Mahindra & Mahindra Stock Buy Report – Prabhudas Lilladher
Mahindra &Mahindra’s standalone adjusted results in Q4FY17 were below expectations as its EBITDA declined 12.8% YoY. While revenues grew 3.3% YoY to Rs111.3bn (PLe: Rs115.1bn), M&M’s EBITDA margin stood at 8.4%, lower 160bps YoY and 340bps QoQ. However, if we adjust for the one‐time discounts given by the company owing to BS III inventory clearance, the EBITDA margin stands at 10% (PLe:10.5%). The product mix was also slightly unfavourable, with tractors constituting 26.7% of total volumes (against 38.8% in Q3FY17 and 23.6% in Q4FY16). The farm equipment segment again benefitted from higher operating leverage YoY (on lower base) and its segmental EBIT margin improved 260bps YoY to 15.5% (lower 180bps QoQ). Boosted by higher non‐operating income, adjusted profit in Q4FY17 grew 11.4% YoY to Rs6.55bn (v/s expectation of ~Rs7bn).
With government policies and budget 2017‐18 focusing on rural development, Mahindra &Mahindra’s tractor division should be a beneficiary. While the automotive division outlook remains subdued, better pick‐up sales and an early mover advantage in evehicles vis‐s‐vis domestic competitors provides better longer‐term outlook. We increase estimates by 4% for FY18e as well as FY19e. We maintain ‘Accumulate’ with a price target of Rs1,478 (previously Rs1,367), based on a core PE of 12x Mar’19e (Rs887) and value of investments and subsidiaries at Rs591.
M&M+MVML performance: Revenues grew by 4.3% YoY to Rs106.1bn (lower than expectations of Rs110.6bn). Gross margins were marginally lower by 20bps YoY as well as QoQ. Other expenditure / sales ratio was higher 40bps YoY and 340bps QoQ while staff cost / sales ratio was higher 90bps YoY but lower 80bps QoQ. Resultantly, EBITDA margin was lower 100bps YoY and 200bps QoQ at 11.7%, with EBITDA declining 4.4% YoY to Rs12.4bn (exp Rs13.9bn). With nonoperating income higher ~207% YoY, adjusted profit growth was 16.9% YoY to Rs8.04bn (PLe: Rs7.4bn).
M&M’s standalone revenues grew by 3.3% YoY to Rs111.3bn (exp Rs115.1bn). This was on the back of volume growth of 2.4% YoY and marginal improvement of 0.9% in blended realizations. Of the overall volume growth in Q4FY17, tractor volume growth was at a decent 16% YoY, while automotive volume decline was 1.8% YoY. As for the product mix, tractors constituted 26.7% of the volumes (as compared to 38.8% in Q3FY17 and 23.6% in Q4FY16).
Q4FY17 gross margins were slightly lower, down 40bps YoY (lower 160bps QoQ). Staff costs as well as other expenditure as a % of sales were higher 70bps YoY (lower 80bps QoQ) and 60bps YoY (higher 260bps QoQ) respectively leading to EBITDA margin being lower 160bps YoY and 340bps QoQ to 8.4%, with EBITDA declining 12.8% YoY to Rs9.4bn (lower than expected). However, adjusting for the discounts given by the company on account of BS III inventory clearance (amounting to Rs1.7bn), EBITDA margin stands at 10%. (PLe: 10.5%).
In the segmental mix, automotive EBIT margin was 3.2% (down 280bps YoY and 130bps QoQ), while the FES EBIT margin was 15.5% (up 260bps YoY but lower 180bps QoQ).
Significantly higher‐than‐expected non‐operating income at Rs3.08bn (up ~170% YoY), coupled with a relatively lower tax rate helped M&M’s one time gain (of Rs937mn) adjusted profit to grow 11.4% YoY to Rs6.55bn (PLe: Rs6.99bn).
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