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Mahindra & Mahindra (MAHM.BO)
2QFY12: Results Miss the High Ask
PAT at Rs 7.4bn was ~8% below our estimates — reflecting an EBITDA miss of
~13% (EBITDA of Rs8.7bn, 11.9%, down 145bps Q/Q). This includes an MTM f/x loss
of ~Rs320m, sans which EBITDA would have been ~Rs9.1bn (12.3%). Both key cost
heads – employee expenses/raw materials - were higher than estimates; the former on
account of ~Rs260m of amortization of ESOPs, the latter due to lower than expected
price hikes (revenues were ~1% below estimates). Mitigating these impacts were a)
~13% YoY growth in income from subs and JVs and b) lower tax rate of 24.4% (vs
25.7% in 1QFY12). Per mgmt, PAT was ~Rs 7.59bn (ex MTM losses).
Incentives – and why they matter — we estimate MM’s quarterly incentives are
~Rs400-500m (pre tax). FY11 incentives / grants booked were ~Rs1.8bn, ~6% of PBT
and ~50-70 bps from a quarterly EBITDA margin perspective. We reckon the miss in
MM’s nos is accentuated, given the change in norms since end 4Q11. We expect this
to continue for another 2Qs, before the nos. reflect in the base.
Segmental trends: slight margin contraction in both tractors and UVs — Auto and
FES reported EBIT margins of 9.9% / 15.3%, down 80/70bps Q/Q respectively. Given
that both businesses are operating at high levels of utilization, we reckon this is on
account of cost pressures, rather than leverage. Mgmt noted in the con call that pricing
in the tractor industry is constrained, though volume growth remains v. robust (>20%).
We reckon this trend (weak pricing) needs to be watched closely.
Con call takeaways — a) Mgmt is positive on the XUV500 outlook – production will be
increased from 2,000 / mth in 3Q to 3,000 / mth in 4Q, b) Tractor inventory levels remain
low, c) elevated working capital reflects ramp-up before festive season, d) tractor vol
growth to moderate in 2H12, e) 1H pickup vols impacted by engine supply constraints.
Pare earnings/target price — We tweak earnings by 3-8% over FY12-14 to reflect a)
higher input cost pressures, b) higher other expenses, but c) also raise tractor volume
forecasts over FY12-14, reflecting robust 1H12 trends. SOTP-based target price of
Rs870 values parent at Rs737/share, subs at Rs133/share. Maintain Neutral.
Mahindra & Mahindra
Company description
Mahindra and Mahindra (M&M) manufactures utility vehicles, light commercial
vehicles and tractors in India. It has also made a foray into the MHCV segment.
M&M is the market leader in both the utility vehicle and tractor segments.
Investment strategy
We rate M&M shares Neutral (2) with a target price of Rs870. M&M's utility-vehicle
business should benefit from new product launches and strong product positioning
for all its brands viz. Bolero, Scorpio and Xylo. We expect M&M's utility-vehicle
business to maintain its market share over the next 12 months due to a stronger
product profile. The UV business is also expected to be buoyed by new launches,
notably the XUV500. The LCVs launched by the company, particularly the Maxximo,
have garnered favorable response from customers. For the tractor business, we are
now slightly cautious, given that India's tractor penetration has exceeded the global
average, and after 4 consecutive years of volume growth >20% CAGR. In addition,
following strong outperformance versus the market over the last quarter, we see
that the aforementioned positives as fully reflected in the price, with limited upside
from current levels.
Valuation
Our target price of Rs870 is based on a sum-of-parts methodology. We value
M&M's core business at Rs737/share (12x March 2013E core CEPS, at a slight
premium to its 10-year average multiple). We also incorporate value for M&M's
listed subsidiaries at Rs133/share. Our subsidiary valuations are based on a 25%
discount to market prices of the listed subsidiaries. We have chosen P/CEPS to
value the core business to facilitate comparison with historical trading bands; the
company is undertaking a significant product development and capital expenditure
program.
Risks
Key downside risks to our investment thesis which could prevent the shares from
reaching our target price include: a) any substantial rise in interest rates that could
curb demand for farm equipment and utility vehicles, b) increase in raw material
costs, especially Steel and Rubber, may put downward pressure on margins, c)
given M&M's strong dependence on the rural economy, which has significantly
benefited from the governments policies, a slight reversal in these policies could
impact the outlook for tractors/change secular growth trajectory, and d) escalating
competition within the UV segment (notably from Maruti R III concept), which might
lead to an increase in discounts and result in margin pressure. Key upside risks to
our investment thesis include: a) a significant uptick in Y/Y growth in tractors of
20%+ could imply meaningful upgrades into FY13, b) a benign commodity cost
environment could buoy margins, c) higher than expected volumes, especially for
new model / variants of UVs and pick-ups could result in volume uptick despite
increasing competitive intensity
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra (MAHM.BO)
2QFY12: Results Miss the High Ask
PAT at Rs 7.4bn was ~8% below our estimates — reflecting an EBITDA miss of
~13% (EBITDA of Rs8.7bn, 11.9%, down 145bps Q/Q). This includes an MTM f/x loss
of ~Rs320m, sans which EBITDA would have been ~Rs9.1bn (12.3%). Both key cost
heads – employee expenses/raw materials - were higher than estimates; the former on
account of ~Rs260m of amortization of ESOPs, the latter due to lower than expected
price hikes (revenues were ~1% below estimates). Mitigating these impacts were a)
~13% YoY growth in income from subs and JVs and b) lower tax rate of 24.4% (vs
25.7% in 1QFY12). Per mgmt, PAT was ~Rs 7.59bn (ex MTM losses).
