Mahindra & Mahindra Neutral Result Update

November 3, 2014
Neutral
Mahindra & Mahindra
Industry: Auto and Auto Components
Result Update
Industry View: Positive
Slowdown in core business
Weak volumes and margin fall leads to a subdued performance
Stock Data
M&M’s standalone Q2FY15 revenues came in at Rs 94.2 bn, which was a growth of 6.9%
yoy and a fall of 6.7% sequentially. The fall on a qoq basis was a result of a seasonal
weak quarter and competition heating up in the UV space. Automotive volumes in the
quarter fell by 2.2% yoy as new competitive launches stole a significant amount of market
share, which was at just 33% down from approximately 45% a year ago same quarter.
FES volumes declined by 18% qoq and grew by just 1% yoy. This can mainly be
attributed to not so good monsoons, no significant pick up in infrastructure development
and cyclonic atmosphere off late. On profitability front, EBITDA margins went down to
10.6% from 12.4% and 12.8% yoy. First of all adverse product mix led to this fall as FES
segment weakened in Q2. Secondly, although there was a relief in the form of material
costs, employee cost as % of sales moved up somewhat and other expenses zoomed up
to 11.82% of sales from 10.1% both qoq as well as yoy. Management accounted this fall
to increase in CSR outgo, launch expenses related with the new Scorpio, losses at
MTBL, increase in customer acquisition cost, rising discounts and the two wheeler Gusto
launch expenses. Depreciation expenses grew yoy 37% at Rs2.48bn as Zaheerabad
plant had commenced operations albeit on a small scale couple of quarters back. Tax
rate came down at 21% while interest costs came down by 21% yoy. Other income came
in way above our expectations at Rs4.85 bn as there was a spurt in dividend from
subsidiaries. PAT decreased 6% yoy to Rs9.46bn.
Current Market Price (Rs)
1,262
Target Price (Rs)
1,312
Absence in UV1 segment costing M&M dearly
Automotive segment of M&M is in a weak league with YTD October sales de-growing by
7%. This was on account of the company’s absence in the UV1, i.e. the compact SUV
segment which has a very strong demand currently. In this segment the competitive
models like the Renault Duster, Ford Ecosport and Honda Mobilio are growing rapidly
and M&M is losing its overall UV market share, which is just 33% now from 45% a year
ago. In order to tackle the competition management indicated that they will be launching
3 new vehicles in FY16. Two out of these launches will be in the compact SUV segment
at different price points and the third in the high end SUV segment. The company recently
launched a new Scorpio which is showing a good early demand. We believe that the
company is delaying the launches a bit too much, due to which we believe that by the
time these launches happen, the company will be losing out more market share to the
existing as well as upcoming competitive launches. We now expect -6%/7% growth in
auto volume growth in FY15E/16E from earlier expectations of 3%/9% respectively.
Potential upside (%)
4
Reuters
MAHM.BO
Bloomberg
MM IN
What’s Changed
12 month PriceTarget (Rs)
1,431 to 1,312
FY2015E EPS (Rs)
From 62 to 57
FY2016E EPS (Rs)
From 70 to 64
Key Data
Market Cap (Rs bn)
791
52-Week Range (Rs)
1,421 / 847
Avg Daily Trading Value last 6 mts(Rs.mn)
1,592
Promoters (%)
25.78
FII Holding (%)
40.21
DII Holding (%)
16.40
Public & Others Holding (%)
17.61
Fiscal YE
YE Mar
FY13
FY14 FY15E FY16E
Total sales (Rs bn)
EBITDA
margins(%)
PAT margins(%)
404
405
400
434
11.6
11.7
11.6
12.0
8.1
9.1
8.8
9.0
EPS
53.1
60.4
57.4
63.9
P/E
23.8
20.9
22.0
19.8
5.3
4.6
4.0
3.5
EV/EBITDA
13.9
13.9
13.4
11.4
ROE%
22.3
22.1
18.3
17.8
1.0
1.2
1.2
1.3
P/BV
Dividend yield %
Relative Price Performance
160
140
120
FES segment disappoints, management may downgrade their outlook
guidance for FY 15
With low and delayed rainfall in India, FES sales seem to be uncertain in FY15. In line
with this, management had cut their FES sales guidance from 8-10% earlier to 5% at the
end of Q1.YTD October FES segment has de-grown by 3%, which may lead the
management to cut the guidance further. Good rabi crop this year and expectations of
sugarcane and cotton producing states of UP, Maharashtra and Gujarat to report strong
numbers are the only hopes for FES segment to come up in FY15. Despite discounting
moving up and new launch of a tractor we are not sanguine on this segment considering
the non agri demand of tractor remaining muted. We have trimmed down the FES
segment estimates to 2%/7% growth in FES segment in FY15E/16E respectively.
