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Mahindra & Mahindra's Q1FY20 results (Outperformer) - Steady quarter; demand tempering

Q1FY20 result highlights

• Operating performance broadly inline: M&M+MVML adjusted PAT of Rs 9.2bn (-26% yoy) was 16% below our expectation on lower other income/higher depreciation. However, EBITDA at Rs 18bn was broadly inline with estimates.
• Automotive business under pressure: M&M+MVML’s revenues at Rs128 bn were down 4% yoy due to a volume decline of 9%. The volume decline was partially offset by sequential increase automotive segment realisations (+4% qoq) on a better product mix (a higher share of UVs in the product mix). EBITDA margins at 14% (down 180bps yoy, up 50bps qoq) met expectations. Sequential improvement in the margins was largely driven by seasonal factors even negative operating leverage affected yoy comparisons. While EBIT margins of the tractor business at 19% (down 160bps yoy) were resilient, the automobile business margins at 6.5% (down 230bps qoq, 300bps yoy) were visibly weaker. Adjusted PAT at Rs9.2bn (-26% yoy) was impacted by lower other income/higher depreciation. Notably, the consolidated automotive EBIT at Rs1.1bn was significantly (~Rs4bn lower than the M&M+MVML automobile EBIT. The difference was due to higher losses at Ssangyong.

Concall highlights: (a) The management guided for flat tractor volumes in FY20 (previously +5%) implying a volume growth of 6-8% between August- April. (b) The outlook on the automobile business remains unclear with financing concerns, slow economic growth and regulation led cost push. (c) Post BSVI, the company expects the large SUV segment to remain predominantly diesel while the small car segment (1.2L and below) would likely shift to petrol. With BSVI, the company hopes to pass on the cost push at a minimum.

Key positives: Higher automobile realisations; strong tractor margins

Key negatives: Weak automobile margins, weak profitability

Impact on earnings: We cut our FY20/21 EPS estimates by ~16% each on lower volumes/margins.

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 ~8xFY21E EPS) make for a favourable risk reward return. Maintain outperformer with a SOTP based of Rs604.