Mahindra & Mahindra: Yet another beat; Raise to Buy:; BofA ML

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Mahindra & Mahindra
Yet another beat; Raise to Buy
􀂄 Raise PO, Upgrade rating to Buy
M&M’s recurring Q2 profit was 21% ahead of estimates at Rs 7.12bn, driven by
better auto margins and lower net interest/depreciation charges. Although the
stock has outperformed the auto sector marginally, we upgrade our rating to Buy
from Underperform following revision of EPS forecasts by 8%/7% over FY11-12E
and expected re-rating. Our revised PO is 35% higher at Rs 850.
Auto margins deliver positive surprise
Contrary to expectations, EBIT margins of auto business (UVs/CVs) grew 340bps
qoq to 15.6%, narrowing gap to tractors, which registered flat qoq EBIT of 17.1%,
despite pressure from competition. These trends allay our concerns that shift in
sales mix to autos would pull down margins, and therefore profitability.
Demand outlook remains strong
M&M’s H1 sales grew 21% in constituent businesses of autos (UVs/CVs) and
Tractors. We expect momentum to sustain, driven by (1) franchise and limited
competition in UVs, (2) new products in CVs, both light and heavy trucks, and (3)
farm mechanization leading to increasing tractor usage.
Multiple drivers to revised PO
Revised PO factors (1) revision in core EPS forecasts, (2) expected re-rating of
core EPS to 14x from earlier 12x, (3) rollover multiple to FY12E, and (3) inclusion
of Ssangyong and Two wheeler subsidiary in SOTP.