Incentives – and why they matter — we estimate MM’s quarterly incentives are
~Rs400-500m (pre tax). FY11 incentives / grants booked were ~Rs1.8bn, ~6% of PBT
and ~50-70 bps from a quarterly EBITDA margin perspective. We reckon the miss in
MM’s nos is accentuated, given the change in norms since end 4Q11. We expect this
to continue for another 2Qs, before the nos. reflect in the base.
Segmental trends: slight margin contraction in both tractors and UVs — Auto and
FES reported EBIT margins of 9.9% / 15.3%, down 80/70bps Q/Q respectively. Given
that both businesses are operating at high levels of utilization, we reckon this is on
account of cost pressures, rather than leverage. Mgmt noted in the con call that pricing
in the tractor industry is constrained, though volume growth remains v. robust (>20%).
We reckon this trend (weak pricing) needs to be watched closely.
Con call takeaways — a) Mgmt is positive on the XUV500 outlook – production will be
increased from 2,000 / mth in 3Q to 3,000 / mth in 4Q, b) Tractor inventory levels remain
low, c) elevated working capital reflects ramp-up before festive season, d) tractor vol
growth to moderate in 2H12, e) 1H pickup vols impacted by engine supply constraints.
Pare earnings/target price — We tweak earnings by 3-8% over FY12-14 to reflect a)
higher input cost pressures, b) higher other expenses, but c) also raise tractor volume
forecasts over FY12-14, reflecting robust 1H12 trends. SOTP-based target price of
Rs870 values parent at Rs737/share, subs at Rs133/share. Maintain Neutral.
Mahindra & Mahindra
Company description
Mahindra and Mahindra (M&M) manufactures utility vehicles, light commercial
vehicles and tractors in India. It has also made a foray into the MHCV segment.
M&M is the market leader in both the utility vehicle and tractor segments.
Investment strategy
We rate M&M shares Neutral (2) with a target price of Rs870. M&M's utility-vehicle
business should benefit from new product launches and strong product positioning
for all its brands viz. Bolero, Scorpio and Xylo. We expect M&M's utility-vehicle
business to maintain its market share over the next 12 months due to a stronger
product profile. The UV business is also expected to be buoyed by new launches,
notably the XUV500. The LCVs launched by the company, particularly the Maxximo,
have garnered favorable response from customers. For the tractor business, we are
now slightly cautious, given that India's tractor penetration has exceeded the global
average, and after 4 consecutive years of volume growth >20% CAGR. In addition,
following strong outperformance versus the market over the last quarter, we see
that the aforementioned positives as fully reflected in the price, with limited upside
from current levels.
Valuation
Our target price of Rs870 is based on a sum-of-parts methodology. We value
M&M's core business at Rs737/share (12x March 2013E core CEPS, at a slight
premium to its 10-year average multiple). We also incorporate value for M&M's
listed subsidiaries at Rs133/share. Our subsidiary valuations are based on a 25%
discount to market prices of the listed subsidiaries. We have chosen P/CEPS to
value the core business to facilitate comparison with historical trading bands; the
company is undertaking a significant product development and capital expenditure
program.
Risks
Key downside risks to our investment thesis which could prevent the shares from
reaching our target price include: a) any substantial rise in interest rates that could
curb demand for farm equipment and utility vehicles, b) increase in raw material
costs, especially Steel and Rubber, may put downward pressure on margins, c)
given M&M's strong dependence on the rural economy, which has significantly
benefited from the governments policies, a slight reversal in these policies could
impact the outlook for tractors/change secular growth trajectory, and d) escalating
competition within the UV segment (notably from Maruti R III concept), which might
lead to an increase in discounts and result in margin pressure. Key upside risks to
our investment thesis include: a) a significant uptick in Y/Y growth in tractors of
20%+ could imply meaningful upgrades into FY13, b) a benign commodity cost
environment could buoy margins, c) higher than expected volumes, especially for
new model / variants of UVs and pick-ups could result in volume uptick despite
increasing competitive intensity
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