Please refer to important disclosures at the end of this report 1 Y/E March (` cr) 2QFY11 2QFY10 % chg (yoy) Angel est. % diff Net Sales 5,434 4,558 19.2 5,381 1.0 EBITDA 895 831 7.7 795 12.6 EBITDA margin (%) 16.5 18.2 (177)bp 14.8 169bp PAT 758 703 7.9 635 19.4 Mahindra and Mahindra (M&M) reported good results for 2QFY2011. Top-line was in line, while operating performance and bottom-line beat our expectations owing to better operating leverage and higher other income. We revise upwards our estimates for the company factoring in the better-than-expected performance on the operating front and higher other income. We remain positive and overweight on M&M. Healthy volume, better operating performance supported good growth: For 2QFY2011, M&M clocked net sales of `5,5434cr, up 19.2% yoy. This growth was aided by the substantial 21% yoy growth in core volumes, while average realisation per vehicle declined by around 1.6% due to change in product mix. During 2QFY2011, M&M’s EBITDA margins came in 169bp ahead of our estimate at 16.5%, a jump of 144bp qoq and a fall of 177bp yoy. M&M registered net profit of `758cr (`703cr) during the quarter, which exceeded our expectation mainly due to the better-than-expected operating performance and higher other income of `200cr (`133cr), which largely included dividend received from the subsidiaries and JVs. Outlook and Valuation: M&M’s utility vehicle (UV) and tractor volumes continued to surprise positively, registering 35% (40%) overall growth in FY2010. M&M also performed well above expectations in the farm equipment and CV segments. We have modeled 10% CAGR in UV volumes over FY2010-12E, while maintaining our tractor volume growth assumption at 7% for the period. New launches like GIO and Maxximo have met with good response. Moreover, the new product launch in the M&HCV space is expected to position the company in line with the other major domestic CV players, aided by its well-known brand equity and extensive sales network. Thus, M&M is one of the preferred picks in our coverage universe and we maintain an Accumulate on the stock. Our SOTP Target Price for M&M works out to `827, wherein its core business fetches `579/share and the value of its investments works out to `248/share. Key Financials Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net Sales 12,927 18,350 22,196 25,858 % chg 14.6 41.9 21.0 16.5 Adj. Net Profit 786 2,029 2,415 2,749 % chg (37.6) 158.1 19.1 13.8 EBITDA margin (%) 6.9 14.8 14.2 14.0 Adj. EPS (`) 13.5 34.9 41.5 47.2 P/E (x) 50.8 20.4 17.6 15.5 P/BV (x) 7.6 5.3 4.5 3.7 RoE (%) 21.3 21.5 25.7 24.7 RoCE (%) 7.4 23.2 22.5 22.3 EV/Sales (x) 2.7 1.9 1.5 1.3 EV/EBITDA (x) 44.0 13.7 11.6 10.1 Source: Company, Angel Research ACCUMULATE CMP `732 Target Price `827 Investment Period 12 Months Stock Info Sector Bloomberg Code Shareholding Pattern (%) Promoters 25.8 MF / Banks / Indian Fls 32.9 FII / NRIs / OCBs 32.2 Indian Public / Others 9.1 Abs. (%) 3m 1yr 3yr Sensex 11.3 24.8 0.3 M&M 13.6 57.8 83.8 6,018 MAHM.BO 43,399 1.1 759/433 232,128 Market Cap ( ` cr) Beta 52 Week High / Low 5 20,032 MM@IN Face Value ( `) BSE Sensex Nifty Reuters Code Automobile Avg. Daily Volume Vaishali Jajoo 022-4040 3800 Ext: 344 [email protected]Yaresh Kothari 022-4040 3800 Ext: 313 [email protected]Mahindra and Mahindra Performance Highlights 2QFY2011Result Update | Automobile October 29, 2010
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Please refer to important disclosures at the end of this report 1
Y/E March (` cr) 2QFY11 2QFY10 % chg (yoy) Angel est. % diff
Net Sales 5,434 4,558 19.2 5,381 1.0
EBITDA 895 831 7.7 795 12.6
EBITDA margin (%) 16.5 18.2 (177)bp 14.8 169bp
PAT 758 703 7.9 635 19.4
Mahindra and Mahindra (M&M) reported good results for 2QFY2011. Top-line was in line, while operating performance and bottom-line beat our expectations owing to better operating leverage and higher other income. We revise upwards our estimates for the company factoring in the better-than-expected performance on the operating front and higher other income. We remain positive and overweight on M&M.
