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Mahindra & Mahindra (MM)
Automobiles
Higher input costs impacted operating margins. 4QFY11 profit of Rs6.06 bn was
13% below our estimates driven by higher raw material expenses, rise in staff and other
expenses. Sharp rise in steel and rubber prices and delay in price increase impacted
gross margins. We downgrade the stock to ADD (from BUY) as we revise our earnings
downwards to factor in withdrawal of VAT refund benefit outside Maharashtra and
higher-than-expected increase in input costs.
4QFY11 profit miss was driven by higher input costs
4QFY11 adjusted profit of Rs6.07 bn (+6% yoy, -2% qoq) was 13% below our estimates.
Revenues were in line with estimates but EBITDA margins declined by 2.4% qoq and were 1.8%
below our estimates. Automotive EBIT margins were10.6% which declined by 173 bps qoq while
tractor EBIT margins were17.0% which declined by 148 bps qoq.
Raw material expenses to net sales increased by 4.4% qoq due to increase in steel and rubber
prices. Staff costs also increased by 23% qoq (Rs786 mn qoq increase) driven by – (1) Rs260 mn
impact of amortization of employee stock options, (2) Rs100 mn impact due to additional
provident payout to employees and (3) Impact due to increase in gratuity due to actuarial
revaluation. Other expenses were also higher than our estimates.
Withdrawal of VAT refund for sales outside Maharashtra could impact near term margins
Company indicated that they received a VAT refund for the total production done at Chakan as
part of incentives for the capital investment made in Maharashtra. However, Maharashtra
government has changed its earlier stance and has now given a directive that VAT refund will be
payable on the final sales done in Maharashtra only and not outside Maharashtra effective mid-
March 2011. Hence company will receive the incentives over a longer period of time than
proposed earlier. According to the company, 25% of total volumes will come from Chakan in
FY2012E (including truck sales which are part of JV). We factor in incremental utility vehicle
volumes to come from Chakan. If company had received full benefit of VAT refund in FY2012E as
well, company’s EBITDA margins would have improved by 1.4% yoy. However, now the company
will get benefit of only Rs736 mn (28 bps benefit on EBITDA margins).
Downgrade the stock to ADD (from BUY earlier)
We downgrade the stock to ADD (from BUY earlier). We have revised our target price to Rs770
(from Rs800 earlier) as we have cut our earnings by 10-11% over FY2012-2013E, we roll over to
FY2013E and we have cut our standalone target PE multiple to 13X (from 14X earlier). We value
the stock on sum-of-the-parts valuation methodology. We value parent business at Rs597/share
based on 13X FY2013E EPS (ex dividends from subsidiaries) and Rs 171/share of subsidiary value.
4QFY11 results impacted by input cost pressures
4QFY11 adjusted profit of Rs6.07 bn (+6% yoy, -2% qoq) was 13% below our estimates.
Revenues were in line with estimates but EBITDA margins declined by 2.4% qoq and were
1.8% below our estimates. Automotive EBIT margins were 10.6% which declined by 173
bps qoq and tractor EBIT margins were17.0% which declined by 148 bps qoq.
Raw material expenses to net sales increased by 4.4% qoq due to increase in steel and
rubber prices. Staff costs also increased by 23% qoq (Rs786 mn qoq increase) driven by –
(1) Rs260 mn impact of amortization of employee stock options, (2) Rs100 mn impact due
to additional provident payout to employees and (3) Impact due to increase in gratuity due
to actuarial revaluation. Other expenses were also higher than our estimates.
We also attended the analyst meet hosted by management.
Key highlights are as follows:
1) Management indicated that they are confident of achieving 12-14% yoy growth in
utility vehicle volumes and 11-13% yoy growth in tractor volumes in FY2012E. Sharp
rise in interest rates and increase in vehicle prices have started to slow down sales of
passenger utility vehicles but pick-up segment and tractor volumes remain buoyant. We
factor in 12% yoy growth in both utility vehicle and tractor volumes in FY2012E.
2) 60-65% of company’s tractor and utility vehicles are financed. Company indicated cash
sales in tractors have gone up in FY2011.
3) Company sold 5,776 units of Yuvraj volumes in FY2011. Company has an annual
capacity to produce 20,000 units.
4) Company indicated that raw material pressures would continue in 1QFY12. However
given the recent decline in natural rubber prices and stable steel prices over the last few
months, we expect raw material pressures to be muted after 1QFY12.
5) Company has also taken 2% increase in prices in utility vehicles and a 3% increase in
tractor prices in April 2011.
6) Company also indicated that earlier they used to get VAT refund on production done at
Chakan. However, Maharashtra government has now come with a directive in mid-
March 2011 that sales done outside Maharashtra from the production done at Chakan
will be eligible for VAT. In FY2011, 20% of Chakan production was sold outside
Maharashtra. Company had a negative impact of Rs70 mn in 4QFY11 for 15 days of
VAT paid on sales done outside Maharashtra from Chakan plant. We estimate that
Chakan revenues were 4% of M&M revenues in FY2011 and company had a positive
impact of 50 bps on the EBITDA margins. Ex VAT refund benefits EBITDA margins were
14.2% in FY2011.
