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Mahindra and Mahindra 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Mahindra and Mahindra (MM) reported a slightly lower-than-expected bottom-line performance for 3QFY2013, primarily due to the contraction in EBITDA margin, led by sequential decline in net average realization. The overall performance was driven by the continued volume traction in the automotive segment (AS) backed by the new launches. We broadly retain our top-line and EBITDA margin estimates for FY2013/14. However our earnings estimates are revised slightly upwards to factor in the lower tax-rate going ahead as guided by the Management. We expect AS to drive the total volume growth of the company led by the success of new launches (XUV5OO, Quanto and Rexton) in the utility vehicle (UV) segment. We expect tractor volumes to recover in FY2014 and clock a growth rate of 8% after posting a decline of 4% in FY2013. We retain our positive bias on MM and recommend a Buy rating on the stock.

3QFY2013 performance driven by AS: MM’s top-line registered a strong growth of 28.5% yoy (9.8% qoq) to Rs.10,774cr; however it was lower than our expectations of Rs.11,070cr, largely due to the sequential decline in net average realization in the AS (1% qoq) and farm equipment segment (FES, 1.3% qoq). The top-line growth on a yoy basis was driven by a robust volume (17.5% yoy) and net average realization growth in the AS (22.5% yoy). Total volumes, however, posted a growth of 10.9% yoy (10.8% qoq) as tractor sales witnessed a decline of 1.6% yoy on account of weak domestic demand. The EBITDA margin contracted 96bp yoy (16bp qoq) to 11.2% owing to raw-material cost pressures, which as a percentage of sales increased 153bp yoy (97bp qoq) to 75.9%. As a result, the bottom-line came in at Rs.836cr, a growth of 26.3% yoy; however it was down 7.3% qoq largely due to absence of dividend income from the subsidiaries. The bottom-line benefitted from the reduced tax rate on account of higher R&D spends.

Outlook and valuation: At Rs.883, MM is trading at 13.7x FY2014E earnings. We retain our positive bias on MM and recommend a Buy rating on the stock. Our sum of the parts (SOTP) target price works out to Rs.1,019, wherein the company’s core business fetches Rs.739/share and the value of its investments works out to Rs.280/share.