Healthy volume, better operating performance supported good growth: For 2QFY2011, M&M clocked net sales of `5,5434cr, up 19.2% yoy. This growth was aided by the substantial 21% yoy growth in core volumes, while average realisation per vehicle declined by around 1.6% due to change in product mix. During 2QFY2011, M&M’s EBITDA margins came in 169bp ahead of our estimate at 16.5%, a jump of 144bp qoq and a fall of 177bp yoy. M&M registered net profit of `758cr (`703cr) during the quarter, which exceeded our expectation mainly due to the better-than-expected operating performance and higher other income of `200cr (`133cr), which largely included dividend received from the subsidiaries and JVs.
Outlook and Valuation: M&M’s utility vehicle (UV) and tractor volumes continued to surprise positively, registering 35% (40%) overall growth in FY2010. M&M also performed well above expectations in the farm equipment and CV segments. We have modeled 10% CAGR in UV volumes over FY2010-12E, while maintaining our tractor volume growth assumption at 7% for the period. New launches like GIO and Maxximo have met with good response. Moreover, the new product launch in the M&HCV space is expected to position the company in line with the other major domestic CV players, aided by its well-known brand equity and extensive sales network. Thus, M&M is one of the preferred picks in our coverage universe and we maintain an Accumulate on the stock. Our SOTP Target Price for M&M works out to `827, wherein its core business fetches `579/share and the value of its investments works out to `248/share.
Key Financials Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E
Total Tractor Sales 45,508 40,482 12.4 95,657 83,867 14.1
Source: Company, Angel Research
M & M |2QFY2011 Result Update
October 29, 2010 3
Net sales up 19.2%, volume growth supported top-line performance: For 2QFY2011, M&M clocked net sales of `5,434cr, up 19.2% yoy. This growth was aided by the substantial 21% yoy growth in core volumes, while average realisation per vehicle declined by around 1.6% due to change in product mix. Strong volumes in the automotive and farm equipment divisions aided top-line growth. In the UV segment, M&M sold 56,639 vehicles and retained its dominant position with a market share of 62.2% on the back of Xylo and Bolero, which continued to see good off-take. The tractor volumes also registered strong 12.4% yoy growth in 2QFY2011 supplementing overall growth in volumes. M&M’s total market share in the tractor segment during 2QFY2011 stood at 41.1%.
Exhibit 3: Total volumes up 20.8%
Source: Company, Angel Research
Exhibit 4: Realisation dips on change in product mix
Source: Company, Angel Research
Segment-wise performance: The farm equipment division clocked 12.4% yoy growth in net sales to `2,085cr, with increase in tractor volumes on normal monsoon forecast. The auto division also reported robust yoy increase of 23.7% in net sales, aided by strong growth in auto volumes. PBIT margins of the auto division improved by marginal 15bp yoy to 15.6% (15.5%). However, on a sequential basis, the company recorded healthy 339bp qoq jump in PBIT margin. The farm division reported a 331bp yoy decline in PBIT margin to 17.1% (20.4%) during 2QFY2011. Adjusted for the one-time VRS expenditure of `25.9cr, the farm division registered PBIT of 18.3%, up 120bp qoq.
Total Net Sales 5,444 4,566 19.2 10,611 8,818 20.3
Auto Segment 3,324 2,687 23.7 6,204 4,944 25.5
Farm Segment 2,085 1,856 12.4 4,359 3,831 13.8
Other Segments 35 23 51.6 49 43 13.3
Total PBIT 878 796 10.2 1,620 1,366 18.6
Auto Segment 519 415 25.0 871 646 35.0
Farm Segment 356 378 (5.9) 746 713 4.6
Other Segments 2.8 2.7 0.7 3.0 7.9 (62.3)
PBIT/ Sales (%)
Total PBIT 16.1 17.4
15.3 15.5
Auto Segment 15.6 15.5
14.0 13.1
Farm Segment 17.1 20.4
17.1 18.6
Other Segments 7.9 11.9 6.2 18.5
Source: Company, Angel Research
17.9 24.0
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M & M |2QFY2011 Result Update
October 29, 2010 4
Margins at 16.5%; up 144bp qoq: During 2QFY2011, M&M’s EBITDA margins for 2QFY2011 came in 169bp ahead of our estimate at 16.5%, a jump of 144bp qoq and a fall of 177bp yoy. Raw material cost for the quarter increased by almost 289bp yoy, while declined by 136bp on a qoq basis. Raw material cost increased to 67.2% (64.3%) in 2QFY2011 primarily due to the rise in the cost of steel and rubber. Better product mix along with higher commercial vehicle volumes supported the company to clock sequential improvement on the operating front. Further, improved operating leverage helped the company to save on other fixed expenditure, which restricted the contraction in EBITDA margins yoy to a certain extent. Staff cost included one-time VRS expenditure of `25.9cr, adjusted for which the company recorded EBITDA margin of almost 17% for the quarter.
