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Mahindra & Mahindra (MAHM.BO)
Sell Equity Research
Above expectations: Valuation risks amid near term strength; Sell
What surprised us
M&M reported 3QFY11 adjusted net income of Rs7.6bn, up 57% yoy, 5%
qoq and 7.5% ahead of our estimates. The surprise was mainly driven by
higher than expected margin performance of its farm equipment business
(up 70bps yoy and 170bps qoq). Automotive division reported a 190bps
qoq fall in margins, inline with the general auto sector trend emerging
during this earnings season. In the results press release, the company
expressed optimism over the demand outlook and noted hardening
commodity prices and monetary tightening as areas of concern. In the
conference call management reported near full capacity utilization at their
plants.
What to do with the stock
We believe high inflation poses downside risks to sector valuation multiples,
particularly for M&M which is trading above historical averages on earnings
based multiples and balance sheet based metrics (refer “Increasing cyclical
risks; downgrading Hero Honda, M&M to Sell”, dated Jan 27, 2011). We
retain our Sell rating on M&M as we believe there is higher relative upside
on other stocks in our Indian auto coverage. Our 12-month FY12E P/E based
Rs 643 TP remains unchanged. Key risks – Strong near term demand
momentum continuing in spite of high inflation, higher than expected
success of new business ventures such as heavy trucks business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MAHM.BO)
Sell Equity Research
Above expectations: Valuation risks amid near term strength; Sell
What surprised us
M&M reported 3QFY11 adjusted net income of Rs7.6bn, up 57% yoy, 5%
qoq and 7.5% ahead of our estimates. The surprise was mainly driven by
higher than expected margin performance of its farm equipment business
(up 70bps yoy and 170bps qoq). Automotive division reported a 190bps
qoq fall in margins, inline with the general auto sector trend emerging
during this earnings season. In the results press release, the company
expressed optimism over the demand outlook and noted hardening
commodity prices and monetary tightening as areas of concern. In the
conference call management reported near full capacity utilization at their
plants.
What to do with the stock
We believe high inflation poses downside risks to sector valuation multiples,
particularly for M&M which is trading above historical averages on earnings
based multiples and balance sheet based metrics (refer “Increasing cyclical
risks; downgrading Hero Honda, M&M to Sell”, dated Jan 27, 2011). We
retain our Sell rating on M&M as we believe there is higher relative upside
on other stocks in our Indian auto coverage. Our 12-month FY12E P/E based
Rs 643 TP remains unchanged. Key risks – Strong near term demand
momentum continuing in spite of high inflation, higher than expected
success of new business ventures such as heavy trucks business.
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