But the central government’s push for rural India and the success of new models are likely to keep overall volumes intact
We had not factored in this earlier in our estimates as we were under the impression that all the incentives had expired in FY15. However, as informed by management now, only income tax incentives had expired in FY15 and the 100% excise duty incentives expired from 1st January 2016. While some offset is possible due to a price increase, any major increase will be difficult in a scenario when duties on SUVs are anyways going up by 4% due to the budget impact. Thus, we lower our FY17-18F margin estimates for M&M+MVML to 13.7% and 13.6%, respectively, resulting in an Ebitda impact of 8% and an EPS impact of ~10% for both FY17F and FY18F. A stronger push by the central government for rural India, and the success of new model launches are the key reasons for us to keep our overall volume estimates unchanged despite the duty hike.
Catalysts: Ramp-up of volumes in both the auto and tractor segments; increased investments by the government of India in rural areas.
Valuation: SOTP-based TP cut to Rs 1,376
We value the core M&M+MVML business at Rs 1,000/ share, based on 15x FY18F EPS (ex-subsidiary dividends) of Rs S 66.6. We value the investments in other listed subsidiaries at Rs 376/share – at the current market price after applying a 20% holding discount. M&M’s core business now trades at 13.4x FY18F EPS of Rs 66.6.
On application of the infrastructure cess, at the industry level, the company does not expect any material impact on vehicles <4m in length for which the price hike would be 1-2.5%. However, a 4% price hike on >4m length vehicles can impact demand. Management expects catalysts from rural recovery to offset some of the impact in the medium-term.
In the case of M&M, for KUV100, management expects some shift in the demand towards the petrol variant. In TUV3OO, the relative impact should be nominal given limited alternatives for the model. Also, the relative impact for Bolero/Scorpio/XUV500 will be limited in the medium-term due to the lack of alternatives in the segment, according to management.
All OEMs would pass on the cess as price hikes to consumers.
On the application of the TDS of 1%, there would be no implications. This is just an advance collection of tax which increases hassles for dealers due to additional paperwork. Also, it stretches the cash flow of consumers by a similar extent, says the management.
The excise benefits for M&M’s Haridwar plant have expired from January 1. This plant has a capacity of 100k units and produces some variants of Bolero, Scorpio and three-wheelers. Thus, Ebitda margins may decline by 100 bps for M&M+MVML from Q4FY16F onwards. Income tax incentives from this plant had already expired last year; hence, no impact is expected on this parameter, in our view.
M&M will continue at minimum alternate tax in FY17/18, at least, says management.
In the tractor segment, there has been improvement in infrastructure activity. Hence, this should boost the demand from the haulage segment. Also, replacement demand can be a key driver of volumes if monsoons remain normal.
Management expects all models of M&M to have petrol options. Even globally, most SUVs have petrol options while this has not been the case yet due to rural/commercial/transport usage in India. Also, the usage of turbo-charged petrol engine should improve power output during low torque and lead to higher acceptance of petrol options in the long-term.
With BS-VI emission norms, the company expects the premium of diesel versus petrol variant to increase from R0.1m to R0.16mn, based on the current technology.
Lower FY16/17/18F M&M+ MVML EPS estimates by 2%-10%
With the expiry of the excise incentives, revenues will be impacted by 2% and Ebitda by 8% in FY17/18F. We lower our M&M+MVML margins by 80 bps for FY17/18F as the impact of lower incentives will partly be offset by operating leverage and price hikes. This leads to a 2%/10%/10% cut in our EPS estimates for M&M+MVML to Rs 53/Rs 60/Rs 67 for FY16/17/18F.