MOSL: MAHINDRA & MAHINDRA (Buy)-Operating performance miss led by higher other expense

Mahindra & Mahindra: Operating performance miss led by higher other expense

(MM IN, Mkt Cap USD12.5b, CMP INR750, TP INR889, 19% Upside, Buy)

• 3QFY18 volume grew 6.5% YoY (-3.8% QoQ) to 210.2k units, as tractor, UV and 3W volumes increased 6.3%, 5% and 8.5% YoY, respectively. Net realizations grew 3.6% YoY (-0.6% QoQ) to INR546.6k (est. of INR553.3k). Net revenue grew 10.3% YoY (-4.4% QoQ) to INR114.9b (est. of INR116.3k).
• EBITDA margin expanded 110bp YoY (-130bp QoQ) to 14.7% (est. of 16.1%), led by higher-than-expected other expense (+21.4% YoY to INR13.9b). EBITDA grew 19.6% YoY to INR16.9b (est. of INR18.7b). PBIT margin of Auto business expanded 140bp YoY (-230bp QoQ) to 8.5%, and that of FES expanded 110bp YoY (-80bp QoQ) to 20.5%. MM reported INR3.85b exceptional gain on liquidation of its long-term investment in a subsidiary. Adj. PAT grew 22% YoY (-28.1% QoQ) to INR10.1b (est. of INR10.3b).
• Takeaways from the earnings call: a) FY19 industry growth guidance: Tractor 8-10%, PVs 10-12% and CVs 10% (higher for LCVs). b) Strong product pipeline, with launch of four new products in PV, two in tractors and one new ICV by 1HFY19. c) Tractor utilization level at ~90% at Mahindra and full utilization at Swaraj; has enough scope to accommodate 8-10% volume growth in FY19. d) RM cost pressure in 9MFY18: <2% for Autos (~2% price hike) and 3.5% for Tractors (price hikes with lag effect). e) EVs – expect fast penetration of electric 3W; E-Alfa contribution ~20% of 3W passenger sales. f) Launching lighter and efficient BS-6 engine. g) Focus on backward integration for EV.