Mahindra & Mahindra Ltd. (M&M)|Q2FY15 Result Update | Subdued operational performance:: IndiaNivesh

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Mahindra & Mahindra’s showed subdued performance in Q2FY15. Net sales
grew by 6.9% YoY to Rs 94.18bn (in line with consensus of Rs. 94.3 bn) due to
7% YoY increase in average realization. Average realization (Auto+ tractor)
increased by 7% YoY (down 1.2% QoQ) to Rs. 5, 32,687 owing to merger of
Mahindra trucks and busses ltd (MTBL). EBITDA margin contracted 227 bps
YoY to 10.7% (below consensus of 12.7%) dragged by adverse mix, higher
discounting pressure and advertisement spends. RM cost (adjusted) increased
by 19 bps YoY to 72.6% (as a percentage of sales) while employee cost and
other expenses increased by 34 bps YoY and 177 bps YoY, respectively.
Company’s reported net profit decreased by 4% YoY Rs 9.4 bn above consensus
of Rs. 8.6 bn due to higher other income. Other income increased by 35% YoY
to Rs 4.8 bn. Management has earlier given tractor segment volume guidance
of 5-7% for FY15 but considering YTD performance of the segment it seems
as though tractor segment has reported de-growth of 3% YTD(including
October, 2014 number).

Valuation
We remain impressed with company’s business due to its strong product portfolio
catering to both urban & rural section. However, M&M appears to be faced with a
challenging near-term environment in both its key segments, UVs and tractors. At
CMP of Rs 1303, M&M is trading at 13 x FY16e consolidated earnings, which is
slightly above it’s historical average of 12x. We maintain HOLD rating on the stock
with target price of Rs. 1,212 (12x FY16E earnings).

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