Friday, June 1, 2012

>MAHINDRA & MAHINDRA: Subsidiary - Mahindra Automotive Distributors Pvt Ltd (MADPL)

M&M: Q4FY2012 results mixed; automotive business saw MADPL consolidation  Mahindra & Mahindra (M&M) has consolidated the full year impact of its 100% subsidiary - Mahindra Automotive Distributors Pvt Ltd (MADPL), the makers of Verito cars in Q4FY2012’s standalone results. This has added Rs740 crore in Q4FY2012’s standalone revenues. Excluding this impact, the standalone revenue came 4% higher than our estimates as compared to 13.5% seen on reported revenues.

Farm equipment segment (FES) realisations in Q4FY2012 jumped 7.3% sequentially on account of price hikes taken in January 2012 as well as inclusion of higher Powerol and construction equipment sales. Similarly, automotive realisations jumped 20.6% quarter on quarter (QoQ) in Q4FY2012 on consolidation
of MADPL financials during the quarter.

To get a closer assessment on Q4FY2012 margins, we saw M&M+ Mahindra Vehicle Manufacturers Ltd (MVML) automotive earnings before interest and tax (EBIT) segmental margins drop 140bps YoY while FES’ EBIT margins as reported in standalone financials dropped 130bps YoY. While there has been a sequential margin improvement in both the segments, we see them moderating in H1FY2013 compared to corresponding period of previous year.

The consolidation of MADPL with M&M saw an exceptional write back of impairment charge worth Rs108 crore in Q4FY2012. The tax outgo was lower on account of the tax shield worth Rs148 crore available to set off MADPL losses.

M&M’s key strength is its strong product pipeline and its aggressive launch plan. The benefits of the same would accrue in H2FY2013 and beyond. However, we are concerned on likely lackluster volume growth in H1FY2013. Hence, we are reducing our FY2013 & FY2014 estimates as we incorporate lower volume growth. Our sum of the parts (SOTP) valuation incorporates FY2014 expected earnings and gives a target of Rs757/share on the stock. Inspite of valuation based upside, we would keep our recommendation on Hold as we see volume and margin related issues in H1FY2013. The policy overhang on taxing diesel vehicles has resurfaced post a status quo in the budget and will be a major negative.