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Mahindra and Mahindra (M&M) reported good results for 2QFY2011. Top-line
was in line, while operating performance and bottom-line beat our expectations
owing to better operating leverage and higher other income. We revise upwards
our estimates for the company factoring in the better-than-expected performance
on the operating front and higher other income. We remain positive and
overweight on M&M.
Healthy volume, better operating performance supported good growth: For
2QFY2011, M&M clocked net sales of `5,5434cr, up 19.2% yoy. This growth was
aided by the substantial 21% yoy growth in core volumes, while average
realisation per vehicle declined by around 1.6% due to change in product mix.
During 2QFY2011, M&M’s EBITDA margins came in 169bp ahead of our
estimate at 16.5%, a jump of 144bp qoq and a fall of 177bp yoy. M&M
registered net profit of `758cr (`703cr) during the quarter, which exceeded our
expectation mainly due to the better-than-expected operating performance and
higher other income of `200cr (`133cr), which largely included dividend received
from the subsidiaries and JVs.
Outlook and Valuation: M&M’s utility vehicle (UV) and tractor volumes continued
to surprise positively, registering 35% (40%) overall growth in FY2010. M&M also
performed well above expectations in the farm equipment and CV segments. We
have modeled 10% CAGR in UV volumes over FY2010-12E, while maintaining
our tractor volume growth assumption at 7% for the period. New launches like
GIO and Maxximo have met with good response. Moreover, the new product
launch in the M&HCV space is expected to position the company in line with the
other major domestic CV players, aided by its well-known brand equity and
extensive sales network. Thus, M&M is one of the preferred picks in our coverage
universe and we maintain an Accumulate on the stock. Our SOTP Target Price for
M&M works out to `827, wherein its core business fetches `579/share and the
value of its investments works out to `248/share.
Net sales up 19.2%, volume growth supported top-line performance: For
2QFY2011, M&M clocked net sales of `5,434cr, up 19.2% yoy. This growth was
aided by the substantial 21% yoy growth in core volumes, while average
realisation per vehicle declined by around 1.6% due to change in product mix.
Strong volumes in the automotive and farm equipment divisions aided top-line
growth. In the UV segment, M&M sold 56,639 vehicles and retained its dominant
position with a market share of 62.2% on the back of Xylo and Bolero, which
continued to see good off-take. The tractor volumes also registered strong 12.4%
yoy growth in 2QFY2011 supplementing overall growth in volumes. M&M’s total
market share in the tractor segment during 2QFY2011 stood at 41.1%.
Segment-wise performance: The farm equipment division clocked 12.4% yoy
growth in net sales to `2,085cr, with increase in tractor volumes on normal
monsoon forecast. The auto division also reported robust yoy increase of
23.7% in net sales, aided by strong growth in auto volumes. PBIT margins of
the auto division improved by marginal 15bp yoy to 15.6% (15.5%). However,
on a sequential basis, the company recorded healthy 339bp qoq jump in PBIT
margin. The farm division reported a 331bp yoy decline in PBIT margin to
17.1% (20.4%) during 2QFY2011. Adjusted for the one-time VRS expenditure
of `25.9cr, the farm division registered PBIT of 18.3%, up 120bp qoq.
Margins at 16.5%; up 144bp qoq: During 2QFY2011, M&M’s EBITDA margins for
2QFY2011 came in 169bp ahead of our estimate at 16.5%, a jump of 144bp qoq
and a fall of 177bp yoy. Raw material cost for the quarter increased by almost
289bp yoy, while declined by 136bp on a qoq basis. Raw material cost increased
to 67.2% (64.3%) in 2QFY2011 primarily due to the rise in the cost of steel and
rubber. Better product mix along with higher commercial vehicle volumes
supported the company to clock sequential improvement on the operating front.
Further, improved operating leverage helped the company to save on other fixed
expenditure, which restricted the contraction in EBITDA margins yoy to a certain
extent. Staff cost included one-time VRS expenditure of `25.9cr, adjusted for which
the company recorded EBITDA margin of almost 17% for the quarter.
Overall the company recorded decent improvement in operating performance
owing to the cost rationalisation measures. Operating profit registered 7.7% yoy
increase during 2QFY2011 to `895cr.
Including Mahindra Vehicle Manufacturers (MVML), OPM would be 16.7% as
against 16.5% of standalone M&M. The Chakan plant is operational and all
products manufactured here will come under MVML, M&M’s 100% subsidiary.
MVML will adopt cost-plus pricing and sell products to M&M standalone. This will
enable M&M to manage costs more efficiently at MVML. This implies that to gauge
profitability of the products out of Chakan, we would have to add MVML to M&M’s
standalone numbers.
Net Profit at `758cr, up 7.9%: M&M registered net profit of `758cr (`703cr) during
the quarter, which was above our expectation mainly due to higher other income
and better-than-expected operating performance. Other income for the quarter
increased 50% yoy `200cr (`133cr), which largely included dividend received from
subsidiaries and JVs.
Consolidated performance: The company’s consolidated performance was
marginally below our expectations, with top-line growth of 13.2% yoy to `8,678cr
(`7,668cr). However, consolidated group revenues are not exactly comparable
with the previous years due to AT&T exercising its stock option and Tech Mahindra
ceasing to be a group subsidiary and becoming a joint venture (JV) of the
company. Consolidated bottom-line stood at `701cr (`844cr) for 2QFY2011.
