Mahindra & Mahindra's Q1FY19 results (Outperformer) - Steady quarter; tractor guidance upped

Q1FY19 result highlights

• Adj PAT in-line with est: M&M+MVML Adj PAT of Rs 12.3 bn (growth of 43% yoy) was~7% ahead of estimates. While the operating performance was broadly inline, the beat was largely on account of higher other income and lower depreciation.
• Steady operating performance: M&M+MVML’s revenues at Rs133.7 bn were in line (growth of 19% yoy) was on the back of strong volume growth. Adj EBITDA grew by 32% yoy while EBITDA margins came in at 15.8% (160 bps yoy; +70 bps sequentially). The yoy improvement was on account of operating leverage benefits as other expenses and staff costs each declined by 70 bps. Tractor segment EBIT margins were strong at 20.9% (+360bps yoy;+140bps qoq) and automotive segment margins also increased 9.5% (up 240 bps yoy).

Concall highlights: (a) Management maintains its guidance for PV industry to grow in low double digits with higher growth for UVs (~15% yoy). However, it now expects the tractor industry to register a growth rate for FY19 to 12-14% (8-10% previously).(b)It is going to launch 3 new products in the UV space- S201 (compact UV on Tivoli platform),U321 (mid-size UV; now called the Marazzo) and Y-400 based on Rexton in FY19. However, post these launches M&M would not have a new product introductions in CY19 (c) Commodity costs to harden in FY19; however the management is confident of maintaining profitability through cost control measures and price hikes. The company took a price increase of 1.3-1.5% in the tractor and automobile segment (d) Axle load increase could impact M&HCV demand in the near term as uncertainty prevails.

Key positives: Stronger tractor margins

Key negatives: None

Impact on earnings: We maintain our FY19/FY20 estimates

Valuations & view

M&M will be a key beneficiary of the thrust in the rural segment. It remains extremely well positioned in the tractor segment. While we remain concerned about the company’s UV portfolio from a long term perspective, we do note that the strong product pipeline provides visibility for FY19. Still reasonable valuations (ex-subsidiaries ~14.5xFY20E EPS) provide comfort. Maintain Outperformer with a target price of Rs 1020.