Mahindra & Mahindra - FES business expected to enter positive cycle ::LKP

Q4 results above expectations

M&M’s Q4 FY13 revenues came in at Rs 103bn, a growth of 12% yoy, and a dip of 2.7% qoq. Volumes in the quarter grew by 6.2% yoy while declining by 6.8% qoq. Auto volumes have grown by 1.4% qoq and 10% yoy in the quarter, while FES volumes have declined by 23% yoy and 5.4% qoq. M&M’s realizations grew by a robust 16% yoy and 2% qoq, which was the impact of price hikes taken last quarter and improved product mix on the UV side (higher number of XUV 5oo and Quanto). The growth in realizations was also in line with the price hikes of 4.5% taken YTD on the FES side and 2% in auto segment in December. Also, the company is out of the race of giving any discounts on any of its vehicles except trucks. This has also led to a good growth in pricing, however, the company has lost some of its FES market share to 40.2%, down by 1.2%. On profitability front, EBITDA margins went up to 12.11% from 11.24% qoq and 10.3% yoy. RM to sales fell to 74.82% from 75.9% qoq and 75.52% yoy.  Other expenses however have grown slightly to 8.8% from 8.2% qoq as the company spent on Quanto launch post a few months of its launch.

There was a strong surge in the segmental EBIT margins as auto margins went up to 12.4% on account of higher sale of high margin vehicles, while FES margins went up to 16%. Realizations on the FES side also moved up by 9.3% as the product mix on the back of improved product mix and price hikes taken in Q3. Depreciation expenses grew by 41% yoy and 2% qoq at Rs1,986mn. Tax rate came at 28%, while interest costs fell by 28% yoy as the company is reducing its debt. PAT adjusted for a Rs0.8 bn extraordinary income grew by 4% yoy, while fell by 4% to Rs 7.9bn, which was still above market expectations of Rs 7.7bn. Reported PAT came in at Rs8.89bn.

Outlook and valuation

Although the company is not launching any major vehicles in FY 14, FY 15 will see some major launches on both M&M as well as Ssangyong side, whose demand and profitability are on an upmove.  Also general elections coming up within next one year, we see a demand boost in FY 15E. We see also see improvement in FES segment in line with the management view. With pricing discipline seen on the FES side with zero discounting and price hikes taken, we see margin picture improving for M&M. Also increasing sales of high margin SUVs will help the cause. Softening of RM costs and stable ad spend will result in better margins.  We have slightly increased our FY14E earnings to Rs 61.2 from Rs 60 based on higher expectations from FES segment.  We now roll over our estimates to FY 15E and value the company on FY 15E earnings of Rs75.7 at 12x times arriving at a value of Rs908 from standalone business and Rs 211 from its various subsidiaries. We maintain our BUY rating on the stock with an upside of 15% from current levels.

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