Accumulate M&M; target of Rs 1473: P Lilladher

Prabhudas Lilladher's research report on Mahindra and MahindraM&M’s results were better than expected as its EBITDA margins surprised positively. This was attributable to lower commodity costs and a better product mix. While M&M’s EBITDA declined 1.3% YoY to Rs12.5bn, EBITDA margin at 12.7% was ahead of expectation. This was slightly set off against a higher‐than‐expected tax rate, but the overall decline at 3.4% to Rs8.5bn was better than expectations.
M&M’s Q1 results were better than expected as cost control, product mix improvement and benign input cost environment benefited the company. In the event of a decent Kharif crop, YoY growth is likely to resume from Nov 2015 in the tractor segment. New UV launches are highly anticipated and should help trigger an improvement in the automotive division performance. While both UVs and tractors come off a lower base, their recovery would be based upon differing triggers pertinent to urban and rural customers, respectively. FY17 should mark a better performance from both these segments though. Thus, the long‐term outlook for M&M remains good due to need for agri‐mechanisation, new launches in UV1 segment in FY16, recovery in CV cycle etc.

At the current market price, the stock is trading at 22.1x FY16E and 17.6x FY17E standalone earnings. Our target of Rs1,473 is based upon a core target PE of 12.5x FY17e (Rs886) and value of investments and subsidiaries at Rs587. We maintain ‘Accumulate’, says Prabhudas Lilladher research.

M&M’s volumes continued to be under pressure in Q1FY16. Total volumes declined 8.1% YoY, with automotive division volumes being lower 2.7% YoY and tractor division volumes being lower 16.4% YoY. Total revenues declined by 3.4% YoY to Rs98.3bn: 8.1% YoY volume decline, 5.6% YoY improvement in realisations and 26.2% YoY decline in other operating income,says Prabhudas Lilladher research.

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