M&M: Good monsoon, results boost visibility :: RBS

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Mahindra & Mahindra
Good monsoon, results boost visibility
M&M’s 2QFY11 results surprised us by 6% on EBITDA and 22% on PAT, on a
better EBITDA margin and higher other income. By overcoming component
supply constraints, the company is well placed domestically to reap the benefits
of rural demand as a result of above-normal rainfall. Upgrade EPS and TP. Buy.


2QFY11 results surprise by 6% on EBITDA, driven by automotive division
For 2QFY11, Mahindra & Mahindra’s (M&M) EBITDA grew 10.4% yoy and 9.4% qoq to
Rs8.48bn on a 4% qoq rise in net sales to Rs53.6bn. M&M’s EBITDA was 5.9% better than
our estimate of Rs8.01bn. The sharp reduction in raw material costs qoq boosted the
EBITDA margin by 80bp qoq to 15.8%. Normalised PAT was substantially higher at
Rs7.36bn (RBS estimate: Rs6.05bn) due to higher other income. The automotive segment’s
EBIT margin rose 160bp and net sales realisation increased 1.5% qoq. However, the
consolidated entity’s PAT fell 17% yoy, but rose 13% qoq, to Rs7bn.

EPS upgraded 10% on EBITDA surprise and good monsoon benefit to volumes
The above-normal monsoon (102% of the average) favours M&M’s product demand, which
generates nearly 60% of its sales volume from rural markets. With supply bottlenecks for key
components being addressed, M&M is well positioned to benefit. The improved visibility of
new products, like the new SUV in the June 2011 quarter and the smaller Xylo at the end of
FY12, lifts our volume estimates 5-7% for FY11-12. Building in the 2Q11 EBITDA margin
surprise and October price hike benefit, we upgrade EPS about 10% for FY11-12F.

Buy reiterated; target price raised to Rs818.7
For the subsidiaries, we incorporate the current listed price, lifting the total value to Rs174.3.
Adjusted for the subsidiary value, the stock trades at an attractive valuation of 11.2x FY12F
with an FY10-12F EPS CAGR of 19.5%. For the parent, we raise our target PE from 12.5x to
13x for FY12F, as its new product success, Maximmo, starts yielding both market share and
EBITDA margin expansion. This is still below our RBS coverage universe PE of 14x FY12F,
reflecting the company’s conglomerate holding structure and cash flow demands from the
subsidiaries on the parent’s balance sheet (near-zero net debt). We reiterate Buy with a new
TP of Rs818.7, and keep M&M as a top pick in the sector as it gains from rural demand
coupled with new product initiatives.