Recommendations » India

Mahindra and Mahindra 3QFY2012 performance highlights and results update

Contributed by Angel Broking

Mahindra and Mahindra (MM) reported mixed results for 3QFY2012. The company registered better-than-expected top-line growth, led by robust volume growth. However, net profit was below our estimates on account of margin contraction due to higher purchases from its manufacturing subsidiary, Mahindra Vehicle Manufacturers Limited (MVML). We have lowered our earnings estimates for FY2012/13 by 6.8%/7% to factor in lower tractor volumes (8% growth in FY2013E from 12% earlier) and higher purchases from MVML. Nevertheless, due to attractive valuations, we maintain our Buy view on the stock.

Margin pressures persist, impact results: For 3QFY2012, MM reported robust revenue growth of 37% yoy (13.9% qoq), driven by 47.4% and 23.2% yoy revenue growth in the automotive and farm equipment segments (FES), respectively. EBITDA margin at 11.9% (adjusted for reversal of forex loss) declined by 324bp yoy, primarily due to increased purchases of finished products (up 265% yoy and 75% qoq) from MVML. Thus, adjusted net profit grew by modest 2.9% yoy (down 17.4% qoq) to Rs.635cr. Additionally, a 37.8% yoy (12% qoq) increase in depreciation expense impacted the bottom line. Quarterly results (considering MM and MVML) registered a healthy performance, with EBITDA margin at 13.4% and adjusted net profit posting 11.6% yoy growth to Rs.679cr.

Outlook and valuation: We expect MM’s automotive segment to be the key volume driver (expected to register a 20.5% CAGR over FY2011-13E) going ahead, backed by the strength of the passenger utility vehicle (UV) and  four-wheeler pick-up portfolio. For FES, we have revised our volume (10.7% CAGR over FY2011-13E) estimates downwards, in-line with management’s guidance. We have also cut our earnings for FY2012E/13E to reflect margin pressures on account of increasing contribution from MVML. Nevertheless, given the attractive valuations, we maintain our Buy rating, valuing the stock on SOTP basis. Our revised SOTP target price works out to Rs.795, wherein its core business fetches Rs.609/share and value of its investments works out to Rs.186/share.