M&M provided the treats this Halloween.:: Kotak Sec

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Mahindra & Mahindra (MM)
Automobiles
M&M provided the treats this Halloween. M&M reported a strong 2QFY11 with
PAT beating our estimates by 15% on higher financial income and an octroi refund.
EBITDA margin for the quarter improved 80 bps qoq excluding the octroi refund and
VRS charge, driven by lower raw material costs. We raised our FY2011E and FY2012E
EPS estimates by 7% to reflect higher financial and other income. We maintain our BUY
rating on the stock and it stays our top pick in the sector.

M&M reported a strong quarter on lower raw material costs and octroi refund
M&M reported PAT of Rs7.6 bn for 2QFY11, up 8% yoy and 35% on a qoq basis. Excluding the
one-time gain of Rs700 mn reported in 2QFY10, the yoy growth was 20% this quarter. PAT for
the quarter came in above our estimate of Rs6.5 bn. The upside was largely driven by an octroi
refund of Rs727 mn (Rs485 mn after-tax) that we had not expected to repeat in the current year
and Rs500 mn in higher financial income. PAT would have been even higher if not for the VRS
charge taken in the quarter of Rs173 mn after-tax. This was included in employee costs. EBITDA
margin for the quarter came in at 16.5%, down 170 bps yoy. Excluding the octroi refund and VRS
charges, margins increased 80 bps from 1QFY11. The 80 bps qoq increase was driven by a 150
bps decline in raw material costs as a percentage of sales offset by higher other costs.


Raising EPS estimates to reflect higher financial income and 2QFY11 beat
We are raising our FY2011E and FY2012E EPS estimates by 7% to Rs47 and Rs55. The increase is
largely driven by higher financial other income and the 2QFY11 beat. Our FY2011E EPS estimate
of Rs47 is based on a 25% growth in volumes and flat margins from FY2010 levels of 16%. While
we expect raw material costs to increase 200 bps as a percentage of sales, operating leverage in
the form of lower labor and other expenditure would offset the raw material increase. EBITDA
margins in the 1HFY11 averaged 15.7%.


Raising target to Rs805, maintain BUY
M&M remains our top pick in the sector, given the company’s strong competitive position and
lesser competitive intensity in its core segments, strong revenue growth led by the company’s
entry into newer markets, and reasonable valuations. The stock is currently trading at 11X our
FY2012E standalone EPS estimate of Rs53 (excluding subsidiary dividends). Our Rs805 target is
based on an Rs630 valuation for the M&M’s standalone business. The Rs630 standalone valuation
reflects 12X FY2012E EPS (net of dividend from subsidiaries) of Rs53. Our 12X P/E multiple reflects
a 15% discount to the 14X average multiple auto stocks trade at. In addition, we assign an Rs175
per share valuation for M&M’s stake in public subsidiaries, based on a 20% discount to the current
market price or KIE targets, whichever is applicable.