EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA & MAHINDRA (Buy)-Mix, discounts, RM inflation dent margins-expect RM softening in FY20

Mahindra & Mahindra: Mix, discounts, RM inflation dent margins; expect RM softening in FY20

(MM IN, Mkt Cap USD11.9b, CMP INR683, TP INR841, 23% Upside, Buy)

 

• Volumes grew 11% YoY in 3QFY19, with UV and tractor volumes increasing by 11% YoY each. Realizations increased 1% YoY (-1.5% QoQ) to ~INR550.9k (our estimate: INR555.1k). Net sales (incl. MVML) increased 12% YoY to INR128.9b (in-line). EBITDA grew 0.7% YoY to INR17b (our estimate: INR19.4b), with the margin contracting 150bp YoY (-130bp QoQ) to 13.2% (our estimate: 14.9%). Auto PBIT margin shrank 260bp YoY (-210bp QoQ) to 5.8%. Tractor EBIT margin contracted 130bp YoY (-100bp QoQ) to 19.2%. Adj. PAT increased 41% YoY (-13% QoQ) to INR14.6b (our estimate: INR10.5b). For 9MFY19, revenue/EBITDA/adj. PAT grew 13.5%/12.2%/36.6% YoY.
• Earnings call highlights: (a) Expects tractor industry to remain flat in 4Q, implying 10% growth in FY19 (prior expectation: 12-14%). (b) Expects PV industry growth of 4-6% in FY19 (prior expectation: 7-8%). (c) Took price hike and managed to pass on partial (~60-70%) RM inflation impact of ~4-4.5% in 9MFY19. (d) Inventory level comfortable at 4-5 weeks, both in Autos and Farm, as of Dec'18. (e) XUV300 pre-launch bookings at ~3k units, with ~60k inquiries. (f) Maintained guidance of 9k volumes from Marazzo, Alturas G4 and XUV3OO.
• Valuation and view: While we maintain our FY20/21 EPS estimates, we cut the core business multiple to 14x (v/s 15x) to factor in the uncertainties around tractor volumes and BS6 challenge. The stock trades at 15.2x FY20E and 14.2x FY21E EPS. Maintain Buy with an SOTP-based TP of INR841 (Mar'21E).