Hold Mahindra and Mahindra; target Rs 862: SPA Research

SPA Research has recommended hold rating on Mahindra and Mahindra (M&M) with a target price of Rs 862, in its October 29, 2012 research report.

"M&M reported net sales of INR 98130 mn, up by 33.4% YoY and up by 4.8% QoQ. Revenues for the quarter were aided by strong growth in volumes for its Utility Vehicles (up 29% YoY) & Pick-ups (up 10% YoY). The Company increased the price by 1.5% in automotive segment & by 3% in the tractor segment during 1QFY13 to compensate for the increase in excise duty and price of raw materials thereby improving realizations. Profits for the quarter stood at INR 9018 mn.

Segmental Performance: M&M reported volumes of 191077 units in Q2FY13, up by 6.8% YoY and up by 2.9% QoQ. This was led by strong growth in automotive volumes to 141237 units, up by 16.2% YoY & up by 12.1% QoQ partly offset by reduced demand from the tractors segment with 49840 units sold in Q2FY13 down by 13.1% YoY & 16.4% QoQ.  The overall tractor sales fell 5% in the country due to poor monsoon but because of its significant presence in the southern market and Gujarat, M&M has been hit harder. Average Selling Price (ASP) in automotive segment stood at INR 506230/unit, up by 36.1% YoY & 1.6% QoQ. ASP’s in tractors segment stood at INR 532392/unit, up by 8.2% YoY & up by 3.1% QoQ. Strong pricing environment helped M&M improve its realization and subsequently the bottom line.

Pressure on margin: Margins in Q2FY13 contracted to 11.4% down by 44 bps QoQ and down by 60 bps YoY led by higher than expected raw material prices which at 79.7% of sales were up by 433 bps QoQ (365 bps YoY). EBITDA margin of M&M+MVML stood at 13.83%, up by 67 bps YoY (down by 8 bps QoQ). PAT margin stood at 9.2% up by 144 bps QoQ and down by 83 bps YoY on the back of higher other income which constitutes healthy dividend income from its group companies.

Other Highlights

• M&M expects tractors industry to perform better in H2FY13 with good summer season crop coming in
• In September end the company has launched the all new compact and versatile SUV Quanto to strengthen its UV product portfolio. It has already generated 5000 bookings in just first three weeks.
• The company has also launched Rexton – the first product from its Ssangyong plant, in mid October
• Ssangyong has increased its market share from ~11% to ~13% in its home market despite the fall in overall industry. Ssangyong board has recently approved a KRW 450bn capex program, and another KRW 900bn program is in the pipeline for approval.
• M&M has also reiterated its capex target of INR 50 bn over the next three years and an investment target of INR 20 bn in subsidiaries and JVs over the same period.

Outlook & Valuation: M&M has been able to outperform the automobile sector in Q2FY13 largely on the back of new launches, better product mix and strong demand in its UV’s & pick-ups segment. The company grew at a rate of 15% as compared to industry growth rate of 3%.  With strong demand for XUV5OO, SUV Quanto, we remain positive on the Company. We expect M&M’s standalone revenues & profits to register a CAGR of 16.2% & 12.9% respectively over FY12-FY14E. Using SOTP valuation, we recommend "HOLD" on the stock with a target of INR 862 over a period of 12 months," says SPA Research report.

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