FY22-24e standalone EPS down 1-6%; turnaround in global subsidiaries is a positive; ‘Buy’ retained on inexpensive valuations
M&M + MVML reported Q1FY22 Ebitda of Rs 16.3 bn (-17% q-o-q), which was 7% below our estimates due to weaker-than-expected profitability in the automotive business. M&M management has taken multiple steps to improve its capital allocation strategy by selling stakes in loss-making subsidiaries and exiting certain JVs or deals, which would have consumed capital. Also, a turnaround in international farm and auto subsidiaries will aid the company to meet its ROE target. Maintain Buy.
Standalone Ebitda 7% below estimates
Net revenues came in at Rs 117.6 bn,which was 3% below our expectations due to lower-than-expected ASPs. Net revenues declined by 12% q-o-q led by (i) 8% q-o-q decline in volumes and (ii) 5% q-o-q decline in realisations. Automotive division revenues came in at Rs 60.5 bn, a decline of 23% q-o-q led by (i) 20% q-o-q decline in volumes and (ii) 4% q-o-q decline in ASPs. Tractor division revenues increased by 7% q-o-q led by (i) 6% q-o-q increase in volumes and (ii) marginal increase in ASPs in Q1FY22. Automotive Ebit margin came in at 1.7% (-330 bps q-o-q), due to RM headwinds and negative operating leverage. Tractor Ebit margins came in at 20.3% (-170 bps q-o-q).
As a result, Ebitda margin came in at 13.9% (-80 bps q-o-q). Adjusted PAT came in at Rs 9.15 bn, which was 5% below our estimates despite miss at Ebitda due to higher-than-expected other income. Overall, the company highlighted that commodity inflation and semiconductor supply issues continue to be of concern. The company incurred exceptional loss of Rs 785 mn regarding impairment for long-term investments. Consolidated revenues fell by 11% q-o-q in Q1FY22 whereas the company reported Ebit loss of Rs 8 bn due to Rs 21.8-bn Ebit loss in Mahindra Finance. Global farm subsidiaries PBIT came in at Rs 1.1 bn in Q1FY22.
Cut our FY2022-24E standalone EPS estimates by 1-6%
We have cut our FY2022-24E standalone EPS by 1-6% on lower volume and Ebitda margin assumptions. We expect recovery in the automotive segment volumes once the chip situation normalises. We also expect tractor segment demand to remain buoyant given a strong normal monsoon, higher water reservoir levels and increased government spending. Losses in international farm and auto subsidiaries have reduced despite the challenging external environment, which is encouraging. Maintain Buy rating on attractive valuations; SoTP-based FV increased to Rs 1,050 (Rs 1,015 earlier) mainly due to increase in value of Tech Mahindra.