M&M: 2QFY11 PAT at Rs.7.2B (+33% yoy) : JPMorgan

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Mahindra & Mahindra
Overweight
MAHM.BO, MM IN
2QFY11 PAT at Rs.7.2B (+33% yoy) driven by healthy
operating margins; raising PT, reiterate OW



• 2QFY10 results were broadly in line, led by impressive operating
performance: M&M’s reported PAT came in at Rs.7.6B; adjusted for
exceptionals – the adjusted PAT came in at Rs.7.2B (+33% yoy) – in line with
estimates. The EBITDA margins surprised at 15.8% (+80bp qoq) driven by a
150bp qoq decline in raw material expenses, which declined given modest
commodity prices, cost control measures as well as a healthy pricing
environment. However, higher-than-anticipated tax rate at 24.7% (+270bbp
qoq) partially offset the impact of the above. We reiterate our OW stance on the
stock, given that: a) The company has an aggressive product roll-out schedule –
particularly for the automotive segment over the next 12 months. b)
management is upbeat on the high-margin tractor segment c) its subsidiaries –
which account for c.25% of stock price and are present in the growth segments
of the Indian economy.
• Management conference call takeaways: Volume Outlook: Management reiterated
its guidance of 14% industry growth for tractors and UV’s in FY11E.
M&M’s production was constrained over 1H given component shortages –
capacities have now been increased. The company will launch a new UV
platform in 1QFY12E - the product will be a MPV based on the monocoque
frame and will be positioned as a premium product; also new variants of the
Xylo and Maximmo will be launched over the next 12 months; on tractors –
management is contemplating setting up a new plant in South India – which
will likely be operational in two years. On margins: The margins are likely to
sustain at current levels, given healthy demand outlook over 2H. On Ssangyong
the due diligence process is largely complete – they will enter into a definitive
agreement by November and the acquisition will likely be complete by Mar’11.
• Price target: We are introducing FY13 estimates and are rolling forward our
price target to Sep’11. We set a revised price target of Rs822. We continue to
value the company on a sum-of-the-parts basis, given that it is a conglomerate.
Key risks: Integrating Ssangyong would be a key challenge for M&M over the
medium term; any moderation in rural growth could impact domestic volume
outlook.