Conference Call – Key Highlights
Management expects ~14% and ~15% industry growth for automotive and
FES segments respectively, for FY2011.
Capacity constraints continue to affect sales; however, supply issues have
eased out in 2QFY2011 compared to 1QFY2011. Around 5,000 units of sales
were lost during the quarter due to supply constraints.
In the UV space, Xylo continues to do well and is now clocking a run-rate of
3,000units/month. Logan sales have revived and the growth momentum has
improved. It crossed sales of 1,000 units a month in September 2010. In the
FES segment, Yuvraj tractors which were launched in July 2010, recorded
volumes of 1,000 units during the quarter. Overall, tractor sales were up
~12% during the quarter.
The company’s total market share during 2QFY2011in the UV and tractor
segments stood at an impressive 62.2% and 41.1%, respectively. The recently
introduced Maxximo continued to grow and notched up a market share of
16.9%. The three- and four-wheeler sales grew 52% and M&M’s market share
in the segment stood at 12.1% during the quarter.
The Powerol business performance fell ~30% during the quarter. The business
is highly dependent on the telecom towers market, which declined
70-75% during the quarter. The Powerol business sales stood at around
`275-300cr.
Exports continued to do well with sales growth of ~106% in 2QFY2011. Chile,
South Africa, Sri Lanka and Bangladesh mainly contributed to the growth.
The Chakan plant is in ramp up phase. Contribution from the plant was
~`24cr to top-line and ~`6cr at the EBIT level.
Product launches: The company plans to launch ~3 variants each of the Xylo
and Maxximo in 2HFY2011. A new SUV (W201) is also being developed,
which the company expects to launch by 1QFY2012. M&M also plans to
launch a 40 tonne vehicle and tippers by the end of FY2011. M&M has begun
the sales of M&HCV (JV with Navistar) vehicles in October 2010 through 20
outlets, which would be increased to 50 outlets by FY2011.
Capex plan: M&M has planned total investment of around `7,000cr over
FY2011-13. Management indicated capital expenditure plan of `4,500cr over
FY2011-13 and an investment plan of `2,500cr over the mentioned period.
The company is setting up a new plant at Chakan, with a capacity of 3,50,000
vehicles, which started its Phase-1 in FY2010. The company plans to
manufacture UVs and LCVs at this plant. This includes 50,000 units of M&M’s
international trucks, 1,20,000 units of a new mass market platform, 90,000
units of a new SUV (successor to the Scorpio) and 90,000 units of Ingenio
variants.
As announced earlier, total capex of `5,600cr would be incurred at the
Chakan plant over FY2009-13, of which `550-600cr has already being spent.
M&M’s contribution to this capex is `2,000cr, which would be mostly utilised
for R&D. MVML will spend `2,000cr, MNAL `1,000cr and the balance
`500-`600cr by MEPL. M&M is also setting up a new tractor plant with a
production capacity of up to 100,000 units per annum in South India by
FY2012-13. M&M’s tractor unit is currently running at 100% utilisation levels,
while PTL’s plants are running at over 80% utilisation levels currently.
Investment Arguments
Strong growth continues in core business: M&M’s UV and tractor volume
growth continues to surprise positively, with 35% (40)% overall growth clocked
in FY2010, primarily due to the substantial 8% market share gain in the UV
segment (to 55%). The new Xylo, and the established Scorpio and Bolero
contributed to the robust UV volume growth. M&M has also performed well
above expectations in its farm equipment segment. Thus, we have modeled
10% CAGR in UV volumes over FY2010-12E for M&M with minimum
competition in the UV space and continue to maintain our tractor volume
CAGR assumption of 7% (including Swaraj).
New ventures firming up well: M&M’s new ventures in the CV space are
firming up well. New product launches like GIO and Maxximo have met with
good response. Further, the new product launch in the M&HCV space would
position the company well in line with other major domestic CV players like
Ashok Leyland and Tata Motors over the next 2-3 years, aided by its
well-known brand equity and extensive sales network. This is expected to
substantially augment the company’s overall volume growth.
Systech operations poised to benefit from rebound: Systech should be a key
beneficiary of the growing trend of component sourcing from lower-cost
countries, given its existing relationships with the global OEMs. Systech
management is focused on creating shareholder value and has set a goal of
achieving `500-600cr in EBITDA, with 75% coming from Europe and the rest
from India. Management believes this is achievable even at 30% below peak
levels. We believe that these moves will start contributing positively to M&M's
consolidated EPS, when the global industry cycle takes a positive turn.
Investments constitute 59% of balance sheet: M&M also has majority stakes in
various listed companies in other sectors, including technology, property and
finance. The high growth potential of M&M's subsidiaries is expected to unlock
actual value of the stock over the years. Listing of its subsidiaries has been
supporting M&M's valuation in the recent past, and may continue to do so in
the long term as well.
Outlook and Valuation
We upgrade our estimates for the company factoring in the better-than-expected
performance at the operating front and higher other income. We maintain our
positive outlook and remain overweight on M&M.
At the CMP of `732, M&M is trading at 17.6x FY2011E and 15.5x FY2012E
standalone earnings. Our SOTP Target Price for M&M works out to `827, wherein
its core business fetches `579/share and the value of its investments fetches
`248/share. M&M is one of our preferred picks in our universe and we maintain
an Accumulate on the stock.
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