Mahindra & Mahindra- 2Q results: Impressive show: Macquarie

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Mahindra & Mahindra
2Q results: Impressive show
Event
 M&M reported solid set of 2Q FY3/11 results that were ~6% above our
estimate at the operating level mainly due to better than expected operating
margins. We maintain Outperform on M&M and increase target price to Rs820
from Rs740 earlier on back of revised earnings growth.
Impact
 Solid 2Q numbers: M&M net sales for second quarter came in at Rs53.6bn
up 18% YoY, exactly in-line with our estimate. PAT pre-exceptional of
Rs7.2bn (up 13% YoY) was significantly ahead of our and consensus
estimate. Along with higher than estimated operating profit, improvement at
the PAT level was caused by significant dividend receipts from subsidiaries.
 Tighter cost controls boost margins: Operating margins for the quarter
stood at 15.8%, an increase of ~80bps QoQ and higher than our estimate of
15%. Higher than expected easing of raw material costs and tight control on
other costs lifted margins for the quarter. As input costs are estimated to
witness minor increment from current levels, we believe margins will remain
relatively soft in the second half of the current fiscal.
 Supply constraints not an issue going forward: Company’s sales in both
the tractor and utility vehicle business were affected by ~4-5% in the last
quarter on account of shortages of diesel fuel injection pumps and castings.
Management has resolved these issues and is well poised to cater demand in
rest of this fiscal, which should help regain some of the lost market share.
 Product pipeline to grow volumes: M&M’s Maxximo has been quick to
garner a market share of ~17%. With further ramp up of production at the new
Chakan plant and planned launches of new variants, we expect volumes to
remain robust in the coming quarters. By 1QFY12, the company plans to
launch a premium SUV which would be positioned above Scorpio. Also on
cards are variants on Xylo platform and less than 4 metre variant of Logan,
which would boost volume growth.
Earnings and target price revision
 Increase earnings by 7-8% for the next few years. We also increase our
SOTP based target price to Rs820 from Rs740 earlier.
Price catalyst
 12-month price target: Rs820.00 based on a Sum of Parts methodology.
 Catalyst: Increasing sales of Maximo, new products and quarterly results
Action and recommendation
 Reiterate Outperform: M&M continues to maintain its leadership position in
the tractor and utility vehicle space on back of strong brands and a wide
product portfolio. We estimate a robust 16% CAGR in earnings over FY10-
FY13 and at ~12.1x core auto FY12 PER, M&M remains one of the most
attractively valued stocks in our coverage universe.