MAHINDRA & MAHINDRA Surging ahead:: Edelweiss

Visit http://indiaer.blogspot.com/ for complete details �� ��



􀂄 Adjusted PAT ahead of estimate
Mahindra & Mahindra (M&M) reported an adjusted PAT of INR 7.3 bn (up 27% Y-o-
Y, 29% Q-o-Q) which was 11% and 17% ahead of our and consensus estimates
(source: Bloomberg). The variance was largely on account of lower–than-expected
raw material costs (68.1% vis-à-vis our expectation of 69.4%) and higher other
non operating income (at INR 2.2 bn vis-à-vis our expectation of INR 1.7 bn).
􀂄 Margin expansion surprises
While the top line benefited from the strong volume growth (up 20% Y-o-Y),
EBITDA margins improved on account of pricing action by M&M in the previous
quarter that offset the negative impact of higher commodity prices (raw material
costs to sales declined by 150bps Q-o-Q). However, sequential expansion in
EBITDA margins (15.8%; up 80bps Q-o-Q) was restricted due to rise in staff costs
and other expenses.
􀂄 Management outlook: Capacity constraints ease; demand strong
M&M remains positive on the demand outlook across its entire product
categories. It expects the tractor industry to grow at ~15% p.a. through FY11,
while the UV segment will continue to grow, albeit at a lower rate. The company
indicated that supply constraints from vendors (w.r.t. to fuel injection pumps
and forged castings) have eased considerably. The growing demand will be met
through debottlenecking of existing capacities and greenfield expansion.
􀂄 Outlook and valuations: Momentum maintained; maintain ‘BUY’
The company’s growth momentum across both key segments—utility vehicles
and tractors—remains strong. With a rich product pipeline, we believe the
company is an ideal play on the Indian economy.
While conservatively maintaining earnings estimates, we revise our core
business multiple to 14x FY12E (from 13x previously) with lower risks to the
growth outlook. We revise our SOTP-based target price to INR 837 (from INR
750), valuing the automobile business at INR 622 plus subsidiaries at INR 215.
We maintain our ‘BUY’/Sector Outperformer recommendation on the stock.