Angel Broking : Result Update: Mahindra & Mahindra - 2QFY2015

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Operating performance lags estimates; higher other income and lower taxation

boost profitability: Mahindra & Mahindra (M&M)’s 2QFY2015 results were in line

with our estimates, primarily due to higher other income and lower taxation even

as the operating performance lagged estimates.

Revenues grew 6% yoy to `9,178cr, led by 5% growth in realization each in the

automotive and the farm equipment segment. Volumes remained flat on a yoy

basis. EBIDTA margin, at 12%, declined 250bp yoy and was significantly lower

than our estimate of 14.1%. Higher employee expenses due to new wage

regulations by Maharashtra government, higher discounting and product launch

expenses impacted the company’s operating performance. However, higher other

income at `490.6cr (35% yoy growth) due to increased dividend from subsidiaries

and lower taxation (tax/PBT at 21.5%) boosted the profitability. Net Profit, at

`974cr, declined 5% yoy and was in line with our estimate.

Outlook and valuation: M&M’s volumes are likely to remain under pressure in

2HFY2015 given the weakness in both the automotive (due to lack of

products in the compact UV space and due to subdued LCV sales) and the

farm equipment space (due to poor sentiments on back of lower sowing).

M&M is however likely to witness volume recovery over the next two years

(FY2016 & FY2017) in both the automotive and the tractor industry. In the

automotive segment, M&M aims to introduce two new utility vehicles over the

next one year in the compact space (where so far it has very limited presence)

enabling it to regain market share. Further, other automotive segments, ie

LCV and three-wheelers, are likely to witness recovery in FY2016 on back of

improvement in the economy. We also believe that the tractor industry growth

would revive in FY2016 on back of increased non-agri usage of tractors and

higher MSPs. Further, M&M’s margins are likely to improve in FY2016 on

back of operating leverage and reduction in discounts. We have reduced our

FY2015/16 estimates marginally given the volume and margin pressure in

the near term. However, given the improved outlook FY2016 onwards, we

maintain our positive view on the company and retain our Accumulate rating

with a revised SOTP based target price of `1,428.