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Mahindra and Mahindra (M&M) reported strong results for 3QFY2011, which
were in line with our expectations. The company’s performance was led by
top-line growth owing to a robust jump in volumes, increased average net
realisation and marginal improvement in margins. We broadly maintain our
volume and earnings estimates for the company. Owing to the recent correction
in the stock price, we recommend Buy on the stock.
Healthy volume, better operating performance supported top-line growth: M&M
reported strong 36.1% yoy (12.6% qoq) top-line growth to `6,121cr, which was in
line with our expectation and aided by a robust 32.5% yoy (11.8% qoq) jump in
overall volumes and a 2.3% yoy (2.3% qoq) increase in average net realisation.
During 3QFY2011, EBITDA margins came in 29bp ahead of our estimate at
15.1%, a jump of 20bp yoy (but down 138bp qoq). Better product mix, higher
commercial vehicle (CV) volumes, improved operating leverage and cost-control
initiatives helped the company to marginally expand its margins. Consequently,
adjusted net profit grew by 49.2% yoy to `617cr (`414cr).
Outlook and valuation: M&M’s volume growth continues to surprise positively,
supported by new product launches such as Xylo, GIO and Maxximo. Moreover,
the planned new product launches in the passenger vehicle (PV) and commercial
vehicle (CV) space are expected to help the company in sustaining its volume
momentum going ahead. We broadly maintain our volume estimates and model
in CAGR of ~11% and ~9% in utility vehicle (UV) and tractor volumes,
respectively, over FY2010–12E. At `654, M&M is trading at 15.1x FY2011E and
13.8x FY2012E standalone earnings. Owing to the recent correction in the stock
price, we recommend Buy on M&M. Our SOTP Target Price for M&M works out to
`794, wherein its core business fetches `592/share and the value of its
investments works out to `202/share.
Segment-wise performance: The farm equipment and auto divisions posted a
strong performance during the quarter, growing by 36.8% yoy and 35.8% yoy,
respectively. PBIT margin of the auto division improved by 107bp yoy to 12.3%
(11.2%) and that of the farm equipment division reported a marginal 19bp yoy
increase to 18.5% (18.3%) during 3QFY2011. However, on a sequential basis,
PBIT margin of the auto division recorded a 333bp decline, while that of the farm
equipment division remained healthy and grew by 138bp.
Operating performance marginally ahead of estimates: M&M’s EBITDA margins
for 3QFY2011 came in 29bp ahead of our estimates at 15.1%, a jump of 20bp
yoy; however, it fell by 138bp qoq. Margin expansion on a yoy basis was
supported by lower raw-material cost as a percentage of net sales at 62.7% v/s
64.6% in 3QFY2010. However, raw-material cost for the quarter increased by
almost 58bp qoq.
Noticeably, for the quarter, purchase of traded goods as a percentage of sales
witnessed a sharp jump of 427bp to 7% v/s 2.7% in 3QFY2010, thus negatively
impacting margins. Better product mix, higher CV volumes, improved operating
leverage and cost-control initiatives also helped the company to save on staff costs
and other expenses. Overall, operating profit registered a 38% yoy increase during
3QFY2011 to `924cr (`670cr).
Adjusted net profit up 49.2% yoy: M&M registered adjusted net profit of `617cr
(`414cr) during the quarter, which was in line with our expectation, aided by
improved operating performance and a 72% yoy increase in other income to
`41.9cr (`24.4cr in 3QFY2010). During the quarter, the company registered an
extraordinary gain of `117cr on the exercise of put options on long-term
investments in Owen Cornings India Ltd.
Consolidated performance: M&M reported a healthy performance on the
consolidated front during the quarter, with strong top-line growth of 24.9% yoy to
`9,547cr (`7,643cr). However, consolidated group revenue is not exactly
comparable with the previous year’s revenue due to AT&T exercising its stock
option and Tech Mahindra ceasing to be a group subsidiary and becoming a joint
venture. Consolidated bottom line for the quarter came in at `822cr (`474cr).
