MOSL: MAHINDRA & MAHINDRA (Buy)-Operating performance in line post adjusting impact of GST

​Mahindra & Mahindra: Operating performance in line post adjusting impact of GST

(MM IN, Mkt Cap USD13.2b, CMP INR1418, TP INR1618, 14% Upside, Buy)

• 1QFY18 volumes grew 2.7% YoY to 201.5k units, driven by 13% growth in Tractors, partially offset by ~2% decline in UVs. Net realizations stood at ~INR550.6k (est. of ~INR541k). Net revenues grew 5% YoY to ~INR110.9b (est. of ~INR109.1b).
• Reported EBITDA margin shrunk 110bp YoY (+140bp QoQ) to 13.1% (est. of 14.3%), impacted by provision of INR1.44b for GST-related dealer compensation. Adjusted for this, EBITDA grew 7% YoY to INR16b (est. of INR15.6b) with margin of 14.2%. Adj. PBIT margin contracted by 10bp YoY (+70bp QoQ) to 7.8% for Auto business, and by 90bp YoY (+160 QoQ) to 18.9% for Tractor business (impacted by absorption of RM cost pressure). PAT adjusted for GST impact declined 4% YoY to ~INR8.6b (est. of ~INR9.8b) due to lower other income and a higher tax rate.
• Takeaways from earnings call: a) Expects tractors industry to grow 10-12% in FY18, with potential upside (our est. of ~15% growth for MM). b) Planning to launch non-hybrid Scorpio to dilute the impact of ~15% increase in the GST rate for hybrid Scorpio (~75% of Scorpio volumes). c) In UVs, it is targeting market share of low-30% in UVs (v/s ~28% in 1QFY18), driven by new products, changes and fresh positioning of old products. d) Tax rate to be higher by 3.5% in FY18 due to discontinuation of 15% investment allowance on capex (impact of 1% of PBT) and lower R&D deduction (2.5% on PBT). e) Expects 2W losses to be under INR1b in FY18 due to restructuring. In 1QFY18, losses were INR0.7b (v/s loss of INR1.6b in 1QFY17).