Mahindra & Mahindra's Q3FY18 results (Outperformer) - Steady performance

3QFY18 result highlights

• Adj PAT below est: M&M+MVML Adj PAT of Rs 9.2bn (growth of 22% yoy/ -35% qoq) was below estimates on the back of a lower other income. There was an exceptional gain of Rs 3.86bn on account of sale of investment in subsidiary, post which PAT came in at Rs13 bn.
• Steady operating performance: M&M+MVML’s revenues at Rs114.9bn were in line (growth of 10% yoy), led by 6% growth in volumes, while realizations declined by 1% qoq. EBITDA grew by 20% yoy while EBITDA margins came in at 14.7% (+110 bps yoy; -130 bps sequentially) – the yoy improvement was on account of lower RM costs (-180 bps yoy, reflecting product mix led improved performance in the Automotive division). This was offset by higher other expenses (+110 bps yoy) partially on account of a shift in festival season. Tractor segment EBIT margins surprised at 20.5% (+110bps yoy;-80bps qoq) while automotive segment margins declined 230 bps qoq to 8.5%.
• Concall highlights: (a) The management revised tractor industry growth outlook from 12-14% to 15-18% for FY18 led by good kharif crop and strong rural momentum. It has guided for a 8-10% industry tractor growth in FY19 (b) It has fully passed on the RM costs increase in automobile (less than 2%) and tractors (+3.5%). Price increases for tractor segment was taken late due to GST transition (c) It expects RM costs in FY19 to be higher than FY18 on rise in commodity costs. (d) It is going to launch 4 new models in FY19 (2 high volume products and 2 niche products) in the auto space – the company has delayed the launch of its MPV from H2FY18 to FY19. (f) It has guided for a capex of Rs75 bn over 3 years with Rs7-8bn on E vehicles.

Key positives: Stronger tractor margins

Key negatives: Lower other income

Impact on earnings: We cut FY18 EPS by 5% on lower other income/ revenues while tweaking FY19/20 EPS downwards by 1-2%

Valuations & view

M&M will be a key beneficiary of the thrust in the rural segment. It remains extremely well positioned in the tractor. However, despite an improvement in the automotive EBIT margins, we continue to remain concerned by M&M’s automotive business (lack of success of new products, shift in consumer preference towards smaller SUVs). Nonetheless, the reasonable valuations (ex-subsidiaries ~11xFY20E EPS) provides comfort. While Maintain Outperformer with a target price of Rs835.