Tractor demand expected to be good; tighter capital allocation could lead to a re-rating; FY22-23e EPS down 1-2%; ‘Buy’ retained.
M&M + MVML reported Q1FY21 Ebitda of Rs 5.7 bn (-68% y-o-y), 27% below our estimates due to steep volume decline in the automotive division. We expect the near term to remain challenging for the auto business given uncertainties related to Covid-19; however, we expect tractor demand to recover as the rural economy remains strong on the back of (i) higher Kharif sowing amid normal monsoons; and (ii) higher government spending resulting in higher rural cash flows. Also, the focus on tightening capital allocation norms could lead to re-rating of the stock. Maintain Buy on cheap valuations. SoTP based FV unchanged at Rs 725.
Q1FY21 Ebitda 27% below estimates due to weak automotive performance
M&M+MVML reported net Ebitda 27% below our expectations led by weaker-than-expected performance in the automotive segment. Net revenues declined by 56% y-o-y led by (i) 56% y-o-y decline in volumes; and (ii) flattish ASPs due to higher volume mix of the tractor segment. Automotive division revenues came in at `20.4 bn, a decline of 75% y-o-y led by 78% y-o-y decline in volumes, offset by 13% y-o-y increase in ASPs due to BS-VI transition in Q1FY21.
In terms of segments, automotive Ebit margin came in at -28.6% (decline of 35.1% y-o-y and decline of 32.7% q-o-q), which was 23% below our estimates due to negative operating leverage. Tractor Ebit margins came in at 20.4% (+110 bps y-o-y and +280 bps q-o-q), which was 240 bps better than our expectations due to cost-cutting initiatives.
Ebitda margin came in at 10.3% (-370 bps y-o-y and -330 bps q-o-q-), 390 bps below our expectations. Net reported profit came in at Rs 678 mn(-97% y-o-y), 87% below our estimates due to (i) miss at Ebitda level; and (ii) higher-than-expected finance cost. Also, the company reported consolidated Ebit loss of Rs 7 bn in Q1FY21 versus Ebit profit of Rs 11.5 bn in Q1FY20 mainly led by losses in the automotive division.
Cut FY2022-23e EPS estimates by 1-2%; maintain BUY on cheap valuation
We have cut our FY2022-23e EPS by 2% on lower volume assumptions, partly offset by higher Ebitda margin assumptions on account of cost-cutting initiatives taken up by the company. We expect automotive volumes to remain under pressure over the medium term. However, we expect tractor segment demand to remain buoyant.
Also, management’s focus on tighter capital allocation norms may result in further value unlocking. The company has already taken a few steps in this direction by (i) not infusing further capital into Ssangyong; (ii) completely exiting from Genze business; and (iii) bailed out from the bid to make delivery trucks for US Postal Service, which would have required investment of $500 mn. Maintain Buy.