MOSL: MAHINDRA & MAHINDRA (Buy)-Above est.-Multi-year-high margins in both Autos and FES segments

​Mahindra & Mahindra: Above est.; Multi-year-high margins in both Autos and FES segments

(MM IN, Mkt Cap USD12.5b, CMP INR1393, TP INR1607, 15% Upside, Buy)

• 2QFY18 volumes grew 16% YoY (+8% QoQ) to 218.4k units, driven by growth of 31% in Tractors volumes and 11% in UV volumes. Net realizations grew 3% YoY (flat QoQ) to INR550.2k (est. of INR559.6k). Net revenue grew 19% YoY (+8% QoQ) to INR120.2b (est. of INR122.2k).
  
• EBITDA margin expanded 190bp YoY (+290bp QoQ) to 16% (est. of 14.4%), led by an improvement in the product mix and price hikes. EBITDA grew 35% YoY to INR19b (est. of INR17.5b). PBIT margin expanded by 110bp YoY (+380bp QoQ) to 10.8% in Auto business and by 130bp YoY (+400bp QoQ) to 21.3% in FES. As a result, PAT grew 22% YoY (+84% QoQ) to INR14.1b (est. of INR13.6b).
  
• Takeaways from earnings call: a) FY18 industry growth guidance: Tractor -12-14% (v/s 10-12% earlier), PVs - 10%+, and M&HCV flat. b) New launches on track - UVs would have three refreshes and one new MPV launch in 2HFY18; Tractors - at least one new platform, several variants and one driverless tractor in 2HFY18. c) Rural market volumes for Auto segment grew 24% in 2QFY18. d) Festive season demand grew 8% for UVs and 14% for Tractors. e) RM cost pressure in 2QFY18 - 1% for Autos (~1.5% price hike) and 2.5% for Tractors (~1.7% price hike). Confident of passing through anticipated cost pressure in 2H. e) EVs - M&M would participate in full range from 3Ws to buses. It has finalized long-term sourcing of li-ion cells, and would invest in plants for battery, motor, power electronics and transmission with international partners.