Mahindra & Mahindra Q4FY19 results (Outperformer) - Steady quarter; demand tempering

Q4FY19 result highlights

• Operating performance ahead of estimates: M&M+MVML adjusted PAT of Rs 10.7 bn (-3% yoy) was broadly inline with our expectations but ahead of consensus. A stronger than expected EBITDA (beat expectations by 14%) was offset by a lower other income.
• Strong realization growth; automotive business fares better than expected: M&M+MVML’s revenues at Rs138 bn were up 5% yoy despite a volume decline on a 7% qoq realization growth. The realisations showed an improvement on a better product mix (a higher share of UVs in the product mix) and lower discounting. EBITDA margins came in 13.5% (+30 bps qoq; -160 bps yoy). Sequential improvement in the margins was largely driven by seasonal factors with the EBIT margins of the automotive business at 8.8% (+300 bps qoq, though down 190bps yoy) surprising positively. This was partially offset by a weaker tractor margin (down 300 bps qoq, 300bps yoy).

Concall highlights: (a) The management guided for a tractor growth of 5% for FY20, CV growth of 10-12% and a PV growth of 3-5%. The tractor guidance is based on a normal or slightly lower than normal monsoon; the management believes that with a stable government in place there could be some upsides to the CV guidance on account (b) The company will be able to meet BSVI norms ahead of schedule but in the process will discontinue to a few low volume products (Xylo, the Jeeto minivan and certain variants of the Bolero) (c) No major impact on the UV portfolio as due to BSVI as the cost push could be limited for higher end products. (d) The new products - Alturus G4, XUV3OO and the Marazzo have been well received. (d) The dealer inventory is comfortable when compared to competition. (d) The management has merged MVML and M&M to be able to simplify the reporting process.

Key positives: Higher realisations; strong automotive margins

Key negatives: Weak tractor margins

Impact on earnings: We maintain our estimates for FY20/21

Valuations & view

M&M core segments – Uvs and tractors face near demand pressures account of a slowing economy, liquidity crunch, rural distress and high fuel prices. However, we note that from a long term perspective the company remains well placed in the tractor segment.  While the impact of BSVI could throw up some challenges for the LCV/pickup portfolio we believe that on the whole, reasonable valuations (ex-subsidiaries ~10xFY20E EPS) make for a favourable risk reward return. Maintain outperformer with a TP of Rs780.