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M&M’s Q1 FY14 revenues came in at Rs 99bn, a growth of 7.1% yoy, and a dip of 4.3% qoq on the back of weak UV volumes. Volumes in the quarter remained flat yoy while declining by 6% qoq. Auto volumes have declined by 2.4% yoy and 17.4% yoy in the quarter, while FES volumes have shown a remarkable turnaround by posting growth of 25% yoy and 50% qoq. M&M’s realizations grew by 6% yoy and 1% qoq, on product mix tilting in favor of tractors. The growth in realizations was also in line with the price hikes of 0.5% taken this quarter in both the segments. On profitability front, EBITDA margins went up to 12.8% from 12.1% qoq and 11.8% yoy as the high margin tractors accounted for a good chunk of the volumes this quarter. RM to sales fell to 72.9% from 74.8% qoq and 75.1% yoy. Other expenses however have grown this quarter to 9.2% from 8.8% qoq as the company focused on marketing expenses on the SUV as well as the tractors side. Depreciation expenses fell by 10% yoy and grew by 2% qoq at Rs1.8 bn. Tax rate came at 23%, while interest costs grew by 7% yoy. Other income came in above our expectations at Rs1.64 bn as dividend from its subsidiaries increased significantly both on qoq as well as yoy basis. PAT increased 29% yoy to Rs9.4 bn, a growth of 29% yoy and 17% qoq mainly on the back of higher other income and better FES business performance. The company also announced its merger with Mahindra Trucks and Buses Ltd (MTBL) which will be completing in FY 15. This business has accumulated losses of Rs8.4 bn and would impact the company’s business in the short to medium term.
Outlook and Valuation
On the SUV side, in the absence of any new model from M&M’s stable in the coming two years, competitors like Renault, Maruti and Ford will be able to steal M&M’s market share in an environment which is getting difficult for UV industry tarnished by higher diesel prices and higher excise duties. On one hand where SUVs are struggling, there has been an interchange of fortunes which we can relate with the FES segment which is growing leaps and bounds. With good monsoon, higher MSPs and overall strength in the agri sector, FES segment is on a very strong footing. We therefore have increased the FES segment volume estimates, while reduced those of the UV and LCV segments. We also believe the merger of MTBL to have a negative impact on profitability in short to medium term. Softening of RM costs and stable ad spend will result in better margins though. In line with this, we have pruned down our FY14E/15E earnings estimates from Rs60/74 to Rs 54/62 and a standalone business value at Rs799 and subsidiaries value of 235 from its various subsidiaries. We maintain our BUY rating on the stock with a reduced target price of Rs 1034 and an upside of 18% from current levels.
LKP Research
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