Nitin Agrawal Moneycontrol Research
Mahindra & Mahindra (M&M) has posted robust growth in net revenues and operating margins in Q4 FY18 on the back of strong industry tailwinds. Sturdy leadership in the farm equipment segment (FES), revival in rural growth, slew of new launches and reasonable valuations make it a stock worth accumulating by long-term investors.
Earnings snapshot
In terms of Q4 performance, India’s largest small commercial vehicle (SCV), second largest commercial vehicle (CV) and third largest passenger vehicle (PV) manufacturer reported a 25.6 percent year-on-year (YoY) growth in revenue at Rs 13,189 crore. Its highest ever revenue was on the back of a 25.3 percent volume growth. The latter was driven by a 40.6 percent growth in tractors and 19.7 percent rise in automotive volumes due to healthy demand for power brands. Average realisation was flat for the quarter under review.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margin expanded 390 basis points YoY and touched 15.1 percent on the back of a favourable product mix, leading to a fall in raw material cost as a percentage of net sales. Automotive and farm equipment segments earnings before interest and tax (EBIT) margins expanded 350 bps and 170 bps YoY, respectively. Net profit was up a whopping 60.2 percent YoY on strong operating performance.
We draw comfort from the following:
Strong outlook for FES
M&M, the market leader in tractors, has been gaining market share (currently 42.9 percent) for the last 3-4 years on new launches. Rural penetration has improved 14 percent YoY and stood at 43 percent at the end of FY18.
On expectations of a normal monsoon and improved rural sentiments, the management pegs volume growth for the industry as a whole at 8-10 percent in FY19 and feels 8-9 percent yearly growth is sustainable in the long-term.
Being the leader, the company is in a sweet spot to take advantage of industry growth. The management believes it would be able to better industry growth on the back of its large exposure to rural and semi-urban areas and launch of new platforms.
Positive impact of GST on automotive segment
With all regulatory headwinds behind it, the management believes rollout of the Goods & Service Tax (GST) will continue to augur well for volumes in the long-term. It sees the PV industry registering record growth of over 10 percent in FY19, with utility vehicle (UV) segment growth of more than 15 percent.
In terms of CV segment outlook, it expects robust demand continuing over the next one-to-two years, given the government’s thrust on infrastructure and mining. M&M has been the numero uno player in the SCV segment with a 47 percent market share. This is on the back of a wide range of product offerings and hopes to capture demand going forward.
Portfolio revamp is on
M&M has a successful UV product portfolio. Response to its refresher Pulse XUV500 has been very strong. The company said it plans to launch three products in the mid-compact UV and premium MPV segments to fill the gaps in its portfolio. Two of which are expected to be launched before Diwali.
Focus on electric vehicles
The company sold 4,026 EVs in FY18 compared to 1,021 units YoY. The management has been aggressively focusing on EVs and plans to expand its manufacturing capacity to 70,000 units by FY20. It is targeting fleet operators for expanding its reach.
Undemanding valuation
The stock’s underperformance has rendered valuation extremely undemanding. Based on sum-of-the-parts valuation (SoTP) and excluding value of subsidiaries, the core automobile business trades at close to 14 times FY20e earnings. The stock is trading at a steep discount to peers, which typically trade at 17-20 times FY20e earnings. We believe there is headroom to grow on the back of a rural recovery and product innovation. Long-term value investors should accumulate M&M for the long-term.
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