Overall the company recorded decent improvement in operating performance owing to the cost rationalisation measures. Operating profit registered 7.7% yoy increase during 2QFY2011 to `895cr.
Exhibit 6: Sales and profitability trend
Source: Company, Angel Research
Exhibit 7: EBITDA margin at 16.5%; beats estimates
Source: Company, Angel Research
Including Mahindra Vehicle Manufacturers (MVML), OPM would be 16.7% as against 16.5% of standalone M&M. The Chakan plant is operational and all products manufactured here will come under MVML, M&M’s 100% subsidiary. MVML will adopt cost-plus pricing and sell products to M&M standalone. This will enable M&M to manage costs more efficiently at MVML. This implies that to gauge profitability of the products out of Chakan, we would have to add MVML to M&M’s standalone numbers.
Net Profit at `758cr, up 7.9%: M&M registered net profit of `758cr (`703cr) during the quarter, which was above our expectation mainly due to higher other income and better-than-expected operating performance. Other income for the quarter increased 50% yoy `200cr (`133cr), which largely included dividend received from subsidiaries and JVs.
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66.3 65.6 67.3 67.9 70.1 68.7
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M & M |2QFY2011 Result Update
October 29, 2010 5
Consolidated performance: The company’s consolidated performance was marginally below our expectations, with top-line growth of 13.2% yoy to `8,678cr (`7,668cr). However, consolidated group revenues are not exactly comparable with the previous years due to AT&T exercising its stock option and Tech Mahindra ceasing to be a group subsidiary and becoming a joint venture (JV) of the company. Consolidated bottom-line stood at `701cr (`844cr) for 2QFY2011.
Management expects ~14% and ~15% industry growth for automotive and
FES segments respectively, for FY2011.
Capacity constraints continue to affect sales; however, supply issues have
eased out in 2QFY2011 compared to 1QFY2011. Around 5,000 units of sales
were lost during the quarter due to supply constraints.
In the UV space, Xylo continues to do well and is now clocking a run-rate of
3,000units/month. Logan sales have revived and the growth momentum has
improved. It crossed sales of 1,000 units a month in September 2010. In the
FES segment, Yuvraj tractors which were launched in July 2010, recorded
volumes of 1,000 units during the quarter. Overall, tractor sales were up
~12% during the quarter.
The company’s total market share during 2QFY2011in the UV and tractor
segments stood at an impressive 62.2% and 41.1%, respectively. The recently
introduced Maxximo continued to grow and notched up a market share of
16.9%. The three- and four-wheeler sales grew 52% and M&M’s market share
in the segment stood at 12.1% during the quarter.
The Powerol business performance fell ~30% during the quarter. The business
is highly dependent on the telecom towers market, which declined
70-75% during the quarter. The Powerol business sales stood at around
`275-300cr.
Exports continued to do well with sales growth of ~106% in 2QFY2011. Chile,
South Africa, Sri Lanka and Bangladesh mainly contributed to the growth.
The Chakan plant is in ramp up phase. Contribution from the plant was
~`24cr to top-line and ~`6cr at the EBIT level.
Product launches: The company plans to launch ~3 variants each of the Xylo
and Maxximo in 2HFY2011. A new SUV (W201) is also being developed,
which the company expects to launch by 1QFY2012. M&M also plans to
launch a 40 tonne vehicle and tippers by the end of FY2011. M&M has begun
the sales of M&HCV (JV with Navistar) vehicles in October 2010 through 20
outlets, which would be increased to 50 outlets by FY2011.
