
- Its JV with Navistar for CV has start sales for 25T and 31T vehicles, and plans to launch of 40T truck and Tipper in 2HFY11.
- While it is currently selling LCVs through M&M’s dealerships, it is setting-up new exclusive Mahindra Navistar dealership. It has opened 20 dealers with plan to increase upto 50 outlets by Mar-11 and upto 100 outlets in the long term.
- The strategy of the JV is to compete not only on product and pricing, but also to provide very good customer experience w.r.t quality of service, availability of spares etc.
Other highlights
- The management expects a growth of ~14-15% growth in Auto and Tractor industry; however UV volumes to grow below industry estimates due to rising competition (Tata Aria, facelift of Innova) and ageing of portfolio.
- It expects hardening of RM costs by 2-3% in 2HFY11 (over and above 6-7% cost inflation in 1HFY11) driven by commodity cost inflation.
- For tractors, it is planning for further debottleneck its tractor capacity. It is planning to set-up new unit for tractors in South India (most likely Tamil Nadu) with initial capacity of 50,000 units which would be gradually increased to 100,000 units.
- It maintains its Capex guidance of Rs45b for FY11-13 and investments of Rs25b in subsidiaries and JVs.
Valuation & view
- We remain positive on M&M’s prospects, driven by dominance in core business of UVs & tractors, coupled with cheap valuations.
- Continued dominance in core business of UVs and tractors with favourable competitive dynamics, and strong volume growth momentum.
- It would be one of the biggest beneficiaries of normal monsoon, given high dependence on rural market for demand of its products.
- The stock trades at 12.7x FY11E consolidated EPS of Rs57.7 and 10.7x FY12E consolidated EPS of Rs68.3. Retain as top pick in the sector buy with target price of Rs 892 (FY12-based SOTP).
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