EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA & MAHINDRA (Buy)-In-line-RM cost benefit, mix dilutes impact of negative operating leverage

MAHINDRA & MAHINDRA: In-line; RM cost benefit, mix dilutes impact of negative operating leverage

(MM IN, Mkt Cap USD9.1b, CMP INR518, TP INR650, 25% Upside, Buy)

 

• Total volumes declined ~9.5% YoY. Realizations grew ~6% YoY to ~INR587k (v/s est. ~INR571k). Net revenues (incl. MVML) declined ~4% to ~INR128b (v/s est. ~INR124.5b). EBITDA declined 15% YoY (-4% QoQ) to ~INR17.9b (v/s est. ~INR17.85b), while EBITDA margins declined 180bp YoY (+50bp QoQ) to 14% (v/s est. 14.3%). PBIT margins for Autos declined ~290bp YoY (-230bp QoQ) to 6.5% and for Tractors, it declined 160bp YoY (+310bp QoQ) to 19.3%. Adj. PAT declined 26% YoY to ~INR9.2b (v/s est. ~INR9.9b).
• Takeaways from the earnings call: (a) Tractors: Expect the worst to be over now; should see some improvement from Aug'19. Company has guided for flat tractor volumes for the industry, based on 6-8% growth in the remainder of FY20. (b) Autos: Company has not given any outlook due to the prevailing uncertainty in the market. It expects some initiatives from the government in this area. (c) Overall some green shoots are visible for demand in the form of near-normal monsoons, benign commodity prices, possibility of lower interest rates at ground level and the likelihood of pre-buying happening on low base of 2H. (d) Inventory in both tractors and autos are under control, higher just by 1.5-2 days than normal. (e) Saw ~50bp benefit due to commodity prices, with further benefit expected in coming quarters.
• Valuation and view: MM's UV business is facing cyclical headwinds, along with rise in competitive intensity. Further, it should face headwinds during BS6 transition for its diesel portfolio. We lower valuation multiple for its core business from 14x to 12x to factor in the risk to its UV business from BS6 transition, as well as from increasing competitive intensity. Maintain Buy.