MOSL: MAHINDRA & MAHINDRA (Buy)-In-line performance-EBIT margin expands for both Autos and Tractors

Mahindra & Mahindra: In-line performance; EBIT margin expands for both Autos and Tractors

(MM IN, Mkt Cap USD16.8b, CMP INR926, TP INR1084, 17% Upside, Buy)

• MM's volumes grew 19% YoY, led by growth of ~19% in Tractors and ~17% in UVs. Realizations grew 3% YoY (-0.6% QoQ) to ~INR554.5k (est. of ~INR542.8k). Adj. net sales (incl. MVML) grew ~24% YoY to ~INR134.9b (est. of ~INR130.8b).
• Reported EBITDA margin expanded ~260bp YoY (+70bp QoQ) to ~15.8% (est. of 15.9%). EBITDA grew 47% YoY to ~INR21.1b (est. of INR20.75b). Auto PBIT margin shrank ~130bp QoQ (+240bp YoY) to 9.4%. Tractor EBIT margin improved ~140bp QoQ (+360bp YoY) to 20.9%. Adj. PAT grew 65% YoY (+10% QoQ) to ~INR12.4b (est. of ~INR12.2b).
• Takeaways from earnings call: (a) In Tractors segment, MM now expects industry to grow at 12-14% in FY19 (v/s previous guidance of 8-10% growth). However, industry volumes are likely to remain flat in 2QFY19 due to the timing difference for the festive season. (b) Rural demand remains robust, driven by normal monsoon, a good Rabi crop output and ~15% growth in MSP for Kharif crops. (c) Took price increase of ~1.5% in Auto and ~1.3% in FES segment. (d) To launch MPV U321 in Sep-18 and another two UVs (compact SUV and premium SUV) before and after Diwali. (e) Expect CV demand in the near term to be impacted by the new axle load norms, but demand should normalize from Sep-18.
• Valuation view: We cut our FY19 consol. EPS estimates by ~4% to factor in higher tax. The stock trades at 18.6x FY20E consol. EPS and ~14.4x core EPS. Maintain Buy with an SOTP-based target price of INR1,084 (Mar-20).