MOSL: MAHINDRA & MAHINDRA (Buy)-Above-estimate-low RM, staff costs drive EBITDA margin beat

Mahindra & Mahindra: Above-estimate; low RM, staff costs drive EBITDA margin beat

(MM IN, Mkt Cap USD15.2b, CMP INR869, TP INR1026, 18% Upside, Buy)

• 4QFY18 volumes grew 25.4% YoY (+12.4% QoQ) to 236.4k units, as tractor, UV and 3W volumes rose 40.6%, 17.8% and 42.8% YoY, respectively. Net realization grew 2.1% QoQ (+0.2% YoY) to INR557.9k (est. of INR556.6k), led by price hikes of ~0.5-1% in the auto segment and a favorable mix. Net revenue grew by 25.6% YoY to INR131.9b (in-line).
• Gross margin of 33.8% exceeded our estimate of 32.7%, as RM cost shrunk 190bp YoY (flat QoQ). EBITDA margin expanded 390bp YoY (+40bp QoQ) to 15.1% (est. of 13.4%), further benefiting from operating leverage and EBITDA break-even for MTBL (CV business). PBIT margin for Auto business expanded 350bp YoY (+220bp QoQ) to 10.7%, and for FES, it expanded 170bp YoY (-100bp QoQ) to 19.5%. Adj. PAT of INR11.2b exceeded our estimate of INR10b. MM's (incl. MVL) FY18 revenue/EBITDA/adj. PAT grew 15%/30%/23%.
• Takeaways from earnings call: a) For FY19, it expects 8-10% growth in tractor industry, double-digit growth in PVs, 15% growth in UVs and 10-12% growth in CVs. b) MTBL (CV business) turned EBITDA positive in 4QFY18, driving a swing of over 50bp for Auto EBITDA margins in 4QFY18 (-110bp impact on Auto margins in FY18). c) It is hopeful of maintaining Auto business margins through operating leverage and cost efficiencies. d) It has increased three-year rolling guidance for capex (incl. investment) to ~INR150b (incl. INR50b of investments) from ~INR125b earlier. e) It expects market share to slightly improve in tractors, reasonably increase in UVs (on back of 3 launches in FY19) and continue expanding in CVs (led by ICV range launch and ramp-up in M&HCVs).