Withdrawal of VAT refund outside Maharashtra could impact near term margins
Company indicated that they received a VAT refund for the total production done at Chakan
as part of incentives for the capital investment made in Maharashtra. However, Maharashtra
government has changed its earlier stance and has now given a directive that VAT refund
will be payable on the final sales done in Maharashtra only effective mid-March 2011. Hence
company will receive the incentives over a longer period of time than proposed earlier.
According to the company, 25% of total volumes will come from Chakan in FY2012E
(including truck sales which are part of JV). We factor in incremental utility vehicle volumes
to come from Chakan. If company had received full benefit of VAT refund in FY2012E as
well, company’s EBITDA margins would have improved by 1.4% yoy. However, now the
company will get benefit of only Rs736 mn (28 bps benefit on EBITDA margins).
Company had created a manufacturing and a distribution subsidiary at Chakan. Distribution
subsidiary booked sales from Chakan which was recognized as first point of sale and hence
was considered as eligible for VAT refund despite it being a state subject. Company has
indicated that they had negotiated for a certain quantum of incentive from Maharashtra
government which will now be back-ended as they will get incentives on sales inside done in
Maharashtra only. However, we would need more clarity on this subject and the nature of
incentives given to Mahindra & Mahindra.
We revise our earnings downwards by 10-11% over FY2012-13E
We have revised our earnings downwards by 10-11% over FY2012-13E due to – (1) 3-4%
downward revision in utility vehicle volumes due to sharp rise in interest rates and potential
increase in diesel prices, and (2) We have cut our EBITDA margins by 110-130 bps over
FY2012-2013E due to negative impact of withdrawal of VAT incentives from the Chakan
plant.
We have revised our target price to Rs770 (from Rs800 earlier) as (1) we have cut our
earnings by10-11% over FY2012-2013E, (2) we roll over to FY2013E and (3) we have cut
our standalone target PE multiple to 13X (from 14X earlier). We value the stock on sum-ofthe-
parts valuation methodology. We value parent business at Rs 597/share (based on 13X
FY2013E EPS (ex dividends from subsidiaries) and Rs 171/share of subsidiary value.
We have downgraded the stock to ADD (from BUY earlier) due to muted earnings growth
(8% CAGR over FY2011-2013E). Stock trades at 10.7X PE on our FY2013E earnings
estimates (excluding subsidiary value) which factors in the slowdown in earnings growth in
our view and we believe stock can give a 16% upside from current levels due to cheap
valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MM)
Automobiles
Higher input costs impacted operating margins. 4QFY11 profit of Rs6.06 bn was
13% below our estimates driven by higher raw material expenses, rise in staff and other
expenses. Sharp rise in steel and rubber prices and delay in price increase impacted
gross margins. We downgrade the stock to ADD (from BUY) as we revise our earnings
downwards to factor in withdrawal of VAT refund benefit outside Maharashtra and
higher-than-expected increase in input costs.
4QFY11 profit miss was driven by higher input costs
4QFY11 adjusted profit of Rs6.07 bn (+6% yoy, -2% qoq) was 13% below our estimates.
Revenues were in line with estimates but EBITDA margins declined by 2.4% qoq and were 1.8%
below our estimates. Automotive EBIT margins were10.6% which declined by 173 bps qoq while
tractor EBIT margins were17.0% which declined by 148 bps qoq.
Raw material expenses to net sales increased by 4.4% qoq due to increase in steel and rubber
prices. Staff costs also increased by 23% qoq (Rs786 mn qoq increase) driven by – (1) Rs260 mn
impact of amortization of employee stock options, (2) Rs100 mn impact due to additional
provident payout to employees and (3) Impact due to increase in gratuity due to actuarial
revaluation. Other expenses were also higher than our estimates.
Withdrawal of VAT refund for sales outside Maharashtra could impact near term margins
Company indicated that they received a VAT refund for the total production done at Chakan as
part of incentives for the capital investment made in Maharashtra. However, Maharashtra
government has changed its earlier stance and has now given a directive that VAT refund will be
payable on the final sales done in Maharashtra only and not outside Maharashtra effective mid-
March 2011. Hence company will receive the incentives over a longer period of time than
proposed earlier. According to the company, 25% of total volumes will come from Chakan in
FY2012E (including truck sales which are part of JV). We factor in incremental utility vehicle
volumes to come from Chakan. If company had received full benefit of VAT refund in FY2012E as
well, company’s EBITDA margins would have improved by 1.4% yoy. However, now the company
will get benefit of only Rs736 mn (28 bps benefit on EBITDA margins).
Downgrade the stock to ADD (from BUY earlier)
We downgrade the stock to ADD (from BUY earlier). We have revised our target price to Rs770
(from Rs800 earlier) as we have cut our earnings by 10-11% over FY2012-2013E, we roll over to
FY2013E and we have cut our standalone target PE multiple to 13X (from 14X earlier). We value
the stock on sum-of-the-parts valuation methodology. We value parent business at Rs597/share
based on 13X FY2013E EPS (ex dividends from subsidiaries) and Rs 171/share of subsidiary value.
