M&M + MVML reported Q3FY20 Ebitda of Rs 17.9 bn (+5% y-o-y), 3% above our estimate, led by better-than-expected Ebit margin in the automotive segment and cost cutting initiatives.
Losses in subsidiaries a cause for concern; FY20-22e EPS cut by 3-9% due to lower volume and Ebitda margin assumptions; ‘Buy’ retained as valuations are attractive
M&M + MVML reported Q3FY20 Ebitda of Rs 17.9 bn (+5% y-o-y), 3% above our estimate, led by better-than-expected Ebit margin in the automotive segment and cost cutting initiatives. Ebitda margin increased by 160 bps y-o-y to 14.8% (KIE: 14%) due to cost cutting initiatives and a richer product mix in the automotive business. SsangYong continued to incur losses in Q4CY19. However, reasonable valuations and strong growth outlook for tractors in the medium-term drive our Buy rating. SoTP based FV revised to Rs 815 (from Rs 820 earlier).
Q3FY20 Ebitda 3% above our estimate
M&M + MVML reported Q3FY20 Ebitda of Rs 17.9 bn (+5% y-o-y), which was 3% ahead of our estimates led by cost cutting initiatives and a better product mix (higher mix of power brands) in the automotive segment. Net revenues came in at Rs 121.2 bn (-6% y-o-y), 2% below our expectations due to lower-than-expected ASPs in Q3FY20. Net revenues declined 6% y-o-y led by 7% y-o-y decline in volumes partly offset by 2% y-o-y increase in net realisations in Q3FY20. Automotive division revenues came in at Rs 74.2 bn, a decline of 6% y-o-y led by 8% y-o-y decline in volumes offset by 2% y-o-y increase in ASPs. Ebitda margin came in at 14.8% (+160 bps y-o-y and +70 bps q-o-q), which was 80 bps above our expectations.
In terms of segments, Ebit margin in auto segment came in at 7.3% (+150 bps y/y and +150 bps q-o-q), 130 bps above our estimate despite negative operating leverage, mostly led by cost cutting initiatives and a better product mix. Tractor Ebit margins came in at 19.4% (+20 bps y-o-y and +10 bps q-o-q), which was 40 bps better-than-our expectations. Net reported profit came in at Rs 3.8 bn (-63% y-o-y), which was 53% below our estimate due to (i) Rs 6 bn of extraordinary loss on provision for impairment of investments in SsangYong, (ii) lower-than-expected other income and (iii) higher tax rate of 51% in Q3FY20. For Q3FY20, M&M consolidated Ebit declined by 60% y-o-y.
Cut our FY2020-22e EPS by 3-9%
We have cut our FY2021-22e EPS by 3-9% led by (i) a marginal cut in our volumes assumptions and (ii) 40 bps cut in Ebitda margin assumptions. We expect automotive volumes to remain under pressure over the medium term due to regulatory cost pressures. Maintain Buy rating on attractive valuations; SoTP-based FV reduced to Rs 815 as the cut in EPS estimates was offset by rollover to December 2021e. However, we remain concerned on the capital allocation issues of the company as subsidiaries continue to mount losses.