Buy Mahindra and Mahindra; target of Rs 890: Prabhudas Lilladher

Prabhudas Lilladher's research report on Mahindra and Mahindra

M&M's Q3FY18 adjusted profit at Rs9.3bn, up ~15% YoY, was slightly ahead of our estimates. While revenue as well as operating performance was broadly on expected lines with revenue at ~Rs116bn, up 4.6% YoY v/s our estimate of Rs118bn and operating margin at 12.9% v/s PLe of 12.8%, the marginal PAT beat was mainly on account of lower than expected finance cost and effective tax rate. Absolute EBITDA stood at Rs14.9bn, up 18% YoY, with EBITDA margins at 12.8% up 150bps YoY (lower 130bps QoQ), on back of a favourable product mix (higher share of tractors), reduced losses in the MTBD (Truck and Bus division) and operating leverage. Resultantly, EBIT margins for the FES and Auto division came in at 20.5% (up 290bps YoY) and 6.2% (up 170bps YoY) respectively.  M&M's volumes continue to be driven by strong demand in tractors and a cyclical recovery in the LCV segment. On the back of a second consecutive year of good monsoon, healthy farm produce and MSPs looking up, M&M's tractor division is expected to continue delivering good performance. Shortage of skilled labour has led to the need of increased mechanization, which is, in turn, leading to a structural shift towards higher HP tractors, accelerating growth and improving profitability. The UV business continues to be a drag with M&M losing ~14% market share over the last three years. However, given the extremely low base, upcoming model launches (MPV/Mahindra branded Tivoli) and refreshes (KUV1oo/TUV3oo) should boost volume growth for M&M over FY19E.  Increased government focus on rural economy could further accelerate growth for both, Farm and Auto segment.

Outlook
We maintain 'BUY' with a price target of Rs890, based on a core PE of 16x Mar'20E and value of subsidiaries at Rs250.

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