SsangYong Motors reported a net loss of KRW18 bn in 1HCY17 led by 29.3% y-o-y decline in export volumes. The company has almost doubled its market share in South Korea in the past five years led by new launches like Tivoli but profitability has taken a hit due to steep decline in export volumes. Export volumes have declined to 52K units in CY2016 versus 82K in CY2013 as the company exited the Russian market. We cut estimates for SsangYong Motors and reduce TP of M&M to Rs 1,615 (Rs 1,625 earlier). Maintain Buy on attractive valuations.
Steep decline in export volumes hits SsangYong Motors’ plans
SsangYong Motors reported a 5.7% y-o-y decline in volumes in 1HCY17 primarily led by 29.3% y-o-y decline in export volumes offset by 5.5% y-o-y improvement in domestic volumes. Export volumes form 24% of the company’s overall volumes. Export volumes have declined across Europe, Middle East and Asia, which is worrying. Tivoli volumes in export markets have also declined by 40% y-o-y in 1HCY17, which is the key model for turning around the export business for SsangYong Motors. The company reported a net loss of KRW18 bn in 1HCY17 versus a profit of KRW20 bn in 1HCY16. Revenues fell by 5% y-o-y while Ebitda declined by 45% y-o-y in 1HCY17. Ebitda margin declined by 250 bps y-o-y in 1HCY17 due to pricing pressure in export markets and negative operating leverage.
CY2019 goals for SsangYong Motors are too tall to achieve
SsangYong Motors has big plans for expansion with $1 bn capex for next five years for setting up factories in China, Russia and Brazil. The company plans to manufacture 250,000 vehicles in CY2019 and achieve an operating margin (Ebit) of 4-5%. We reckon the plans are too ambitious as company plans to increase volumes by 60% over the next three years and increase Ebit margin from 1% in CY2016 to 4-5% in CY2019. The company has doubled its market share in South Korean market to 5.8% in CY2016 versus 3% in CY2015 due to the success of new models like Tivoli and Korando, but the profitability has not improved materially as no model has been able to achieve scale. SsangYong Motors’ models are cannibalising each other and the popularity of the new models is extremely short. The balance sheet is healthy though with net cash of KRW44 bn at the end of December 2016.
Maintain BUY on M&M due to attractive valuations; tweak target price
We have cut value of M&M stake in SsangYong Motors to Rs 59/share from Rs 92/share earlier led by a sharp cut in our estimates for SsangYong Motors. The standalone value remains unchanged while subsidiary value has been cut by Rs 10/share. Cut in value of SsangYong Motors business has been offset by increase in value in Mahindra Finance and other subsidiaries. Our SOTP target price has been reduced to Rs 1,615 (from Rs 1,625 earlier).