Analyst corner | Maintain ‘buy’ on M&M, target price at Rs 637

By: |
Published: August 10, 2019 3:31:08 AM

M&M is currently battling multiple headwinds, simultaneous weakness in automotive and FES segment; and perception challenge on its ability to ensure a smooth transition to BS VI given its higher share of diesel portfolio.

target price, vehicle costs, M&M, target price, lower raw material costsAt current stock level, we believe Street is overly pessimistic about M&M’s ability to effect a smooth transition to BS VI. (Reuters)

M&M reported a 15% Y-o-Y dip in Q1FY20 Ebitda to Rs 1,790 crore, broadly in line with our estimate. With headwinds including tighter financing and higher vehicle costs blowing in the face, the outlook for the automotive segment continues to be subdued. According to management, an external stimulus to revive demand would be needed by the industry at large (GST rate cut, for instance).

For the farm equipment segment, the management now expects flat tractor growth in FY20 (despite poor H1FY20) against guidance of 5% driven by expectations of a normal monsoon and rabi sowing season. We are cutting FY20E/21E EPS by 15%/18% factoring in overall tepid demand. Maintain ‘buy’ with a revised SoTP-based TP of Rs 637 (earlier Rs 737)

Overall Ebitda margin improved 50bps Q-o-Q to 14%, helped by lower raw material costs and other expenses. By segment, despite a 14% YoY drop in volumes, the FES segment delivered an EBIT margin of 19.3% (down only 160bps YoY) driven by a strong focus on cost control. However, EBIT margin in the automotive business slid about 290 bps YoY to 6.5% due to higher depreciation pertaining to three launches (Marazzo, XUV300 and Alturas G4). We expect lower raw material costs and slower spending pertaining to recent launches to support overall margins going ahead.

M&M is currently battling multiple headwinds, simultaneous weakness in automotive and FES segment; and perception challenge on its ability to ensure a smooth transition to BS VI given its higher share of diesel portfolio.

As explored, this time it is different, we expect M&M to make a smooth transition while management remains committed to ensuring cost efficiencies. With regards to the overall demand challenge, easing of liquidity and normal monsoon are critical to spur demand. At current stock level, we believe Street is overly pessimistic about M&M’s ability to effect a smooth transition to BS VI.

Maintain ‘BUY/SO’ with an SoTP-based TP of Rs 637 (13x December 2020E core EPS and Rs 72 cash/share, Rs 233 for listed subsidiaries). The stock is trading at FY20/21E PER of 15.6x/14.2x.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.