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Strong show in core business
Mahindra & Mahindra’s 2QFY11 adjusted profits at Rs7.3bn were 12% higher than our estimate. This
was driven by better-than-expected margins, which improved 80bps QoQ on lower raw-material costs,
which declined 150bps QoQ. With supply constraints resolved, volumes should scale up in 2H.
Management reiterated its guidance for a 14% growth in both UVs and tractors in FY11. Consolidated
profit at Rs7bn was lower than standalone profit at Rs8.4bn, primarily on exceptional gains in 2QFY10,
but also on account of losses in new automotive ventures. We reckon these losses could increase
going forward on account of motorcycle and CV launches. We upgrade our estimates by 6-7% and
revise our target price to Rs850.
Strong 2Q; volumes will scale up, as capacity constraints are resolved: M&M’s 2Q results were better
than estimated on lower raw-material costs, which declined 150bps QoQ. The improvement in margins was
better in the Auto segment, where margins improved 150bps QoQ and 65bps YoY. FES segment performance
was impacted by lower sales in the Powerol segment on account of decline in the telecom segment.
Management mentioned that supply constraints, on account of which the company lost ~9,000 vehicles in
1H, are now resolved. With demand momentum remaining strong, volumes should scale up in the coming
months. The company has also recently taken a price hike, which should help maintain margins.
Need to closely monitor losses in the new automotive ventures: We reckon Mahindra’s EBIT loss in
the automotive business residing in subsidiaries widened from Rs236m in 1QFY11 to Rs638m in 2QFY11.
reckon this loss is on account of losses in the two-wheeler and passenger-car business and partly in the
commercial-vehicle business. The company has recently launched commercial vehicles and also launched
motorcycles in the two-wheeler segment. Hence, we reckon these losses will widen going forward. While we
understand that these businesses will take time to break even, this could act as an overhang on the stock.
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