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 in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or i nconsistent with any recommendation and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking 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
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