Mahindra & Mahindra reported strong Q3FY16 results with 31% y-o-y Ebitda growth led by the success of new launches and improvement in Ebitda margin. Adjusted for non-recurring expenses, Ebitda margin for the quarter was 14.5%, which was 50 bps above our estimates. New compact SUV launches will drive double-digit volume growth for the company next year while monsoon remains the key for tractor cycle recovery. We maintain our ADD rating with a target price of R1,325 (from R1,330).
Operational results above estimates after adjusting for non-recurring expenses
M&M+MVML reported Ebitda of R14.1 bn, which was up 31% y-o-y led by (i) 12% y-o-y growth in volumes driven by new compact SUV launches and (ii) 180 bps y-o-y improvement in Ebitda margin driven by the benefit of lower commodity prices and the company’s cost-reduction efforts.
Ebitda margin came in at 13.5% in Q3FY16, which was 50 bps below our estimates. However, there were non-recurring expenses of around R1 bn during the quarter pertaining to higher provisioning of employee bonus and cost related to revaluation of loans and diminution in value of fixed assets. Adjusted Ebitda margin for the quarter was 14.5%, which was 50 bps above our estimates. Reported Ebit margin for automotive segment was 10.2% (KIE 9.6%) and 15.3% for farm equipment business (KIE 17.5%); this was partly impacted by reduction in factory-level inventory by 19,000 tractors and lower ASPs (average selling price) possibly due to lower powerol revenues.
New SUVs to drive volume growth in FY2017e; monsoon key for tractor cycle recovery
We expect domestic passenger vehicle volumes for M&M to increase by 28% y-o-y in FY2017e led by the successful launch of two new compact SUVs. Both TUV300 and KUV10 have received strong initial bookings, which should drive robust volumes for at least the next six months. However, we will watch out for sustenance of volumes beyond that, particularly given increased competitive intensity from planned new launches of other OEMs (original equipment manufacturers). We are building in monthly volumes of 8,000 units from these new launches in FY2017e (estimates) as compared to management expectations of more than 10,000 units/ month. Demand for tractors still remains under pressure due to lower Rabi crop sowing although lower base will lead to y-o-y volume growth over the next two to three months. Good monsoon remains the key for the revival of industry volumes next year; we are building in 10% y-o-y growth in tractor industry volumes in FY2017e.
Fine-tune our earnings estimates; maintain ADD with target price of R1,325
Our FY2017-18e EPS estimates remain largely unchanged while we cut our FY2016e EPS estimates by 7% due to lower revenue assumptions. We maintain our ADD rating on the stock with SOTP-based TP of R1,325 (from R1,330) as valuations are attractive at 11.4X March 2017e core EPS (ex-subsidiary value). We believe that potential shift in industry volumes towards petrol models (due to steep cost increase for diesel vehicles) as the industry moves to more stringent BS-VI norms by April 2020 is a key long-term challenge for the company.
Conference call takeaways
w The company has received strong initial response for its two new compact SUV launches. For TUV300, M&M has received 19,000 bookings so far and monthly volumes would likely remain around 4,000 units for at least next three to four months. For KUV100 (launched in mid-Jan 2016), M&M has received 18,000 bookings and is incrementally getting 350-400 bookings/day. Petrol mix for the bookings is around 45%. Current capacity for KUV100 is 5,000 units/month and thus, the model is booked until April 2016. The company plans to increase capacity to 7,500 units/month by August 2016. While the volumes for new models will likely remain strong over the next 3-6 months, we will watch out for volume performance in 2HFY17 particularly given increased competitive intensity from planned new launches by other OEMs.
w Tractor volumes in last two to three months have not improved to the desired extent due to lower sowing for Rabi crop. Demand in states such as Andhra Pradesh, Tamil Nadu and Rajasthan is faring well while volumes in Uttar Pradesh, Madhya Pradesh and Maharashtra continues to see steep declines. We expect tractor volumes to remain weak for the next few months while there will be growth on a y-o-y basis due to weaker base effect. We expect 10% y-o-y growth in tractor industry volumes in FY2017e; weaker-than-expected monsoon could be a risk to our estimates.
w There were non-recurring expenses of around R1 bn in Q3FY16 driven by (i) R220m due to higher provisioning for employee bonus for the past seven quarters, (ii) R320m due to revaluation of foreign currency loans and (iii) the remaining due to diminution in value of fixed assets and reversal of certain incentives (conservative accounting practices). Adjusted for this, Ebitda margin was 14.5% in Q3FY16, which was 50 bps above our estimates.
w In the tractors segment, the company has reduced factory inventory by around 19,000 units, which impacted Ebitda margin by 50 bps as the company follows full cost absorption method for inventory valuation.
w The company has announced transfer of its agri-business in the standalone business to a 100% owned subsidiary, Mahindra Shubhlabh (MSSL). We note that agri revenues for M&M standalone business were around R2.6 bn in FY2015; combined annual agri revenues of MSSL will be around R6.5-7 bn after this business restructuring.
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