Accumulate Mahindra and Mahindra; target Rs 1120: Emkay

Emkay's report on Mahindra and Mahindra

• Management highlights higher SUV tax, fuel price and interest rates as key near-term concerns
• Healthy CFO for the Stdl business at Rs41bn (+52 percent y-o-y) -invested Rs13.8bn in capex and Rs13bn in subsidiaries; major investments towards funding 2W, truck venture
• While Stdl Net D/E stood at 0.03x with ROCE of 24.8 percent were healthy, consol D/E was at 0.9x and ROCE at 17.2 percent
• We have an Accumulate rating on the stock with an SOTPbased TP of Rs 1120

"M&M’s standalone cash flow generation remained healthy at Rs41.4bn, up 52 percent y-o-y. While the capex on plants and buildings stood at Rs13.9bn, it invested Rs13bn in its subsidiaries, with the major portion of the investment of Rs5.8bn in Mahindra Navistar Automotive Ltd. (MNAL) and Rs3.5bn in Mahindra 2W. Standalone net debt-to-equity improved to 0.03x (vs. 0.09x in FY12), while ROCE/ROE stood at 24.8 percent/23.3 percent (vs. 23.7 percent/23.6 percent in FY12); gross debt stood at Rs32.3bn. Investments in R&D increased 29 percent y-o-y to Rs10.6bn (~2.6 percent of the turnover). Auto and Farm divisions filed 47 new patents in FY13; 4 patents were approved. M&M rolled out compact SUV Quanto, Maxximo Minivan, Maxximo Plus, refreshed Verito, and Mahindra e2O during the year along with several new
variants of tractors. It also introduced Rexton from Ssangyong in the domestic market, besides 2 new tippers under MNAL. The company is working on deriving synergy benefits with Ssangong Motors; they are jointly developing two common platforms and various new engines to be used on these platforms. Exports in the automotive segment grew 11 percent driven largely by SAARC, Chile and South Africa. However, in the tractor segment, volumes dipped 10.4 percent, led by a decline in markets of Sri Lanka and Bangladesh and partly offset by rising exports to the US and Africa. Overall, export revenues rose 26 percent y-o-y to Rs22.7bn. Mahindra Powerol achieved Rs10bn in revenue, with its telecom share coming down to 19 percent vs. 58 percent in 2010. The lower capacity segment (<82.5kvA), wherein M&M has the second-largest market share of 28.5 percent, has been the key driver. Consolidated performance improved with revenue/PAT at Rs688bn/Rs41bn, growing 16 percent/31 percent; Consol D/E stood at 0.9x and ROCE at 17.2 percent. While Stdl (Rs33.5bn) and MMFSL (Rs4.5bn) had the highest share in profits (proportionate share) - the 2W business (Rs2.6bn loss), truck business (Rs4.3bn loss) and Ssangyong (Rs4bn loss) dragged down the consol performance," says Emkay Global Financial Services research report. Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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