Conference call – Key highlights
Management has guided 15–18% and 10–12% industry growth for the
automotive and farm equipment segments, respectively, for the remaining part
of FY2011. However, rising interest rates and commodity inflation are the
likely headwinds going ahead.
M&M’s total market share during 3QFY2011 in the UV and tractor segments
stood at 62.2% and 43.3%, respectively. Management has indicated that the
company has regained the market share lost during 1HFY2011.
Maxximo, launched across India in the last two–three months, continues to
grow well and the current production level stands at ~4,500units/month.
Management has plans to further ramp up production going ahead.
GIO volumes have been picking up since the last four–five months and
production has now reached about 900–1,000units/month.
M&M raised prices in the automotive and farm equipment segments by 3%
and 5%, respectively, on an average during 9MFY2011.
M&M continues to perform well on the exports front and recorded overall
volume growth of ~65% yoy during 9MFY2011. Performance is driven by
strong demand from key markets (US, South Africa, Sri Lanka and
Bangladesh).
The ramp up plan at the Chakan plant remains on track. The plant produced
~11,500 units in 3QFY2011.
Tractor demand in the country is driven by strong demand in Gujarat,
Maharashtra, Orissa and Madhya Pradesh. Moreover, demand for tractors
has witnessed a shift in terms of horsepower, with higher demand for greater
than 40HP tractors.
Performance of the Powerol business during the quarter continued to be
negatively impacted by the slowdown in the telecom towers market. However,
management stated that it was successful in maintaining its market share.
Capex plan: M&M has planned total investment of around `7,000cr over
FY2011–13. Management indicated capex plan of `4,500cr and investment
plan of `2,500cr over FY2011–13. M&M is setting up a new plant at Chakan,
with a capacity of 3,50,000 vehicles, which started its Phase-1 in FY2010.
The company plans to manufacture UVs and LCVs at this plant. This includes
50,000 units of M&M’s international trucks, 1,20,000 units of a new mass
market platform, 90,000 units of a new SUV (successor to the Scorpio) and
90,000 units of Ingenio variants.
As announced earlier, total capex of `5,600cr would be incurred at the
Chakan plant over FY2009–13E, of which `550cr–600cr has already been
spent. M&M’s contribution to this capex is `2,000cr, which would mostly be
utilised for R&D. MVML will spend `2,000cr, MNAL will be spending `1,000cr
and the balance `500cr–`600cr would be incurred by MEPL. M&M is also
setting up a new tractor plant with annual production capacity of up to
100,000 units in South India by FY2012–13. Currently, M&M’s tractor unit is
running at 100% utilisation levels, while PTL’s plants are running at over 80%
utilisation levels.
Investment arguments
Strong growth continues in core business: M&M’s UV and tractor volume
growth continues to surprise positively, with 39.4% and 45.8% yoy growth
reported in FY2010 primarily due to the substantial 8% market share gain in
the UV segment (to 55%). The new Xylo and the established Scorpio and
Bolero contributed to the robust UV volume growth. M&M has also performed
well above our expectations in its farm equipment segment. Thus, we have
modeled a CAGR of ~11% in UV volumes over FY2010–12E for M&M, with
minimum competition in the UV space, and continue to maintain our tractor
volume CAGR assumption of ~9% (including Swaraj).
New ventures firming up well: M&M’s new ventures in the CV space are
firming up well. New product launches such as GIO and Maxximo have
received good response. Further, the new product launch in the M&HCV space
would position the company well in line with other major domestic CV players
such as Ashok Leyland and Tata Motors over the next 2–3 years, aided by its
well-known brand equity and extensive sales network. This is expected to
substantially augment the company’s overall volume growth.
