Mahindra & Mahindra - "Volumes remain the key growth driver": LKP

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Q2 FY12 disappoints slightly on forex losses at operating levels, robust growth at topline

M&M’s Q2 FY12 revenues were robust at Rs73bn, a growth of 38% yoy and 9% qoq on solid performance on volume front. Volumes in the quarter grew by 30% yoy, while the company gained market share in the FES segment to the tune of 2% recording their highest ever market share of 45%. On the UV side the company maintained its market share. Auto volumes have grown by 32% in the quarter, while FES volumes have grown by 26% in the quarter. M&M’s topline was not a concern in the quarter, however, forex losses due to adverse currency movement resulted in losses to the tune of Rs220mn thus affecting EBITDA margins which came in at 11.9%. Excluding this impact they were at 12.2%, still the lowest in the recent past. This was also due to unfavorable product mix, only partial passing off of raw material price hikes and high input costs. Adjusted PAT for the quarter came in at Rs7.6bn, a growth of 3% yoy and 26% qoq.

Surge in tractor sales, strong LCV sales and new SUV launch leads us to increase the volume estimates

Good monsoons, continuous increase in MSPs and government schemes of employment in rural India have all led to robust tractor sales in the first seven months of the financial year. YTD, tractors have grown by a huge 26% led by a spike in the month of October. Going forward, with January to March quarter being seasonally strong, we expect FES division to end this year with a 17% volume growth, in line with management’s upping of their growth target for this division (12-13% earlier). In FY 13, we expect FES to grow by 12%. With the recent launch of XUV 500, SUV segment will get a boost as the early response for the model has been warm. With continuous ramp up happening in its production, we expect to see a strong volume number in the ensuing quarters. Strong sales of Maximo Van and Genio cab has created a new segment for M&M, while in the pickup goods segment, Bolero and Genio pickups have garnered a market share of 71%, while the Maximo pick up has a market share close to 24%. Also on the 3 wheeler side, the company has surprised us by reporting increasing volumes month on month. Hence, we have increased our total auto growth to 16%/12% for FY12/13E.

Margins seem to have bottomed out, expect to move up on low RM costs and improved product mix

EBITDA margins in the quarter came at 12.2% excluding the impact of forex losses, which still were lower than expected and what the company has been reporting in the past. We believe this quarter has seen the bottoming out of margins and going forward with the impact of higher RM costs getting factored along with the recent price hikes (2-3% in auto sector and Rs 6000 in tractors) coupled with expected upcoming price hikes, margins will look better. With the high margin XUV 500 gaining momentum some impact of improving product mix will be felt though to a little extent as it will be a low volume business initially. Increase in high margin FES business as a % of total volumes of M&M will also lead to a rise in profitability. We forecast 13.1%/13.8% margins for the company in FY12/13E.

Outlook and Valuation

With higher expectations on the volume front and improvement expected on the margin front, we have raised our target price to Rs889, as we now value the core FY 13E earnings of Rs54 at 14x times  arriving at a value of Rs 753 from standalone business and Rs 136 from its various subsidiaries. We maintain our BUY rating on the stock with an upside of 13% from current levels.