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Mahindra & Mahindra (MM)
Automobiles
Maintain margins despite sharp spike in raw material costs. Mahindra and
Mahindra maintained EBITDA margins at 15% in 3QFY11, in line with last two quarters
driven by price increases, improvement in product mix and cost reduction efforts which
allays some street concerns on pressure on margins due to hike in rubber and steel
costs. We maintain BUY rating on the stock but cut our target price to Rs800 (from
Rs850) as we build higher raw material expenses going forward.
3QFY2011 EBITDA was 4.4% below our estimates
�� 3QFY2011 EBITDA of Rs 9.23 bn was 4.4% below estimates driven by higher–than-expected
raw material expenses. Automotive EBIT margins declined by 1.5% qoq while tractor EBIT
margins increased by 20 bps qoq (key positive in our view) which led to a overall decline of 20
bps qoq in the EBITDA margins.
�� Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoq
which led to an improvement in product mix and offset the impact of escalating raw material
cost pressures. Tractor revenues as a % of parent revenues increased to 43% in 3QFY11 vs
39% in 2QFY11.
�� Company also reported a one-time gain of Rs 1,175 mn due to sale of their investment in
Owens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs 24.7% in 2QFY11.
�� Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicle prices have
been increased by 3% during this period. Company also took a 0.5-2% increase in prices on
utility vehicles while no price increase was taken on tractors. Company guided that raw material
cost escalation on tractor business increased by 8-9% during 9MFY11.
�� Ssangyong Motors has received formal approval from creditors for Mahindra’s bid to acquire
the company. Creditors have taken a $100 mn haircut on the amount owed to them. M&M will
acquire a 70% stake in Ssangyong Motors for a consideration of US$463 mn.
Maintain BUY rating but reduce target price to Rs800
We maintain our BUY rating on the stock but reduce our target price to Rs800 (factoring in a 4-6%
cut in earnings over FY2011-2013E due to higher-than-expected raw material cost pressures). Our
valuation is based on sum of parts valuation methodology. We ascribe Rs632/share value to parent
business (14X PER on our FY2012E EPS) and Rs 169/share value to subsidiaries.
3QFY2011 results: 13% below estimates
3QFY11 adjusted profit of Rs6,172 mn (was 13% below estimates) driven by lower EBITDA
margins, lower other income and higher tax rate. EBITDA margins of 15.1% were 80 bps
below estimates driven by higher raw material expenses. Automotive EBIT margins declined
by 1.5% qoq while tractor EBIT margins increased marginally by 20 bps qoq driven by price
increases. Company also reported a one time gain of Rs1,175 mn due to sale of their
investment in Owens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs
24.7% in 2QFY11.
Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoq
which led to an improvement in product mix and offset the impact of escalating raw
material cost pressures. Tractor revenues as a % of parent revenues increased to 43% in
3QFY11 vs 39% in 2QFY11.
Automotive EBIT margins came in at 12.3% (-1.5% qoq) while tractor EBIT margins were
18.5% (+20 bps qoq).
Key highlights in the conference call hosted by the management were:
1) Company increased its tractor market share by 1.6% qoq. Yuvraj is selling at 800
units/month run rate.
2) Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicle
prices have been increased by 3% during this period. Company also took a 0.5-2%
increase in prices on utility vehicles while no price increase was taken on tractors.
Company guided that raw material cost escalation on tractor business increased by 8-
9% during 9MFY11.
3) Maxximo has gained a 25% market share in the less than 1 ton segment. It is currently
selling at 4,000 units/month run rate. Gio’s monthly run rate is ~1,000 vehicles/month.
Company’s new offering Xylo pick up will be positioned for captive business purposes
which is 45% of the pick-up market.
4) Ssangyong Motors has received formal approval from creditors for Mahindra’s bid to
acquire the company. Creditors have taken a $100 mn haircut on the amount owed to
them. M&M will acquire a 70% stake in Ssangyong Motors for a consideration of
US$463 mn. 10% of the amount has been paid already while rest 90% will be paid in
next couple of days. We have not incorporated Ssangyong Motors financials in our
estimates due to lack of clarity on product development expenses likely to be incurred in
that business.
5) Powerol engine business which supplies gensets to telecom segment is under pressure
according to the management. Despite which tractor EBIT margins have been stable.
6) Company indicated that raw material cost pressures are a major concern but expected
volume growth to remain between 15-18% for utility vehicle industry and 10-12% for
the tractor industry for FY2012E.