Systech operations poised to benefit from the rebound: Systech should be a
key beneficiary of the growing trend of component sourcing from lower-cost
countries, given its existing relationships with global OEMs. Systech
management is focused on creating shareholder value and has set a goal of
achieving EBITDA of `500cr–600cr, with 75% coming from Europe and the
rest from India. Management believes this is achievable even at 30% below
peak levels. We believe these moves will start contributing positively to M&M's
consolidated EPS, when the global industry cycle takes a positive turn.
Investments constitute 59% of the balance sheet: M&M also has majority
stakes in various listed companies in other sectors, including technology,
property and finance. The high growth potential of M&M's subsidiaries is
expected to unlock the actual value of the stock over the years. Listing of its
subsidiaries has been supporting M&M's valuation in the recent past and may
continue to do so in the long term as well.
Outlook and valuation
M&M’s volume growth continues to surprise positively, supported by new product
launches such as Xylo, GIO and Maxximo. Moreover, the planned new product
launches in the PV and CV space are expected to help the company in sustaining
its volume momentum going ahead. We broadly maintain our volume estimates
and model in CAGR of ~11% and ~9% in UV and tractor volumes, respectively,
over FY2010–12E.
At `654, M&M is trading at 15.1x FY2011E and 13.8x FY2012E standalone
earnings. Owing to the recent correction in the stock price, we recommend Buy on
the stock. Our SOTP Target Price for M&M works out to `794, wherein its core
business fetches `592/share and the value of its investments works out to
`202/share. M&M remains one of the preferred picks in our coverage universe.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra and Mahindra – 3QFY2011 Result Update
Angel Broking recommends a Buy on Mahindra and Mahindra with a Target Price of Rs. 794.
Mahindra and Mahindra (M&M) reported strong results for 3QFY2011, which
were in line with our expectations. The company’s performance was led by
top-line growth owing to a robust jump in volumes, increased average net
realisation and marginal improvement in margins. We broadly maintain our
volume and earnings estimates for the company. Owing to the recent correction
in the stock price, we recommend Buy on the stock.
Healthy volume, better operating performance supported top-line growth: M&M
reported strong 36.1% yoy (12.6% qoq) top-line growth to `6,121cr, which was in
line with our expectation and aided by a robust 32.5% yoy (11.8% qoq) jump in
overall volumes and a 2.3% yoy (2.3% qoq) increase in average net realisation.
During 3QFY2011, EBITDA margins came in 29bp ahead of our estimate at
15.1%, a jump of 20bp yoy (but down 138bp qoq). Better product mix, higher
commercial vehicle (CV) volumes, improved operating leverage and cost-control
initiatives helped the company to marginally expand its margins. Consequently,
adjusted net profit grew by 49.2% yoy to `617cr (`414cr).
Outlook and valuation: M&M’s volume growth continues to surprise positively,
supported by new product launches such as Xylo, GIO and Maxximo. Moreover,
the planned new product launches in the passenger vehicle (PV) and commercial
vehicle (CV) space are expected to help the company in sustaining its volume
momentum going ahead. We broadly maintain our volume estimates and model
in CAGR of ~11% and ~9% in utility vehicle (UV) and tractor volumes,
respectively, over FY2010–12E. At `654, M&M is trading at 15.1x FY2011E and
13.8x FY2012E standalone earnings. Owing to the recent correction in the stock
price, we recommend Buy on M&M. Our SOTP Target Price for M&M works out to
`794, wherein its core business fetches `592/share and the value of its
investments works out to `202/share.
Top-line performance in line, driven by volume growth: For 3QFY2011, M&M
reported strong 36.1% yoy (12.6% qoq) top-line growth to `6,121cr, which was in
line with our expectation and aided by a robust 32.5% yoy (11.8% qoq) jump in
overall volumes and a 2.3% yoy (2.3% qoq) increase in average net realisation.