Ashwin Patil
[email protected]
+91 22 6635 1271
100
80
60
Nov-13
Mar-14
M&M
Jul-14
Oct-14
S&P Bse Sensex
One Year Indexed
(%)
Absolute
BSE Relative
1 Month
3 Months
12 Months
(6)
8
42
(11)
1
10
Disclaimer:
The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is
for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and
assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any clai m, demand or cause of action. LKP
Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions
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or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.
Mahindra & Mahindra
Increasing discounts, weakening FES segment, new launches may pressurize
margins
EBITDA margins in the quarter came down at second ever lowest point at 10.6% (after
8.2% in Q4 FY14) on standalone front which was due to several reasons like increase in
the CSR outgo, higher discounting, low demand for M&M’s products vis-à-vis
competition, higher cost of acquisition, higher launch expenses and wage hike. EBIT
margins in auto segment in Q2 were ~6%, which was also at a very low point. Going
forward, we do not expect a significant recovery in the high margin FES business.
Secondly, three upcoming launches in FY16 may lead to higher launch expenses and
further marketing expenses related with them. Secondly, the magnitude of losses in
MTBL segment is uncertain which may any time jolt the margins. Continuation of higher
CSR expenses coupled with higher cost of customer acquisition and slow improvement in
discounting scenario may impact margins adversely. In line with all these pressure points,
we are cutting our margin expectation now to 11.6%/12% for FY15E/16E.
Financial Highlights
Net sales
Other operating income
Q1 FY15
% qoq
Q2FY14
% yoy
94,181
100,961
-6.7%
88,143
6.9%
1,256
1,659
-24.3%
1,152
9.0%
Total income
95,437
102,619
-7.0%
89,295
6.9%
Raw material costs
68,381
73,766
-7.3%
63,825
7.1%
Employee costs
5,687
5,828
-2.4%
5,024
13.2%
Other expenses
11,277
10,330
9.2%
8,997
25.3%
EBITDA
10,092
12,695
-20.5%
11,449
-11.9%
EBITDA margins %
10.6%
12.4%
(180 bps)
12.8%
(220 bps)
Other income
4,855
1,895
156.2%
3606
34.6%
Depreciation
2,483
2,480
0.1%
1970
26.0%
494
586
-15.6%
623
-20.6%
Tax
2,503
2,706
-7.5%
2568
-2.5%
Adjusted PAT
9,466
8,819
7.3%
9895
-4.3%
Adj EPS
15.22
13.59
12.0%
16.0
-4.8%
Interest expenses
LKP Research
Q2 FY15
2
Mahindra & Mahindra
Segmental Metrics
Q3 FY13
Q4 FY13
Q1 FY14
Q2 FY14
Q3 FY14
Q4 FY14
Q1 FY15
Q2 FY15
Auto
73,605
71,638
59,806
57,805
64,532
78,120
59,886
61,357
FES
34,040
28,540
38,995
31,476
40,987
31,879
39,329
34,067
Other
144
262
74
59
55
63
65
64
Total
107,789
100,439
98,876
89,341
105,573
110,062
99,280
95,488
Auto
6,254
8,895
5,855
5,418
6,111
2,055
6,243
3,971
FES
5,274
4,559
6,527
5,345
7,214
5,442
6,661
5,232
Other
12
87
24
60
8
2
6
26
Total
11,540
13,541
12,407
10,823
13,332
7,499
12,910
9,229
Auto
8.50%
12.42%
9.79%
9.37%
9.47%
2.63%
10.43%
6.47%
FES
15.49%
15.97%
16.74%
16.98%
17.60%
17.07%
16.94%
15.36%
Other
8.54%
33.08%
32.84%
101.01%
13.74%
3.36%
8.90%
40.16%
Total
10.71%
13.48%
12.55%
12.11%
12.63%
6.81%
13.00%
9.66%
Auto
146,878
148,871
122,984
118,282
