Mahindra & Mahindra
Tractors to drive growth; Buy
Key takeaways
Tractors the growth driver. After a robust performance in FY13, Mahindra
& Mahindra’s (M&M) automotive division volumes have been constrained in
9MFY14 (in 3QFY14 9.5% lower yoy). This was more than made up for by
robust tractor volumes; in 3QFY14 (as in 1HFY14), these were prolific
(growing 21% yoy). Among the automotive segments, pick-up sales were up
0.7% yoy, UVs were lower ~16% yoy, and three-wheelers were down 4.1%
yoy). M&M’s overall volumes in 2QFY14 dipped marginally, by 0.1% yoy.
3Q likely to be good. For 3Q, on yoy flat volumes, we expect 1% yoy
income dip to `106.7bn and 14.5% EBITDA growth to `13.9bn. Our
EBITDA margin expectation is 13.5% (up 230bps yoy, 70bps qoq). The
higher share of tractors in the product mix qoq could result in EBITDA
margin improving qoq. We expect the quarter’s profit, at `9.4bn, to be up
12.4% yoy.
FES to drive EBIT margins. We expect 9% EBIT margin for the
automotive division (50bps higher yoy, 40bps lower qoq) and 16.8% for the
farm-equipment segment (130bps higher yoy, 20bps lower qoq). EBIT per
tractor is expected to be 9.5% higher yoy, while EBIT per vehicle in the
automotive division is expected to be 2.8% higher yoy.
Our take. Tractors have recorded a strong recovery in 1H, with a good
trajectory in 3Q as well. For the segment, 1HCY14 should also be decent.
The higher tractor-segment growth would also result in a better operating
performance for M&M. The consolidated performance should also be good,
but Systech, and the two-wheeler business would be drags on profitability. We
have a Buy rating, with a sum-of-parts-based target of `1,037. The stock
trades at ~10.6x FY15 consolidated earnings. Risks. Downside: Delay in
rural demand recovery, keener competition, diesel price hike, negatives on the
merger of the truck business.
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Tractors to drive growth; Buy
Key takeaways
Tractors the growth driver. After a robust performance in FY13, Mahindra
& Mahindra’s (M&M) automotive division volumes have been constrained in
9MFY14 (in 3QFY14 9.5% lower yoy). This was more than made up for by
robust tractor volumes; in 3QFY14 (as in 1HFY14), these were prolific
(growing 21% yoy). Among the automotive segments, pick-up sales were up
0.7% yoy, UVs were lower ~16% yoy, and three-wheelers were down 4.1%
yoy). M&M’s overall volumes in 2QFY14 dipped marginally, by 0.1% yoy.
3Q likely to be good. For 3Q, on yoy flat volumes, we expect 1% yoy
income dip to `106.7bn and 14.5% EBITDA growth to `13.9bn. Our
EBITDA margin expectation is 13.5% (up 230bps yoy, 70bps qoq). The
higher share of tractors in the product mix qoq could result in EBITDA
margin improving qoq. We expect the quarter’s profit, at `9.4bn, to be up
12.4% yoy.
FES to drive EBIT margins. We expect 9% EBIT margin for the
automotive division (50bps higher yoy, 40bps lower qoq) and 16.8% for the
farm-equipment segment (130bps higher yoy, 20bps lower qoq). EBIT per
tractor is expected to be 9.5% higher yoy, while EBIT per vehicle in the
automotive division is expected to be 2.8% higher yoy.
Our take. Tractors have recorded a strong recovery in 1H, with a good
trajectory in 3Q as well. For the segment, 1HCY14 should also be decent.
The higher tractor-segment growth would also result in a better operating
performance for M&M. The consolidated performance should also be good,
but Systech, and the two-wheeler business would be drags on profitability. We
have a Buy rating, with a sum-of-parts-based target of `1,037. The stock
trades at ~10.6x FY15 consolidated earnings. Risks. Downside: Delay in
rural demand recovery, keener competition, diesel price hike, negatives on the
merger of the truck business.
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