Mahindra & Mahindra (M&M) reported strong Q4FY16 results with 26% y-o-y Ebitda growth led by new SUV launches, recovery in tractor volumes and improvement in Ebitda margin. New compact SUV launches will drive double-digit volume growth for the company in FY17 while a good monsoon remains the key for tractor cycle recovery. We maintain ADD rating with a target price of R1,380 (from R1,305).
M&M+MVML reported Ebitda of R12.7 bn (+26% y-o-y) led by 14% y-o-y growth in volumes driven by new compact SUV launches and recovery in tractor volumes and (ii) 150 bps y-o-y improvement in Ebitda margin driven by benefit of lower commodity prices and the company’s cost-reduction efforts. Ebitda margin came in at 12.5% in Q4FY16 but this included a one- time benefit of Rs700m in staff costs due to actuarial valuation. Reported Ebit margin for automotive segment was 9.6% (KIE 9.0%) and 12.9% for farm equipment business (KIE 16%); this was impacted by sharp sequential decline in tractor volumes. We expect the company’s Ebitda margin to recover to 13% in FY2017 as tractor quarterly volume run-rate recovers to 60,000 from Q4FY16’s 43,321 units.
We expect domestic passenger vehicle volumes for M&M to increase by 23% y-o-y in FY2017e led by two new compact SUV launches. Both TUV300 and KUV100 have received decent initial bookings, which should drive robust volumes at least for 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. We are building in monthly volumes of 7,500 units from these new launches in FY2017e as compared to management expectations of more than 10,000 units/month. Demand for tractors will likely recover from a low base in FY2017, although a good monsoon is critical for tractor demand to improve.
Our FY2017-18e EPS estimates remain largely unchanged while we increase our Ebitda estimates by 3% led by higher Ebitda margin assumptions. We maintain our ADD rating on the stock with an SOTP-based target price of R1,380 (from R1,305) as valuations are attractive at 13X March 2018e core EPS (ex-subsidiary value). We have increased our multiple on standalone business to 14X (from 13X earlier), which has led to an increase in our target price primarily driven by recovery in tractor volumes and margin.
The company reported Ebitda margin of 12.5%, which was in line with our estimates as better-than-expected gross margin and lower employee expenses offset the impact of higher other expenses. We note that gross margin declined by only 30 bps q-o-q (KIE 90 bps q-o-q decline) despite 100 bps negative impact due to expiry of tax benefits at Haridwar plant and negative product mix (lower share of tractors and higher share of new UV models). This implies that gross margin improved by 70 bps q-o-q excluding the impact of Haridwar plant despite a 5% q-o-q decline in volumes, higher share of new SUV models and lower share of tractor volumes in the overall volumes.
Tractor volume growth has recovered from a low base in Q4FY16. Demand in states such as Andhra Pradesh, Tamil Nadu and Rajasthan is faring well. We expect 10% y-o-y growth in tractor industry volumes in FY2017e.
For KUV100 (launched in mid-Jan 2016), M&M has received 40,000 bookings. Petrol mix for the bookings is around 45-50%. Current capacity for KUV100 is 5,000 units/month and thus, the model is booked until June 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 three months, we will watch out for volume performance in 2HFY17 particularly given increased competitive intensity.
The company is focused on expanding its rural distribution and has doubled its touch points in FY2016. The company covers 300,000 villages, which is one of the highest for any auto company. Applitrac business (farm implement business) declined by 11% y-o-y in FY2016. Revenue of this division was R2.37 bn in FY2016. Agriculture business revenue was R9 bn in FY2016, which grew by 55% y-o-y.
—Kotak Institutional Equities