4QFY11 results impacted by input cost pressures
4QFY11 adjusted profit of Rs6.07 bn (+6% yoy, -2% qoq) was 13% below our estimates.
Revenues were in line with estimates but EBITDA margins declined by 2.4% qoq and were
1.8% below our estimates. Automotive EBIT margins were 10.6% which declined by 173
bps qoq and tractor EBIT margins were17.0% which declined by 148 bps qoq.
Raw material expenses to net sales increased by 4.4% qoq due to increase in steel and
rubber prices. Staff costs also increased by 23% qoq (Rs786 mn qoq increase) driven by –
(1) Rs260 mn impact of amortization of employee stock options, (2) Rs100 mn impact due
to additional provident payout to employees and (3) Impact due to increase in gratuity due
to actuarial revaluation. Other expenses were also higher than our estimates.
We also attended the analyst meet hosted by management.
Key highlights are as follows:
1) Management indicated that they are confident of achieving 12-14% yoy growth in
utility vehicle volumes and 11-13% yoy growth in tractor volumes in FY2012E. Sharp
rise in interest rates and increase in vehicle prices have started to slow down sales of
passenger utility vehicles but pick-up segment and tractor volumes remain buoyant. We
factor in 12% yoy growth in both utility vehicle and tractor volumes in FY2012E.
2) 60-65% of company’s tractor and utility vehicles are financed. Company indicated cash
sales in tractors have gone up in FY2011.
3) Company sold 5,776 units of Yuvraj volumes in FY2011. Company has an annual
capacity to produce 20,000 units.
4) Company indicated that raw material pressures would continue in 1QFY12. However
given the recent decline in natural rubber prices and stable steel prices over the last few
months, we expect raw material pressures to be muted after 1QFY12.
5) Company has also taken 2% increase in prices in utility vehicles and a 3% increase in
tractor prices in April 2011.
6) Company also indicated that earlier they used to get VAT refund on production done at
Chakan. However, Maharashtra government has now come with a directive in mid-
March 2011 that sales done outside Maharashtra from the production done at Chakan
will be eligible for VAT. In FY2011, 20% of Chakan production was sold outside
Maharashtra. Company had a negative impact of Rs70 mn in 4QFY11 for 15 days of
VAT paid on sales done outside Maharashtra from Chakan plant. We estimate that
Chakan revenues were 4% of M&M revenues in FY2011 and company had a positive
impact of 50 bps on the EBITDA margins. Ex VAT refund benefits EBITDA margins were
14.2% in FY2011.
Withdrawal of VAT refund outside Maharashtra could impact near term margins
Company indicated that they received a VAT refund for the total production done at Chakan
as part of incentives for the capital investment made in Maharashtra. However, Maharashtra
government has changed its earlier stance and has now given a directive that VAT refund
will be payable on the final sales done in Maharashtra only effective mid-March 2011. Hence
company will receive the incentives over a longer period of time than proposed earlier.
According to the company, 25% of total volumes will come from Chakan in FY2012E
(including truck sales which are part of JV). We factor in incremental utility vehicle volumes
to come from Chakan. If company had received full benefit of VAT refund in FY2012E as
well, company’s EBITDA margins would have improved by 1.4% yoy. However, now the
company will get benefit of only Rs736 mn (28 bps benefit on EBITDA margins).
Company had created a manufacturing and a distribution subsidiary at Chakan. Distribution
subsidiary booked sales from Chakan which was recognized as first point of sale and hence
was considered as eligible for VAT refund despite it being a state subject. Company has
indicated that they had negotiated for a certain quantum of incentive from Maharashtra
government which will now be back-ended as they will get incentives on sales inside done in
Maharashtra only. However, we would need more clarity on this subject and the nature of
incentives given to Mahindra & Mahindra.
We revise our earnings downwards by 10-11% over FY2012-13E
We have revised our earnings downwards by 10-11% over FY2012-13E due to – (1) 3-4%
downward revision in utility vehicle volumes due to sharp rise in interest rates and potential
increase in diesel prices, and (2) We have cut our EBITDA margins by 110-130 bps over
FY2012-2013E due to negative impact of withdrawal of VAT incentives from the Chakan
plant.
We have revised our target price to Rs770 (from Rs800 earlier) as (1) we have cut our
earnings by10-11% over FY2012-2013E, (2) we roll over to FY2013E and (3) we have cut
our standalone target PE multiple to 13X (from 14X earlier). We value the stock on sum-ofthe-
parts valuation methodology. We value parent business at Rs 597/share (based on 13X
FY2013E EPS (ex dividends from subsidiaries) and Rs 171/share of subsidiary value.
We have downgraded the stock to ADD (from BUY earlier) due to muted earnings growth
(8% CAGR over FY2011-2013E). Stock trades at 10.7X PE on our FY2013E earnings
estimates (excluding subsidiary value) which factors in the slowdown in earnings growth in
our view and we believe stock can give a 16% upside from current levels due to cheap
valuations.
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