Tuesday, February 14, 2012

>MAHINDRA & MAHINDRA: Combined results for M&M+MVML in line; Maintain Buy

Mahindra & Mahindra’s (M&M) 3QFY12 standalone operating results were disappointing with adjusted EBITDA margins at 11.7% (adjusted for exchange gain of Rs.398mn) compared to our estimate of 13%. However, EBITDA margins combined for M&M and MVML (Mahindra Vehicles Manufacturing Limited) stood at 13.3%. MVML is a 100% subsidiary of M&M set up at Chakkan with a capacity of 270k units and currently manufactures Genio, Maxximo and XUV500 range of vehicles. Also while the standalone PAT was lower than our estimate by 6%, combined with MVML, the reported PAT stood in line at Rs.7.1bn against our estimate of Rs.7.1bn. Going forward, we believe that it makes sense to look at the combined financials for M&M and MVML as this represents a more realistic picture of its Auto operations. Our dealer check indicates long waiting period for its Automotive portfolio (Scorpio - 15-30 days, Bolero – 2 months for ZLx models and 10 days for the rest, Pick-ups – 1month). We continue to remain positive on the stock and maintain BUY with a revised target price of Rs.813 (earlier Rs.855).

 Operating results in line combined for M&M+MVML: While standalone numbers disappointed, combined figures for M&M+MVML were impressive. Combined EBITDA margins stood at 13.3% (adjusted for forex gain) and PAT stood at Rs.7.1bn in line with our estimate.

 Conference call highlights: 1) Management expects tractor sales to remain flat over the next 2 months. It guided for 8-10% volume growth for the segment for FY13E, if monsoons were healthy 2.) Capex guidance for M&M and MVML stands at Rs.56bn over next 3 years and Rs.20bn for investments 3.) XUV500 has been received well with 25+K applications; management indicated another price hike after the 7,200 units (out of 25k applications) are delivered.

 Valuations and Recommendations: At the CMP of Rs705, the stock is trading at 11.5x FY12E core EPS of Rs40 and 11.3x FY13E core EPS of Rs41. We continue to remain positive on the company and maintain BUY rating with a revised target price of Rs813, valuing the stock at 14x FY13E Core EPS + subsidiary value of Rs244 and assign 15% to holding co discount.