In the UV segment, M&M sold 56,211 vehicles and retained its dominant position
with a market share of 62.2% on the back of Xylo and Bolero, which continued to
see good offtake. Tractor volumes also registered strong 33.8% yoy growth in
3QFY2011, aided by the festival season and post harvesting period. M&M’s total
market share in the tractor segment during 3QFY2011 stood at 43.3% (41.1% in
2QFY2011). Further, a substantial increase in other operating income at `47cr
(`18cr in 3QFY2010) supported top-line growth.
Segment-wise performance: The farm equipment and auto divisions posted a
strong performance during the quarter, growing by 36.8% yoy and 35.8% yoy,
respectively. PBIT margin of the auto division improved by 107bp yoy to 12.3%
(11.2%) and that of the farm equipment division reported a marginal 19bp yoy
increase to 18.5% (18.3%) during 3QFY2011. However, on a sequential basis,
PBIT margin of the auto division recorded a 333bp decline, while that of the farm
equipment division remained healthy and grew by 138bp.
Operating performance marginally ahead of estimates: M&M’s EBITDA margins
for 3QFY2011 came in 29bp ahead of our estimates at 15.1%, a jump of 20bp
yoy; however, it fell by 138bp qoq. Margin expansion on a yoy basis was
supported by lower raw-material cost as a percentage of net sales at 62.7% v/s
64.6% in 3QFY2010. However, raw-material cost for the quarter increased by
almost 58bp qoq.
Noticeably, for the quarter, purchase of traded goods as a percentage of sales
witnessed a sharp jump of 427bp to 7% v/s 2.7% in 3QFY2010, thus negatively
impacting margins. Better product mix, higher CV volumes, improved operating
leverage and cost-control initiatives also helped the company to save on staff costs
and other expenses. Overall, operating profit registered a 38% yoy increase during
3QFY2011 to `924cr (`670cr).
Adjusted net profit up 49.2% yoy: M&M registered adjusted net profit of `617cr
(`414cr) during the quarter, which was in line with our expectation, aided by
improved operating performance and a 72% yoy increase in other income to
`41.9cr (`24.4cr in 3QFY2010). During the quarter, the company registered an
extraordinary gain of `117cr on the exercise of put options on long-term
investments in Owen Cornings India Ltd.
Consolidated performance: M&M reported a healthy performance on the
consolidated front during the quarter, with strong top-line growth of 24.9% yoy to
`9,547cr (`7,643cr). However, consolidated group revenue is not exactly
comparable with the previous year’s revenue due to AT&T exercising its stock
option and Tech Mahindra ceasing to be a group subsidiary and becoming a joint
venture. Consolidated bottom line for the quarter came in at `822cr (`474cr).
Conference call – Key highlights
Management has guided 15–18% and 10–12% industry growth for the
automotive and farm equipment segments, respectively, for the remaining part
of FY2011. However, rising interest rates and commodity inflation are the
likely headwinds going ahead.
M&M’s total market share during 3QFY2011 in the UV and tractor segments
stood at 62.2% and 43.3%, respectively. Management has indicated that the
company has regained the market share lost during 1HFY2011.
Maxximo, launched across India in the last two–three months, continues to
grow well and the current production level stands at ~4,500units/month.
Management has plans to further ramp up production going ahead.
GIO volumes have been picking up since the last four–five months and
production has now reached about 900–1,000units/month.
M&M raised prices in the automotive and farm equipment segments by 3%
and 5%, respectively, on an average during 9MFY2011.
M&M continues to perform well on the exports front and recorded overall
volume growth of ~65% yoy during 9MFY2011. Performance is driven by
strong demand from key markets (US, South Africa, Sri Lanka and
Bangladesh).
The ramp up plan at the Chakan plant remains on track. The plant produced
~11,500 units in 3QFY2011.
Tractor demand in the country is driven by strong demand in Gujarat,
Maharashtra, Orissa and Madhya Pradesh. Moreover, demand for tractors
has witnessed a shift in terms of horsepower, with higher demand for greater
than 40HP tractors.
