Mahindra & Mahindra -Beats estimates; Maintain BUY :: Religare

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Mahindra & Mahindra Ltd
Beats estimates; Maintain BUY

Mahindra & Mahindra’s (M&M) Q2FY11 results beat our and street estimates
reporting an adjusted EBITDA margins of 15.8%, a sequential improvement of
80 bps. The positive surprise came from the higher-than-anticipated drop in
raw material costs which declined 150 bps on a sequential basis. Though we
expect the commodity cost pressures to increase going forward, nonetheless,
the pricing power demonstrated so far and cost savings, have been ahead of
estimates and hence we slightly increase our margins estimates going forward.
We revise our target price to Rs 820 (Rs 740 earlier) on account of upward
revision in our margins estimates and rolling forward our target price to Sep ’12
earnings. Maintain Buy.
Key takeaways from Q2FY11 conference call
􀂙 Management estimates sales loss of ~5,000 units in Q2 due to supply
constraints in castings and fuel injection systems; do not envisage any major
capacity constraint in H2FY11
􀂙 Not-so-robust performance in the tractor segment relative to the automotive
segment, on account of supply-constrained tractor sales, sharp decline in
revenues from the telecom focussed ‘Powerol’ business (revenues at ~3.5 bn
in H2FY11 vs ~5.5 bn H2FY10) and relatively lower pass through of costs
􀂙 Commodity costs have started firming up again so expect some erosion in
margins in H2; however were able to pass on emission norms costs easily
􀂙 New UV launch expected in Q1FY12 and US launch largely on track;
launched two motorcycles and 25T and 35T trucks during the month
􀂙 Due diligence on the Ssangyong deal has been completed; currently in the
process of drafting definitive agreement (expected to get finalised end of
Nov); deal closure to tentatively take place in Feb-Mar ’11
Maintain BUY, upgrade target price to Rs 820: We maintain that the UV, LCV and
tractor segments will continue to report robust numbers expecting 13.5%/11.0%
volume growth for the company in FY11/FY12. We maintain our BUY
recommendation on M&M with an SOTP based target price of Rs 820, valuing the
standalone business at Rs 599, based on13x Sep ’12E core earnings . The value of
holdings and subsidiaries (at 20% discount) amounts to Rs 216, where we have
started valuing Ssangyong at book value of investment at Rs 34/share, assuming the
deal size of Rs 20bn (financed by 1:1debt/equity). The M&M standalone business is
currently trading at 12.0xFY11E and 10.8xFY12E earnings.