Earnings revision table
We have revised our volume estimates upwards by 4-5% over FY2011-2013E due to strong
volume growth expected in 4QFY11E while we have cut our EBITDA margin estimates by
4.4-5.8% over the same period to factor in higher raw material cost pressures.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MM)
Automobiles
Maintain margins despite sharp spike in raw material costs. Mahindra and
Mahindra maintained EBITDA margins at 15% in 3QFY11, in line with last two quarters
driven by price increases, improvement in product mix and cost reduction efforts which
allays some street concerns on pressure on margins due to hike in rubber and steel
costs. We maintain BUY rating on the stock but cut our target price to Rs800 (from
Rs850) as we build higher raw material expenses going forward.
3QFY2011 EBITDA was 4.4% below our estimates
�� 3QFY2011 EBITDA of Rs 9.23 bn was 4.4% below estimates driven by higher–than-expected
raw material expenses. Automotive EBIT margins declined by 1.5% qoq while tractor EBIT
margins increased by 20 bps qoq (key positive in our view) which led to a overall decline of 20
bps qoq in the EBITDA margins.
�� Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoq
which led to an improvement in product mix and offset the impact of escalating raw material
cost pressures. Tractor revenues as a % of parent revenues increased to 43% in 3QFY11 vs
39% in 2QFY11.
�� Company also reported a one-time gain of Rs 1,175 mn due to sale of their investment in
Owens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs 24.7% in 2QFY11.
�� Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicle prices have
been increased by 3% during this period. Company also took a 0.5-2% increase in prices on
utility vehicles while no price increase was taken on tractors. Company guided that raw material
cost escalation on tractor business increased by 8-9% during 9MFY11.
�� Ssangyong Motors has received formal approval from creditors for Mahindra’s bid to acquire
the company. Creditors have taken a $100 mn haircut on the amount owed to them. M&M will
acquire a 70% stake in Ssangyong Motors for a consideration of US$463 mn.
Maintain BUY rating but reduce target price to Rs800
We maintain our BUY rating on the stock but reduce our target price to Rs800 (factoring in a 4-6%
cut in earnings over FY2011-2013E due to higher-than-expected raw material cost pressures). Our
valuation is based on sum of parts valuation methodology. We ascribe Rs632/share value to parent
business (14X PER on our FY2012E EPS) and Rs 169/share value to subsidiaries.
3QFY2011 results: 13% below estimates
3QFY11 adjusted profit of Rs6,172 mn (was 13% below estimates) driven by lower EBITDA
margins, lower other income and higher tax rate. EBITDA margins of 15.1% were 80 bps
below estimates driven by higher raw material expenses. Automotive EBIT margins declined
by 1.5% qoq while tractor EBIT margins increased marginally by 20 bps qoq driven by price
increases. Company also reported a one time gain of Rs1,175 mn due to sale of their
investment in Owens Corning India Limited. Tax rate increased to 25.3% in 3QFY11 vs
24.7% in 2QFY11.
Automotive segment revenues grew by 7% qoq while tractor revenues were up 27% qoq
which led to an improvement in product mix and offset the impact of escalating raw
material cost pressures. Tractor revenues as a % of parent revenues increased to 43% in
3QFY11 vs 39% in 2QFY11.
Automotive EBIT margins came in at 12.3% (-1.5% qoq) while tractor EBIT margins were
18.5% (+20 bps qoq).
Key highlights in the conference call hosted by the management were:
1) Company increased its tractor market share by 1.6% qoq. Yuvraj is selling at 800
units/month run rate.
2) Company has taken a 5% price increase in tractors in 9MFY11 while utility vehicle
prices have been increased by 3% during this period. Company also took a 0.5-2%
increase in prices on utility vehicles while no price increase was taken on tractors.
Company guided that raw material cost escalation on tractor business increased by 8-
9% during 9MFY11.
3) Maxximo has gained a 25% market share in the less than 1 ton segment. It is currently
selling at 4,000 units/month run rate. Gio’s monthly run rate is ~1,000 vehicles/month.
Company’s new offering Xylo pick up will be positioned for captive business purposes
which is 45% of the pick-up market.
4) Ssangyong Motors has received formal approval from creditors for Mahindra’s bid to
acquire the company. Creditors have taken a $100 mn haircut on the amount owed to
them. M&M will acquire a 70% stake in Ssangyong Motors for a consideration of
US$463 mn. 10% of the amount has been paid already while rest 90% will be paid in
next couple of days. We have not incorporated Ssangyong Motors financials in our
estimates due to lack of clarity on product development expenses likely to be incurred in
that business.
5) Powerol engine business which supplies gensets to telecom segment is under pressure
according to the management. Despite which tractor EBIT margins have been stable.
6) Company indicated that raw material cost pressures are a major concern but expected
volume growth to remain between 15-18% for utility vehicle industry and 10-12% for
the tractor industry for FY2012E.
Earnings revision table
We have revised our volume estimates upwards by 4-5% over FY2011-2013E due to strong
volume growth expected in 4QFY11E while we have cut our EBITDA margin estimates by
4.4-5.8% over the same period to factor in higher raw material cost pressures.
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