Tractor Recovery to Cushion UV Slowdown
Notwithstanding slowdown in tractor segment, Mahindra & Mahindra
(M&M) has delivered strong operational performance in Q4FY13. Its
operating margins rose 184 bps YoY (87 bps QoQ) to 12.1% vs. our estimate of
11%. Its revenues rose 12% YoY to Rs. 105 bn (vs. our estimate of Rs. 101 bn),
while volume grew 7% YoY to 199,105 units. Price hike and better productmix
resulted in 5% YoY rise in average realization per vehicle. Its RM/Sales
ratio dipped 75 bps YoY (110 bps QoQ) to 74.8%. M&M booked Rs. 900 mn
capital gain on stake sale of its investment in Mahindra Holidays, excluding
which its adjusted PAT rose 28.6% YoY to Rs. 8 bn. Adjusted profit of
combined entity (M&M+MVML) rose 8% YoY to Rs. 8.7 bn on revenues of Rs.
99.8 bn (up 9.6% YoY), while its EBIDTAM rose 239 bps YoY (91 bps QoQ) to
14.4% in Q4FY13.
Recovery in Tractor Segment Suffice to Offset UV Slowdown: We observed
strong positive co‐relation between tractor volume and election period during
past decades. Farm segment always benefits from election money‐flow in rural
India, which coupled with relief to farmers from government would result in
strong demand for tractors in FY15E. We expect UV growth to taper down
from ~50% to 13.5% in FY14‐15 due to high base, increase in excise duty
coupled with declining fuel price differential. We believe that strong tractor
volume would be more than enough to maintain profitability, as Tractor
segment (EBIT margin of 16%) enjoys much higher operating margin than
Auto segment (EBIT margins of 9%). We expect margin improvement of 50
bps over FY13‐15 on account of increasing contribution from Tractor segment.
Outlook & Valuation
In view of UV growth tapering down, we lower our revenue and EPS
estimates by 3% each for FY15E. Based on 8xFY15E EV/EBIDTA, we value
M&M’s standalone business at Rs. 820 (from Rs. 836 earlier). Based on
7xEV/EBIDTA, we value MVML at Rs. 67 and post‐20% Hold Co discount, we
value subsidiary at Rs. 263 per share (from Rs. 247 earlier). We reiterate our
“BUY” recommendation on M&M and maintain our SOTP‐based target price
of Rs. 1,150 per share, primarily on account of increasing value of its
subsidiary supported by their improved financial performance.
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Notwithstanding slowdown in tractor segment, Mahindra & Mahindra
(M&M) has delivered strong operational performance in Q4FY13. Its
operating margins rose 184 bps YoY (87 bps QoQ) to 12.1% vs. our estimate of
11%. Its revenues rose 12% YoY to Rs. 105 bn (vs. our estimate of Rs. 101 bn),
while volume grew 7% YoY to 199,105 units. Price hike and better productmix
resulted in 5% YoY rise in average realization per vehicle. Its RM/Sales
ratio dipped 75 bps YoY (110 bps QoQ) to 74.8%. M&M booked Rs. 900 mn
capital gain on stake sale of its investment in Mahindra Holidays, excluding
which its adjusted PAT rose 28.6% YoY to Rs. 8 bn. Adjusted profit of
combined entity (M&M+MVML) rose 8% YoY to Rs. 8.7 bn on revenues of Rs.
99.8 bn (up 9.6% YoY), while its EBIDTAM rose 239 bps YoY (91 bps QoQ) to
14.4% in Q4FY13.
Recovery in Tractor Segment Suffice to Offset UV Slowdown: We observed
strong positive co‐relation between tractor volume and election period during
past decades. Farm segment always benefits from election money‐flow in rural
India, which coupled with relief to farmers from government would result in
strong demand for tractors in FY15E. We expect UV growth to taper down
from ~50% to 13.5% in FY14‐15 due to high base, increase in excise duty
coupled with declining fuel price differential. We believe that strong tractor
volume would be more than enough to maintain profitability, as Tractor
segment (EBIT margin of 16%) enjoys much higher operating margin than
Auto segment (EBIT margins of 9%). We expect margin improvement of 50
bps over FY13‐15 on account of increasing contribution from Tractor segment.
Outlook & Valuation
In view of UV growth tapering down, we lower our revenue and EPS
estimates by 3% each for FY15E. Based on 8xFY15E EV/EBIDTA, we value
M&M’s standalone business at Rs. 820 (from Rs. 836 earlier). Based on
7xEV/EBIDTA, we value MVML at Rs. 67 and post‐20% Hold Co discount, we
value subsidiary at Rs. 263 per share (from Rs. 247 earlier). We reiterate our
“BUY” recommendation on M&M and maintain our SOTP‐based target price
of Rs. 1,150 per share, primarily on account of increasing value of its
subsidiary supported by their improved financial performance.
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