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Mahindra & Mahindra’s (M&M) Q2FY12 adjusted PAT at INR7.7bn (up 6%
YoY; 27% QoQ) was 5% below our estimates though in‐line with
consensus expectations. The key deviation was in 100bps drop in EBITDA
margin to 12.3% due to poor product mix and input cost pressures which
in our view is reversible in H2FY12. Margins have fallen below mean
margin of 12.5%, implying limited downside risk especially when demand
remains strong and inventory is at its lowest level. We raise our FY13E
EPS by 8% to factor in higher tractor sales. We also maintain ‘BUY’ on the
stock and raise our SOTP target price to INR914 (INR817 earlier). Near
term risks include a probable hike in excise duty on diesel engines.
Margins below mean rate; could improve in H2FY12
Inferior product mix (510bps lower QoQ contribution from tractors in total sales and
470 bps lower QoQ contribution from UV in total automotive sales) and input cost
pressure led to a fall in EBITDA margin to 12.3% vs 13.3% in Q1FY12. Product mix is
likely to improve in H2FY12 due to seasonality. Moreover, margins have now fallen
below mean margins observed over the last seven years, giving us comfort that the
downside is limited especially when the sales outlook remains robust and input cost
pressure is likely to ease off.
Volume growth likely to be better than industry
Demand for tractors and UVs continues to surprise on strong farm income and
availability of bank financing. As stated, inventory in the system is at a historic low. We
raise our FY12/13 volume estimate up by 7%/9% and accordingly FY12/13 EPS by
1%/8% respectively. On MVML, the management is hopeful of re‐instatement of VAT
exemption from the government. If it happens, could be an upside risk.
Outlook and valuations: Product mix to improve; maintain ‘BUY’
Strong rural income and low competition have made the outlook favourable. We
maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the stock. We value
the stock on SOTP basis at INR914 after assigning 11x to FY13E core auto earnings and
valuing subsidiary at 30% discount. Near term risks include a probable hike in excise duty
on diesel engines where the impact would be more sentimental given majority of UV
sales are in rural areas and are for commercial usage.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Mahindra & Mahindra’s (M&M) Q2FY12 adjusted PAT at INR7.7bn (up 6%
YoY; 27% QoQ) was 5% below our estimates though in‐line with
consensus expectations. The key deviation was in 100bps drop in EBITDA
margin to 12.3% due to poor product mix and input cost pressures which
in our view is reversible in H2FY12. Margins have fallen below mean
margin of 12.5%, implying limited downside risk especially when demand
remains strong and inventory is at its lowest level. We raise our FY13E
EPS by 8% to factor in higher tractor sales. We also maintain ‘BUY’ on the
stock and raise our SOTP target price to INR914 (INR817 earlier). Near
term risks include a probable hike in excise duty on diesel engines.
Margins below mean rate; could improve in H2FY12
Inferior product mix (510bps lower QoQ contribution from tractors in total sales and
470 bps lower QoQ contribution from UV in total automotive sales) and input cost
pressure led to a fall in EBITDA margin to 12.3% vs 13.3% in Q1FY12. Product mix is
likely to improve in H2FY12 due to seasonality. Moreover, margins have now fallen
below mean margins observed over the last seven years, giving us comfort that the
downside is limited especially when the sales outlook remains robust and input cost
pressure is likely to ease off.
Volume growth likely to be better than industry
Demand for tractors and UVs continues to surprise on strong farm income and
availability of bank financing. As stated, inventory in the system is at a historic low. We
raise our FY12/13 volume estimate up by 7%/9% and accordingly FY12/13 EPS by
1%/8% respectively. On MVML, the management is hopeful of re‐instatement of VAT
exemption from the government. If it happens, could be an upside risk.
Outlook and valuations: Product mix to improve; maintain ‘BUY’
Strong rural income and low competition have made the outlook favourable. We
maintain our ‘BUY/Sector Outperformer’ recommendation/rating on the stock. We value
the stock on SOTP basis at INR914 after assigning 11x to FY13E core auto earnings and
valuing subsidiary at 30% discount. Near term risks include a probable hike in excise duty
on diesel engines where the impact would be more sentimental given majority of UV
sales are in rural areas and are for commercial usage.
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