In FY12, top-line performance of M&M was encouraging, in our view,
with 25% volume growth and 36% revenue growth. The company also
gained market share of around 300bps in the domestic automotive
segment driven by new launches. M&M’s new launch pipeline looks
solid, and we expect the company to maintain strong volume
performance. Investments in new businesses dragged down
consolidated EPS by around INR15/sh (~30%) in FY12. Turnaround in
some of these businesses could lead to strong earnings growth over the
next two to three years, in our view. Core business (ex investments) is
trading at 9x FY14 M&M + MVML earnings of INR 58/sh, which is lower
than 1-yr forward historical average P/E of ~12x. Reiterate BUY.
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Auto segment – Market share improvements led by UVs and MPVs
M&M’s sales volumes in the automotive segment increased by 27% yoy
in FY12 led by strong growth in UVs, LCVs and entry into the new MPV
segment. Market share in the UVs segment increased to 55.1% in FY12,
driven largely by the success of XUV500 launched in Sep-11. M&M
launched Gio and Maxximo vans in FY12 and was able to garner 10% of
the overall MPV segment. Market share also improved in the Verito
segment and 3-wheelers. M&M remains the market leader in 2-3.5 ton
LCV segment with a market share of around 67%, as per the company
Tractor segment – Steady market share
M&M’s volumes in the domestic tractor market increased by 10% yoy in
FY12, nearly in-line with industry growth of 11%. M&M’s overall market
share remained steady at around 42%, but the company lost some
market share in the 31-50 HP segment. The major gainer in this category
has been TAFE (Tractors and Farm Equipments Ltd). M&M gained share
in the 51HP+ and <30HP segments. The company is planning to launch
a new tractor platform in FY13, which we believe should help it gain
some market share.
Standalone profitability and cashflows remain strong
ASP increase led by price hikes and business mix: Revenues
increased by around 36% y-y in FY12, compared to around 25%
growth in volumes (auto and tractors). ASP rise by 8.6% y-y led by
price increases and a favourable change in the volume mix in favor of
high-end UVs
Core profitability remains strong: EBITDA margin declined by
280bps yoy in FY12 due to raw material cost pressures, lower
contribution from higher margin tractor business and higher mix from
MVML. This impacted return ratios as well in FY12. We note that
standalone RoEs are suppressed by higher investments in
subsidiaries; core business RoEs are much higher.
Free cashflow positive in FY12: Operating cashflows of the
standalone business were INR27.3bn in FY12, marginally lower than
the INR29.8bn in FY11, reflecting an increase in working capital led by
a rise in receivables and inventories. We note that overall working
capital in the standalone business is still negative at around INR 6bn
(-4 days). Free cashflow (after capex and investments) was around
INR8bn in FY12 compared to negative FCF of INR8bn in FY11.
Investments in subsidiaries
M&M invested around INR10bn in subsidiaries in FY12 – a large part of
the investment was towards unlisted subsidiaries. Three key points to
note here are:
M&M invested around INR3.5bn in its two-wheeler venture – the
company increased its stake to 88.5% in the business from 80%
earlier.
M&M invested around INR1.6bn in Mahindra Navistar, its commercial
business. This is possibly largely towards funding M&M’s share of net
loss in the subsidiary in FY12, we believe.
The company has invested INR2.3bn in Mahindra Engineering &
Chemical Products Ltd (MECPL), a wholly owned subsidiary. MECPL
is engaged in the business of manufacturing of material handling
equipment. Further, Mahindra Retail is an indirect subsidiary of
MECPL which has cumulative loss of around INR2.4bn till FY12.
Profitability of key subsidiaries – Higher losses at trucks and 2-
wheeler business
In FY12, profitability of key listed Indian subsidiaries improved yoy – net
profit of M&M Financial Services increased by 34% yoy, while net profit
of Mahindra Lifespace increased by 18% yoy. Other subsidiaries like
Mahindra Ugine and Mahindra Forgings were profitable in FY12 as
compared to losses in FY11.
On the other hand, M&M’s share of loss in Ssangyong was around
INR5bn in FY12 and the losses at Mahindra Navistar and Mahindra Two
Wheelers also increased by 50-70% yoy which is a cause of concern, in
our view. If M&M is able to achieve break-even in these 3 subsidiaries
over the next 2-3 years, consolidated EPS could increase by INR15.5/sh,
based on our calculations. Of this, INR9/sh would be due to Ssangyong,
INR3.8/sh due to 2-wheelers and INR 2.8/sh due to Navistar.
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