Mahindra & Mahindra - Strong volume to drive earnings:: Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Mahindra & Mahindra
Strong volume to drive earnings
Event
 M&M reported lower than expected PAT of Rs6.05bn (+8% YoY) in 1QFY12,
due to 40bp margin miss compared to our estimates. Revenue grew strongly
at 30%YoY to Rs67.3bn led by 23% volume growth. Including MVML, M&M’s
100%-owned subsidiary, EBIT increased 23%YoY. Maintain Outperform.
Impact
 New products driving growth ahead of industry. In both passenger
vehicles (PV) and tractor segments, M&M has gained market share by 450bp
and 230bp to 56% and 43%, respectively. In UVs, M&M domestic sales grew
14% against industry growth of ~5.1% in 1QFY12. Likewise, M&M’s tractor
sales grew 20% against industry growth of 13.7%. We believe M&M is likely to
maintain strong growth momentum due to upcoming new launches.
 Higher commodity costs hurt margins. Standalone EBITDA grew 16% YoY to
Rs9bn due to a 170bp margin decline primarily due to higher raw material costs.
The margin was impacted by i) an increase in staff costs by Rs260mn due to
ESOPs cost amortisation and ii) changes in tax benefits awarded to its plant at
Chakan. Including MVML, total operating margins contracted 100bp, mostly
explained by 37bp due to ESOPs and 60-80bp due to changes in VAT policy.
 Margins should improve going forward. M&M has raised product prices in
the automotive and tractor segments during 1QFY12, the full impact of which
will be seen in the current quarter. RM pressure is also likely to ease as
commodity prices have stay muted. Management expects the Chakan VAT
issue to be resolved by the end of August.
 Concerns on diesel PV tax overdone. M&M’s stock has corrected sharply
(~10%) on account of the Finance Minister (FM) speech in the Parliament
stating that he is willing to consider the proposal to levy an additional tax on
diesel PV. However, later the FM clarified that there is no such proposal at
this point. According to our analysis, additional tax on diesel vehicles would
have small impact on the fiscal deficit of India (US$115bn in FY12E) or diesel
under recovery, and the government is unlikely to adopt this proposal. Refer
to our recent note on diesel tax “Indian Automobile Sector - What if duty on
diesel PV is hiked?”.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs820.00 based on a Sum of Parts methodology.
 Catalyst: Resolution of VAT issue
Action and recommendation
 Outperform maintained. Due to market leadership in key operating segments
(tractors and UVs), coupled with a low competitive threat, we believe M&M is
better placed than its peers in case of an ease in raw material prices.