Mahindra & Mahindra's Q4FY18 results (Outperformer) - Steady quarter; eyes on new product launches

4QFY18 result highlights

• Adj PAT in-line with est: M&M+MVML Adj PAT of Rs 11 bn (growth of 64% yoy/ +20% qoq) was in-line with consensus estimates. There was an exceptional item of Rs0.5bn on profit of sale of investment and reversal of impairment loss. Reported PAT at Rs 11.5 ( growth of 50% yoy)
• Steady operating performance: M&M+MVML’s revenues at Rs131.8 bn were in line (growth of 26% yoy), led by 25% growth in volumes, while realizations increased by 2% qoq. Adj EBITDA grew by 49% yoy while EBITDA margins came in at 15.1% (230 bps yoy; +40 bps sequentially).There was an exceptional loss of Rs1.71bn on discounts for liquidating dealer stocks in 4QFY17. The yoy improvement was on account of lower RM costs (-210 bps yoy, reflecting product mix led improved performance in the Automotive division) along with benefit of operating leverage as other expenses declined by 130 bps yoy) Tractor segment EBIT margins were at 19.5% (+170bps yoy;-100bps qoq) while adjusted automotive segment margins increased 210 bps qoq to 10.7%.
• Concall highlights: (a) Management guided for PV industry to grow in low double digits with higher growth for UVs (~15% yoy).It expects CVs to grow by 10-12% with M&HCV growth at 10% while LCVs outperforming the overall CV growth. Industry tractor growth rate for FY19 is expected to be 8-10% in FY19.(b)It is going to launch 3 new products in the UV space- S201 (compact UV on Tivoli platform),U321 (mid-size UV) and Y-400 based on Rexton in FY19. M&M plans to gain market share in the CV segment with entry in the ICV segment (7.5-16 Ton) (c)It expects commodity costs to harden in FY19 (d) The company indicated exports have bottomed out and sees revival in FY19(e)Ssangyong is facing headwinds in its export markets in Russia and Europe due to declining share of diesel portfolio. Domestic market in FY18 was also flat.

Key positives: Stronger Automobile margins

Key negatives: Lower other income

Impact on earnings: We broadly 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. While we remain concerned about the company’s UV portfolio, the strong product pipeline are likely to boost volumes in FY19. Reasonable valuations (ex-subsidiaries ~13xFY20E EPS) provide comfort. Maintain Outperformer with a target price of Rs956.