129,424
136,487
112,614
115,653
FES
64,800
49,664
74,577
59,264
78,419
55,374
74,555
61,152
Auto
501,130
481,205
486,293
488,707
498,606
572,365
531,783
530,526
FES
525,304
574,656
522,885
531,122
522,663
575,700
527,510
557,092
Revenues(Rs mn)
EBIT(Rs mn)
EBIT Margins%
Volumes(units)
Realizations(Rs/unit)
Outlook and valuation
M&M’s volume growth is in a slow lane now. YTD October sales are in the red zone at
7% and 3% respectively for Auto and FES segment. With structural issues for the
company like absence in the compact SUV segment has led to a sharp fall in its market
share. In order to tackle this M&M will be launching 2-3 new SUVs in FY16. The delay in
these launches beyond FY15 is leading to further erosion of market share. Though these
launches will help the company to regain its market share somewhat, we believe that the
upcoming competitive launches and the existing trio of Mobilio-Duster-Ecosport will give a
tough time to M&M. Also from margin point of view it will be dilutive as mktg expenses will
shoot up. On the FES segment side, low YTD growth has led us to trim full year growth.
This also may hurt margin expansion prospects going forward. Any slowdown in
infrastructure further may reduce the prospects for non agri demand for tractors. In line
with this, we expect negative earnings growth for M&M in FY15 at 6% and 11% growth in
FY16E on the back of volume recovery coming from new launches. We hence
downgrade the stock on the back of trimming off the volume and margin estimates to
NEUTRAL from BUY with a target price of Rs 1,312. Robust subsidiary valuation and the
strong other income component in the standalone business coming from dividends from
these subsidiaries is actually bolstering the intrinsic value of the stock.
SOTP Valuation
Particulars
Basis
Discount
Value per share
M&M
P/E (@15x)
-
958
M&M Financial Services
Market cap
30%
99
Tech Mahindra
Market cap
30%
171
Mahindra Lifespaces
Market cap
30%
12
Mahindra Ugine
Market cap
30%
9
Mahindra CIE Automotives
Market cap
30%
5
Mahindra Holiday & Resorts
Market cap
30%
21
Swaraj Engines
Market cap
30%
1
Ssangyong
Market cap
30%
35
Total
LKP Research
1312
3
Mahindra & Mahindra
Financial Summary
Income statement
Balance sheet
YE Mar (Rs.mn)
FY 13
FY 14
FY 15E
FY 16E
YE Mar (Rs. mn)
Total Revenues
404,412
405,085
400,695
434,203
Equity and Liabilities
Raw Material Cost
FY 13
FY 14
FY 15E
FY 16E
304,152
294,323
287,699
309,153
Equity Share Capital
2,952
2,952
2,952
2,952
Employee Cost
18,665
21,637
23,240
25,184
Reserves & Surplus
143,638
164,960
189,439
217,702
Other Exp
35,333
41,912
43,275
47,762
Total Networth
146,589
167,912
192,391
220,654
EBITDA
47,093
47,212
46,481
52,104
Total debt
40,294
48,410
48,563
48,163
11.6
11.7
11.6
12.0
6,149
8,897
8,897
8,897
Other Income
5,492
7,180
10,000
11,000
Current liabilities and Prov
Depreciation
7,108
8,633
9,903
11,283
Total Liabilities
EBITDA Margin(%)
Interest
PBT
PBT Margin(%)
Deferred tax liabilities
81,504
87,668
83,990
90,627
274,536
312,887
333,839
368,340
58,213
71,054
76,351
77,368
97,877
103,877
109,877
1912
2592
2003
2171
43,565
43,166
44,574
49,651
Assets
10.8
10.7
11.1
11.4