Performance of the Powerol business during the quarter continued to be
negatively impacted by the slowdown in the telecom towers market. However,
management stated that it was successful in maintaining its market share.
Capex plan: M&M has planned total investment of around `7,000cr over
FY2011–13. Management indicated capex plan of `4,500cr and investment
plan of `2,500cr over FY2011–13. M&M is setting up a new plant at Chakan,
with a capacity of 3,50,000 vehicles, which started its Phase-1 in FY2010.
The company plans to manufacture UVs and LCVs at this plant. This includes
50,000 units of M&M’s international trucks, 1,20,000 units of a new mass
market platform, 90,000 units of a new SUV (successor to the Scorpio) and
90,000 units of Ingenio variants.
As announced earlier, total capex of `5,600cr would be incurred at the
Chakan plant over FY2009–13E, of which `550cr–600cr has already been
spent. M&M’s contribution to this capex is `2,000cr, which would mostly be
utilised for R&D. MVML will spend `2,000cr, MNAL will be spending `1,000cr
and the balance `500cr–`600cr would be incurred by MEPL. M&M is also
setting up a new tractor plant with annual production capacity of up to
100,000 units in South India by FY2012–13. Currently, M&M’s tractor unit is
running at 100% utilisation levels, while PTL’s plants are running at over 80%
utilisation levels.
Investment arguments
Strong growth continues in core business: M&M’s UV and tractor volume
growth continues to surprise positively, with 39.4% and 45.8% yoy growth
reported in FY2010 primarily due to the substantial 8% market share gain in
the UV segment (to 55%). The new Xylo and the established Scorpio and
Bolero contributed to the robust UV volume growth. M&M has also performed
well above our expectations in its farm equipment segment. Thus, we have
modeled a CAGR of ~11% in UV volumes over FY2010–12E for M&M, with
minimum competition in the UV space, and continue to maintain our tractor
volume CAGR assumption of ~9% (including Swaraj).
New ventures firming up well: M&M’s new ventures in the CV space are
firming up well. New product launches such as GIO and Maxximo have
received good response. Further, the new product launch in the M&HCV space
would position the company well in line with other major domestic CV players
such as Ashok Leyland and Tata Motors over the next 2–3 years, aided by its
well-known brand equity and extensive sales network. This is expected to
substantially augment the company’s overall volume growth.
Systech operations poised to benefit from the rebound: Systech should be a
key beneficiary of the growing trend of component sourcing from lower-cost
countries, given its existing relationships with global OEMs. Systech
management is focused on creating shareholder value and has set a goal of
achieving EBITDA of `500cr–600cr, with 75% coming from Europe and the
rest from India. Management believes this is achievable even at 30% below
peak levels. We believe these moves will start contributing positively to M&M's
consolidated EPS, when the global industry cycle takes a positive turn.
Investments constitute 59% of the balance sheet: M&M also has majority
stakes in various listed companies in other sectors, including technology,
property and finance. The high growth potential of M&M's subsidiaries is
expected to unlock the actual value of the stock over the years. Listing of its
subsidiaries has been supporting M&M's valuation in the recent past and may
continue to do so in the long term as well.
Outlook and valuation
M&M’s volume growth continues to surprise positively, supported by new product
launches such as Xylo, GIO and Maxximo. Moreover, the planned new product
launches in the PV and CV space are expected to help the company in sustaining
its volume momentum going ahead. We broadly maintain our volume estimates
and model in CAGR of ~11% and ~9% in UV and tractor volumes, respectively,
over FY2010–12E.
At `654, M&M is trading at 15.1x FY2011E and 13.8x FY2012E standalone
earnings. Owing to the recent correction in the stock price, we recommend Buy on
the stock. Our SOTP Target Price for M&M works out to `794, wherein its core
business fetches `592/share and the value of its investments works out to
`202/share. M&M remains one of the preferred picks in our coverage universe.
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