M&M + MVML’s 4QFY19 EBITDA of ~Rs 18.6 bn was higher than our (Nomura: Rs 16.7 bn). EBITDA margin came in at 13.5% (Nomura: 12.2%). Auto EBIT margins at 8.8% (up 300bp q-q) benefitted from lower discounts and price hikes, while Farm EBIT margin at 16.2% (-300bp q-q) was impacted due to weak operating leverage and discounts.
Management expects 5% tractor industry volume growth in FY20. We note that initial signs of rainfall progress has been subdued – pre-monsoon showers are deficient by 23% (March-May) and monsoon onset is also likely to be delayed, with chance of drought. Hence, we maintain our view of a 5% decline in the tractor industry in FY20F, followed by 10% growth in FY21F.
In UVs, given the near-term slowdown in demand, we lower our volume growth estimates to 15%/-8% y-y for FY20F/21F (from 23%/-7% earlier). We expect the full-year impact of the recently launched XUV300 and pre-buying to drive growth in FY20F, followed by a decline in FY21F due to BS-6 implementation.
We also slightly trim our margin estimates to 13.7%/13.1% over FY20F/FY21F (from 13.9%/13.5%), resulting in an EBITDA cut of ~3% over FY20-21F. However, our EPS cut is higher at 6%/8%, as we factor in higher capex/ investments (Rs 120 bn over 3 years). Current valuation of core auto business (ex-investments) at 9.5x P/E factors in these risks and is attractive, in our view.
We believe that strong UV sector growth in FY20F and potential successes in segments such as electric 3Ws could be catalysts for the stock to re-rate. Further, actions by state and central governments to support the rural economy may also act as a positive catalyst.
Valuation: SOTP-based TP cut to Rs 827
We maintain our target P/E at 14x FY21F EPS (ex-subsidiary dividends) to get s 483 for the core auto business. We value other investments at Rs 344/share. We maintain our Buy rating.
Lower FY20-21F EPS by 6-8%
We lower our UV volume estimates by 5-6% over FY20-21F as we factor in a near-term slowdown in demand. We now factor in 15%/-8% volume growth in FY20F/21F compared to 23%/-7% earlier. Our LCV/tractor growth numbers remain unchanged. Overall, our volume estimates are cut by 2% over FY20-21F. Overall, our revenue estimates are lower by 2%/1% for FY20F/21F. We decrease EBITDA marginally by 3% for FY20F/21F. We expect EBITDA margins to come down to 13.7%/13.1% in FY20F/21F (from 14.2% in FY19) due to higher regulatory cost pressures. Thus, we reduce EPS by 6%/8% for FY20F/21F on lower EBITDA, and as we factor in higher capex/investment spending of `120 bn over FY20-21F.