Hold M&M; target of Rs 1550: Karvy

M&M’s Q1FY17 performance was broadly in line with our estimates, helped by softer commodity prices and cost control, despite challenging environment. Company’s volume increased 14% YoY and 6.7% QoQ due to auto volume growth of 11% and tractor growth of 20% YoY. Its (M&M+MVML) Revenues/EBIDTA/PAT increased 11%/11%/5% YoY but declined 4%/17%/32% QoQ in Q1FY17. EBIDTA margins declined 9 bps YoY (up 165 bps QoQ) to 14.1%, as against our estimate of 13.3%. Company‘s EBIDTA margin was healthy, despite challenging business environment and discontinuation of excise benefit from Haridwar plant in Q1FY17. Its EBIT margin was down by 240 bps YoY to 7.8% in auto segment, but rose 120 bps YoY to 18.8% in FES segment in Q1FY17.  

We broadly maintain our volume estimates, while reduce our revenue estimate factoring revised ASP. However, with increasing high tractor contribution, we increase our margin estimates, which results in marginal (~1%) change in our EBIDTA and EPS estimates for FY17E/FY18E. We maintain our SOTP based target price of Rs 1,550 per share, valuing its M&M+MVML at 8x FY18E EBIDTA to Rs 1085 and we value subsidiary at Rs.465, post-20% discount to M-cap. On account of valuation and limited upside, we reiterate our “HOLD” on M&M. Benefit of healthy tractor volume would get nullified by intensifying competition in Automobile segment. We do not see further rerating/upgrade in earnings for M&M and we believe that majority of the positives is priced in, leaving limited upside from CMP.For all recommendations, click here 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.