Capex plan: M&M has planned total investment of around `7,000cr over
FY2011-13. Management indicated capital expenditure plan of `4,500cr over
FY2011-13 and an investment plan of `2,500cr over the mentioned period.
The company is setting up a new plant at Chakan, with a capacity of 3,50,000
vehicles, which started its Phase-1 in FY2010. The company plans to
manufacture UVs and LCVs at this plant. This includes 50,000 units of M&M’s
international trucks, 1,20,000 units of a new mass market platform, 90,000
units of a new SUV (successor to the Scorpio) and 90,000 units of Ingenio
variants.
As announced earlier, total capex of `5,600cr would be incurred at the
Chakan plant over FY2009-13, of which `550-600cr has already being spent.
M&M’s contribution to this capex is `2,000cr, which would be mostly utilised
for R&D. MVML will spend `2,000cr, MNAL `1,000cr and the balance
`500-`600cr by MEPL. M&M is also setting up a new tractor plant with a
production capacity of up to 100,000 units per annum in South India by
FY2012-13. M&M’s tractor unit is currently running at 100% utilisation levels,
while PTL’s plants are running at over 80% utilisation levels currently.
M & M |2QFY2011 Result Update
October 29, 2010 7
Exhibit 9: M&M – UV volumes and market share trend
Source: Company, Angel Research
Exhibit 10: M&M – Tractor volume trend
Source: Company, Angel Research
Investment Arguments
Strong growth continues in core business: M&M’s UV and tractor volume
growth continues to surprise positively, with 35% (40)% overall growth clocked
in FY2010, primarily due to the substantial 8% market share gain in the UV
segment (to 55%). The new Xylo, and the established Scorpio and Bolero
contributed to the robust UV volume growth. M&M has also performed well
above expectations in its farm equipment segment. Thus, we have modeled
10% CAGR in UV volumes over FY2010-12E for M&M with minimum
competition in the UV space and continue to maintain our tractor volume
CAGR assumption of 7% (including Swaraj).
New ventures firming up well: M&M’s new ventures in the CV space are
firming up well. New product launches like GIO and Maxximo have met with
good response. Further, the new product launch in the M&HCV space would
position the company well in line with other major domestic CV players like
Ashok Leyland and Tata Motors over the next 2-3 years, aided by its
well-known brand equity and extensive sales network. This is expected to
substantially augment the company’s overall volume growth.
Systech operations poised to benefit from rebound: Systech should be a key
beneficiary of the growing trend of component sourcing from lower-cost
countries, given its existing relationships with the global OEMs. Systech
management is focused on creating shareholder value and has set a goal of
achieving `500-600cr in EBITDA, with 75% coming from Europe and the rest
from India. Management believes this is achievable even at 30% below peak
levels. We believe that these moves will start contributing positively to M&M's
consolidated EPS, when the global industry cycle takes a positive turn.
Investments constitute 59% of balance sheet: M&M also has majority stakes in
various listed companies in other sectors, including technology, property and
finance. The high growth potential of M&M's subsidiaries is expected to unlock
actual value of the stock over the years. Listing of its subsidiaries has been
supporting M&M's valuation in the recent past, and may continue to do so in
the long term as well.
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M & M |2QFY2011 Result Update
October 29, 2010 8
Outlook and Valuation
We upgrade our estimates for the company factoring in the better-than-expected performance at the operating front and higher other income. We maintain our positive outlook and remain overweight on M&M. Exhibit 11: Change in estimates (Standalone) Y/E March (` cr) Earlier Estimates Revised Estimates % chg
FY2011 FY2012 FY2011 FY2012 FY2011 FY2012
Net Sales 21,923 25,355 22,196 25,858 1.2 2.0
OPM (%) 13.8 13.5 14.2 14.0 35bp 45bp
EPS (`) 38.6 43.8 41.5 47.2 7.5 7.8
Source: Company, Angel Research
At the CMP of `732, M&M is trading at 17.6x FY2011E and 15.5x FY2012E standalone earnings. Our SOTP Target Price for M&M works out to `827, wherein its core business fetches `579/share and the value of its investments fetches `248/share. M&M is one of our preferred picks in our universe and we maintain an Accumulate on the stock. Exhibit 12: SOTP Valuation
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Disclosure of Interest Statement M & M 1. Analyst ownership of the stock Yes 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors. Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%)