Mahindra & Mahindra Rating Q2: Revenue beat, margins under pressure

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Published: November 20, 2018 2:47:51 AM

Mahindra & Mahindra’s (M&M’s) Q2FY19 Ebitda of Rs 18.5 bn (down 4% y-o-y) missed estimate by 4% due to cost pressure, which we expect to be passed on gradually.

mahindra and mahindra vehicle lease, mahindra and mahindra policyMahindra & Mahindra’s revenue at Rs 127 bn was 1.6% above our estimate driven by 2% improvement in realisation.

Mahindra & Mahindra’s (M&M’s) Q2FY19 Ebitda of Rs 18.5 bn (down 4% y-o-y) missed estimate by 4% due to cost pressure, which we expect to be passed on gradually. The healthy rural demand outlook remains intact and we believe the recent liquidity tightening scenario is transitory. Good response to the recently launched Marazzo cushioned subdued PV sales. Similarly, launch of S201 by FY19 end can further boost the company’s UV portfolio. Management expects the M&HCV business to turn Ebitda positive by FY19 end. Hence, we perceive adequate tailwinds for M&M to surprise on the upside. Maintain Buy with SOTP-based target price of Rs 1,091.

Q2FY19: Margin under pressure

Mahindra & Mahindra’s revenue at Rs 127 bn was 1.6% above our estimate driven by 2% improvement in realisation. Ebitda margin slipped 154bps y-o-y and 134bp q-o-q due to sustained pressure from raw material costs and a broad-based rise in expenses. Margin of the farm equipment segment (FES) and automotive segments fell 100bps and 274bps y-o-y, respectively. Automotive margin was also under pressure due to increased expenses from the Marazzo launch (50-70bps impact on Ebitda).

Strong demand outlook and new product launches

The share of rural sales jumped to 51% in Q2FY19 from 49% in Q2FY18. Rural demand is expected to remain strong, bolstered by a normal monsoon and increase in minimum support prices (MSPs). The Marazzo launch gave a fillip to an otherwise weak performance of M&M’s UV portfolio. This deepens our confidence that the two upcoming launches – Altrus G4 SUV and S201 – will be in the right direction, further aiding the UV portfolio.

Outlook: On a firm footing

We estimate FY18–20 core EPS CAGR of 24% driven by a strong underlying business and improving operating leverage. We maintain ‘BUY/SO’ with SOTP-based target price of Rs 1,091 (15x FY20e core EPS, Rs 120 cash/share, Rs 265 for listed subsidiaries). At current price, the stock is trading at FY20e PER of 15.65x.

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