>MAHINDRA & MAHINDRA (MORGAN STANLEY)

Core Business Growth Impressive; Remain OW

Investment conclusion: We reiterate our OW and continue to believe that with earnings CAGR of 27% over F2009-11E and trading at 13x F2010E earnings, a 30% discount to the market, M&M is our preferred play for the Indian semi-urban and rural demand upcycle.

Revise price target: We updated our model for F1Q10 and are raising our PT to Rs1,065. Our revision primarily reflects the 14% and 16% increases in our F2010E and F2011E standalone earnings, respectively. We value the core business at Rs780 per share and the non-core business at Rs284 per share, thus arriving at our price target of Rs1,065. At our PT, the stock trades at 16x F2010E earnings and 14x F2011E earnings.

F1Q10 results recap At the standalone level, revenue, EBITDA, and adjusted net income was up 28%, 138%, and 187% YoY, respectively. Backed by 4% YoY realization growth, revenue was right in line with our estimates. A drop in raw material prices and operating leverage lifted margins to 14.4% – up 410bp YoY and 330bp QoQ, and 220bp above our 12% estimate. Net income was Rs4bn, up 187% YoY.

Core operations continue to impress; margins highest in two years: Margins in the tractor division improved 590bp QoQ while those in the automotive division improved 220bp YoY and QoQ. These were the highest margins posted by M&M in two years. We are building in 13.6% EBITDA margins in F2010E.

Consolidated results in line: Revenue was Rs78bn, 4% over last year and 6% QoQ. Net profit of Rs4.3bn was up 5.5% YoY but 27% down QoQ, as the sequential downtick came from high interest costs at Tech Mahindra relating to the Satyam acquisition with no corresponding income add from Satyam.

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