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Aug 09, 2012, 11.24 AM IST
Broking firm IIFL is positively surprised by auto major Mahindra & Mahindra’s (M&M) first quarter earnings, hence has revised its earnings forecast for both FY13 and FY14.
Broking firm IIFL is positively surprised by auto major Mahindra & Mahindra ’s (M&M) first quarter earnings, hence has revised its earnings forecast for both FY13 and FY14.
On Wednesday, the stock touched an intraday high of Rs 752.40. Its first quarter net profit rose much better-than-expected 20% year-on-year to Rs 726 crore, helped by strong growth in utility vehicle sales.
"We have raised our estimates for FY13 from around Rs 48 to around Rs 54. Similarly, we have increased it up to around Rs 59 for FY14," Prayesh Jain, analyst, IIFL told CNBC-TV18.
IIFL has retained buy recommendation on the stock with a target price of Rs 800. "M&M through its efforts has been able to sail through tough times with very good margins and that commands a premium valuation. That is the reason we have maintained our buy, Jain explained.
Below is the edited transcript of Jain’s interview with CNBC-TV18.
Q: Did you upgrade your numbers after looking at M&Ms (Mahindra and Mahindra) reported earnings yesterday?
A: The numbers have compelled us to raise our earning estimates both for FY13 as well as FY14. Major surprise came in from the margin front where we were expecting margins to be in the range of around 11% while they delivered around 11.8%.
Even if you combine it with MVML (Mahindra Vehicle Manufacturers Limited) the margins were even better at 13.9%. They have positively surprised us. We have raised our estimates for FY13 from around Rs 48 to around Rs 54. There has bee a similar increase up to around Rs 59 for FY14.
Q: Where do you see this stock headed from this level of Rs 750 now?
A: We have maintained our buy recommendation. We have given a target price of Rs 800. This is considering that the tractor volumes are likely to be flat for this year given that the monsoons have been very bad. If the scenario improves towards the end of September then possibly you might see an uptick in tractor volume.
Tractor being a high EBIT margin segment, you might just get to a higher profitability growth in the second half and might compel higher, more upgrades in the EPS estimates and then possibly a further higher target prices.
Q: What surprised you about the M&M numbers primarily?
A: It was mainly the automotive segment margins. Even for that matter the tractor segment margins have remained at 15.7% for 3 quarters consecutively. This is despite of the fact that the volumes have been tepid and there is no substantial growth happening there. There have been commodity and rupee depreciation pressures.
But, the company through its cost efficiencies has been able to maintain its margins which definitely surprises us and that is a key thing that we take away. M&M through its efforts has been able to sail through tough times with very good margins and that commands a premium valuation. That is the reason we have maintained our buy.
Q: Do you expect further shrinkage in Tata Motors ’ JLR margins from what they reported last quarter?
A: We are expecting some modest foreign margins. Last quarter they delivered around 14.6%, we are expecting it to be around 14.3% in this quarter. It is not a big fall, but definitely there would be some marginal fall in the margins.
If you look at the model mix, it continues to be in the favor of Evoke, which has been delivering pretty strong growth. On the currency front, most of the currencies have moved something very similar to what they have moved in Q4 vis-à-vis Q3. That kind of pressure is likely to sustain even in this quarter.
Q: On the reported PAT is your number closer to Rs 2,500 crore or Rs 3,000 crore?
A: It is around Rs 2,776 crore. It is approximately right in between the range you gave. It is mainly driven by JLR. On year on year basis, JLR profit growth is expected to be very strong in spite of a sequential pressure.
Standalone numbers are likely to be under severe pressure because of low medium and heavy commercial vehicles (M&HCV) volumes where the company earns better margins. Given that, if they deliver Rs 2,776 crore it is a healthy number.
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