EUR 120.00 For Business Accounts Only

MOSL: MAHINDRA AND MAHINDRA (Buy)-In-line-Auto margins recover, Tractor stable

Mahindra and Mahindra: In-line; Auto margins recover, Tractor stable 

(MM IN, Mkt Cap USD9.1b, CMP INR524, TP INR686, 31% Upside, Buy)

 

• MM’s 3QFY20 performance was in line with our expectation at the operating level, with margin improving led by a better mix and lower RM cost. While Tractor outlook is improving, Auto business could face BS6 transitory pain along with intense competition in SUVs.
• We maintain our EPS estimate for FY20/21. Near-term performance is expected to be a mixed bag, which is largely in the price. We maintain Buy as valuations are very cheap (implied core P/E of 9.6x/8.6x FY20/21E). 

Op. performance broadly in line, EBIT flat YoY; one-offs distort PAT

• M&M (incl. MVML) revenue/adj. PAT declined 1%/26% YoY, while EBITDA was up 5% YoY in 3QFY20. For 9MFY20, revenue/EBITDA/adj. PAT was down 8%/9.5%/24% YoY.
• Net realization grew ~1.5% YoY (-2% QoQ) to ~INR559k (est. of INR566k).
• Gross margin improved ~190bp YoY (-130bp QoQ) to 32.7% (est. of 33.6%), driven by lower commodity prices and a favorable mix in Auto.
• EBITDA margin expanded 160bp YoY (+60bp QoQ) to ~14.8% (est. of ~15%). Sequential improvement in the EBITDA margin, despite a lower gross margin, was driven by operating leverage (+13% QoQ volume growth).
• EBIT was flat YoY at ~INR12b (est. of ~INR12.5b). Auto PBIT margin improved 150bp YoY/QoQ to ~7.3% led by mix. Tractor PBIT margin improved 20bp YoY (+10bp QoQ) to ~19.4%, as the benefit of commodity prices was offset by the inventory reduction impact.
• PAT declined 26% to ~INR8.5b (est. of ~INR11.1b).