Bank of America Merrill Lynch
Mahindra & Mahindra (M&M) reported an EBITDA margin of 11.7%, in line with estimates. On a segment-wise basis, EBIT margins for the Auto segment stood at 7.2% +10bps q-o-q while for Farm equipment stood at 17.3% -10bps q-o-q. We expect margins to improve in FY18/19E as: new launches in the core SUV segment improve volumes and pricing power; lower losses from truck and 2W business; continued cyclical uptick in tractor demand.
Our estimates for FY19 are raised by 2% as we factor in higher tractor volumes.
In addition, valuation discount to Maruti Suzuki is at 40% highest over the last seven years implying a favourable risk reward. Our PO is raised to Rs 1480 as we roll forward valuations and we reiterate our Buy rating on the stock.
As highlighted in previous notes, M&M has a strong pipeline of products across both automotive and tractor segments . However, the first of these is only expected in H2FY18, till which time volumes within the Automotive segment are likely to remain tough. Tractors, on the other hand, are seeing a cyclical uptick on improved rural spending and government infrastructure spends. We raise our tractor volume estimates to 12%/14% for FY18/19, respectively. GST is marginally positive for SUVs 3-4% lower taxes.
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Automotive EBIT margin for M&M has slipped from 10% in H1FY16 to 7.2% in Q4. In our view, this is close to a trough as base SUV profitability is expected to improve with new launches; expected lower losses from CV business; one-off cost of Rs 1.7 billion towards BS3 ban in Q4. We await more details regarding M&M’s new products, before factoring them in our estimates. On the other hand, Farm equipment (FES) profitability remains steady, despite a seasonal QoQ reduction in volumes. Our estimates imply 18% CAGR in profits (FY17-19E) for core business M&M + MVML.