Mahindra & Mahindra's Q3FY19 results (Outperformer) - Automotive business weakens; demand tempering

Q3FY19 result highlights

• Operating performance below par: M&M+MVML EBITDA of Rs 17.03 bn (flat yoy) was 5% below expectations on lower profitability in the automotive segment. Adjusted PAT of Rs 11.02bn (+20% yoy) was ahead of estimates largely due to a higher-than-expected other income.
• Automotive business disappoints: M&M+MVML’s revenues at Rs128.9 bn were 12% yoy on the back of a 11% yoy volume growth. EBITDA though was flat with EBITDA margins declining to 13.2% (-130 bps qoq; -150 bps yoy). Sequentially margins were under pressure mainly due to higher material costs (+300 bps yoy) led by a sharp detoriation in the EBIT margins of the automotive business of 5.8% (down 210bps qoq) – the lowest since FY14. The automotive margins were impacted by higher commodity cost (~120bps), higher discounts (~40bps) and higher depreciation (~70bps) partly as the company focussed on clearing inventory after the poor festival season. The PAT benefitted from higher other income and exceptional items including tax refunds.

Concall highlights: (a) The management cut its guidance on tractor growth to 10% for FY19 (earlier 12-14%) based on flat Q4. For FY20, despite positive impetus from the budget, the growth will likely be in single digits. PV growth likely to be between 4-6% (previous guidance 7-9%) (b) During the quarter, in the automotive space, the management focussed on clearing the inventory and offered higher discounts; this led to the profitability being lower in the year. Inventory levels are now at 4-5 weeks inline with the company’s target. (c) SUV Alturus G4, XUV3OO and the Marazzo on a combined basis are expected to add 9,000 units p.a. These volumes will be partially offset by a degree of cannibalisation.

Key positives: Steady tractor margins

Key negatives: Weak Automotive margins

Impact on earnings: We cut our FY19/FY20 estimates by 5%/3% each on lower volume growth and lower margins.

Valuations & view

Even though growth rates in the tractor segment could slow down in the near term, M&M remains extremely well positioned in the segment. It could benefit from rural demand tractor segment. However, 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. On the whole, reasonable valuations (ex-subsidiaries ~10xFY20E EPS) make for a favourable risk reward return. However, given the imminent slowdown in the tractor space we cut our target multiple to 13xSept2020 for an SOTP valuation of Rs780.