Non current Investments
105,715
Fixed assets
Tax
10,943
6,111
9,361
10,427
Other non current assets
21,173
31,066
30,066
29,066
Adj PAT
32,622
37,056
35,214
39,224
Current Assets
89,434
112,889
123,545
152,029
8.1
9.1
8.8
9.0
Cash and Bank
17,814
29,504
55,307
76,821
0
0
0
0
Inventories
24,198
28,036
28,376
31,339
906
528
0
0
Sundry Debtors
22,084
25,098
24,909
27,020
33,528
37,584
35,214
39,224
8.3
9.3
8.8
9.0
Adj PAT Margins (%)
Minority interest
Exceptional items
Reported PAT
Rep. PAT Margins (%)
Loan, Advances & others
Other current assets
Total Assets
Key Ratios
YE Mar
7,634
9,458
9,882
11,578
17,705
20,792
5,071
5,271
274,536
312,887
333,839
368,340
Cash Flow
FY 13
FY 14
FY 15E
FY 16E
Per Share Data (Rs)
YE Mar (Rs mn)
PBT
FY 13
FY 14
FY 15E
FY 15E
43,565
43,166
44,574
49,651
Adj. EPS
53.1
60.4
57.4
63.9
Depreciation
7,108
8,633
9,903
11,283
CEPS
66.2
75.3
73.5
82.3
Interest
1,912
2,592
2,003
2,171
BVPS
238.7
273.5
313.3
359.4
(1,832)
12.5
14.7
15.5
15.8
DPS
Growth Ratios(%)
Chng in working capital
1,559
(5,055)
(5,953)
Tax paid
(8,732)
(6,111)
(9,361) (10,427)
Other operating activities
(3,955)
0
10,000
10,000
41,457
43,226
51,167
50,846
Total revenues
27.0
0.2
-1.1
8.4
EBITDA
25.1
0.3
-1.5
12.1
Capital expenditure
(13,893) (21,475) (15,200) (12,300)
PAT
17.7
13.6
-5.0
11.4
Chng in investments
(12,826)
7,838
(6,000)
(6,000)
EPS Growth
17.7
13.6
-5.0
11.4
Other investing activities
(2,241)
0
7,686
1,599
PE
23.8
20.9
22.0
19.8
Free cash flow (a+b)
12,497
29,590
37,653
34,145
P/CEPS
19.1
16.8
17.2
15.3
Equity raised/(repaid)
0
0
0
0
P/BV
5.3
4.6
4.0
3.5
Inc/dec in borrowings
(1,533)
5,720
(344)
(900)
EV/Sales
1.6
1.6
1.6
1.4
Dividend paid (incl. tax)
(8,670) (10,170) (10,735) (10,961)
13.9
13.9
13.4
11.4
Other financing activities
Valuation Ratios (X)
EV/EBITDA
Cash flow from operation (a)
Cash flow from investing (b)
Operating Ratios (Days)
Cash flow from financing (c)
Inventory days
29.0
34.8
36.0
37.0
Net chng in cash (a+b+c)
Recievable Days
18.9
21.5
23.0
23.0
Closing cash & cash equiv
Payables day
61.9
72.2
73.0
74.0
Net Debt/Equity (x)
0.22
0.22
0.19
0.16
ROE
22.3
22.1
18.3
17.8
Dividend payout
23.5
24.3
27.0
24.7
1.0
1.2
1.2
1.3
(28,960) (13,637) (13,514) (16,701)
(459)
(10,661)
(458)
(457)
(456)
(4,908) (11,536) (12,317)
1,836
24,681
26,117
21,828
11,640
29,338
55,307
76,821
Profitability Ratios (%)
Dividend yield
Source: Company, LKP Research
LKP Research
4
Mahindra & Mahindra
Team LKP
Pratik Doshi
Director
98210 47676
[email protected]
S. Ranganathan
Head of Research
98212 22510
6635 1270
[email protected]
Ashwin Patil
Research Analyst
98195 78395
6635 1271
[email protected]
Chirag Dhaifule
Research Analyst
98679 80172
6635 1220
[email protected]
Hardik Mehta
Sales
98190 66569
6635 1246
[email protected]
Varsha Jhaveri
Sales
93241 47566
6635 1296
[email protected]
Hitesh Doshi
Sales
93222 45130
6635 1281
[email protected]
Bharat Shah
Dealing
98337 97256
6635 1210
[email protected]
Kaushik Doshi
Dealing
93205 23595
6635 1207
[email protected]
LKP Securites Ltd, 13th Floor, Raheja Center, Free Press Road, Nariman Point, Mumbai-400 021. Tel -91-22 - 66351234 Fax- 91-22-66351249. www.lkpsec.com