Mahindra & Mahindra BUY

(Q1 FY13)
Sector: Automobiles Sensex: CMP (Rs): Target price (Rs): Upside (%): 52 Week h/l (Rs): Market cap (Rscr) : 6m Avg vol (000Nos): No of o/s shares (mn): FV (Rs): Bloomberg code: Reuters code: BSE code: NSE code:
Prices as on 08 Aug, 2012

17,601 723 800 10.7 875 / 622 44,375 1,749 614 5 MM IB MAHM.BO 500520 M&M

Revenues increase 39% yoy driven by strong volume growth in automotive segment; Revenues ahead of our expectations on higher than estimated realizations OPM at 11.8% was better than our estimates of 11%, OPM declined 147bps yoy but rose 152bps sequentially Including MVML, OPM was lower by only 39bps yoy but increased 181bps qoq to 13.9% Higher interest and depreciation resulted in a restricted PAT growth compared to rise in operating profit While auto segment volume growth will continue to remain strong, poor monsoons entail a grim outlook for the tractors segment We value M&M at Rs800/share (9-month target), which includes Rs592 for its automotive business (10x P/E for FY14E) and Rs208 for its subsidiaries

Shareholding pattern June '12 Promoters Institutions Non promoter corp hold Public & others Performance rel. to sensex (%) M&M Maruti Tata Motors Ashok Ley 1m (0.1) (7.0) 1.5 (7.8) 3m 1.0 (20.2) (24.7) (24.6) 1yr 5.1 (9.1) 42.4 (6.3) (%) 25.5 47.6 8.9 18.1

Result table
(Rs m) Net sales Material costs Personnel costs Other overheads Operating profit OPM (%) Depreciation Interest Other income Extra ordinary items PBT Tax Effective tax rate (%) Adjusted PAT Adj. PAT margin (%) Ann. EPS (Rs) Q1 FY13 93,674 (70,354) (4,516) (7,710) 11,094 11.8 (1,548) (460) 599 9,684 (2,428) 25.1 7,256 7.7 49.3 Q1 FY12 67,271 (48,336) (4,017) (5,964) 8,954 13.3 (1,099) (262) 550 8,143 (2,095) 25.7 6,049 9.0 41.2 % yoy 39.2 45.5 12.4 29.3 23.9 (147) bps 40.9 75.4 8.7 18.9 15.9 20.0 (125) bps 19.6 Q4 FY12 93,872 (70,894) (4,294) (8,990) 9,694 10.3 (1,997) (709) 956 1,083 9,026 (281) 3.1 8,745 9.3 59.5 % qoq (0.2) (0.8) 5.2 (14.2) 14.4 152 bps (22.5) (35.1) (37.4) 7.3 764.0 (17.0) (157) bps (17.2)

Share price trend

140 120 100 80

M&M

Sensex

Source: Company, India Infoline Research

Segmental performance
Jul-12

60 Aug-11 Dec-11 Apr-12

Revenue (Rs mn) Automotive Farm equipments Others Total EBIT (Rs mn) Automotive Farm equipments Others Total EBIT Margin (%) Automotive Farm equipments Others Total

Q1 FY13 62,787 30,783 170 93,739 Q1 FY13 5,528 4,824 40 10,392 Q1 FY13 8.8 15.7 23.5 11.1

Q1 FY12 38,559 28,571 205 67,335 Q1 FY12 4,139 4,574 21 8,734 Q1 FY12 10.7 16.0 10.1 13.0

% yoy 62.8 7.7 (17.3) 39.2 % yoy 33.5 5.5 91.3 19.0 bps yoy (193) (34) 1,333 (189)

Q4 FY12 66,137 27,611 196 93,944 Q4 FY12 5,759 4,342 31 10,132 Q4 FY12 8.7 15.7 16.1 10.8

% qoq (5.1) 11.5 (13.3) (0.2) % qoq (4.0) 11.1 26.8 2.6 Bps qoq 10 (5) 742 30

Source: Company, India Infoline Research August 09, 2012

Mahindra & Mahindra (Q1 FY13)

M&M Standalone + MVML quarterly performance

(Rs m) Net sales Material costs Personnel costs Other overheads Operating profit OPM (%) Depreciation Interest Other income Extra ordinary items PBT Tax Effective tax rate (%) Adjusted PAT Adj. PAT margin (%) Q1 FY13 88,785 (63,493) (4,810) (8,132) 12,350 13.9 (1,800) (714) 662 10,498 (2,713) 25.8 7,785 8.8 Q1 FY12 67,537 (47,491) (4,206) (6,183) 9,658 14.3 (1,313) (532) 550 8,363 (2,180) 26.1 6,183 9.2 % yoy 31.5 33.7 14.4 31.5 27.9 (39) bps 37.1 34.1 20.4 25.5 24.5 25.9 (39) bps Q4 FY12 91,188 (65,855) (4,550) (9,754) 11,029 12.1 (2,264) (1,101) 1,015 1,083 9,762 (650) 6.7 9,113 10.0 % qoq (2.6) (3.6) 5.7 (16.6) 12.0 181 bps (20.5) (35.2) (34.8) 7.5 317.6 (14.6) (123) bps

Source: Company, India Infoline Research

Revenues increase on back of improvement in automotive volumes Mahindra & Mahindra (M&M) reported a net sales growth of 39.2% yoy driven by a strong automotive segment volume growth of 28.7% yoy (in Q1 FY12 Verito volumes were not a part of M&M Auto segment). However, tractor segment volumes were lower by 1% yoy leading to an overall volume growth of 17.2% yoy. In the automotive segment, passenger UV sales were higher by 32% yoy on account of continued success of Scorpio and Bolero and also on account of an outstanding launch of the XUV 500. 4W pick up volumes jumped by 26.9% yoy. Realizations for the automotive segment were higher by 29% yoy owing to substantially higher realizations of XUV 500, higher proportion of UVs and price hikes implemented over the last one year. Realizations of tractors increased by 8.8% yoy on the back of price hikes implemented. On a qoq basis, volumes for automotive segment were lower by 14.8% (Q4 FY12 had full FY12 volumes of Verito) while farm equipment segment witnessed a rise of 14% in sales. Additionally, the company had merged with itself the automotive business of Mahindra Automobile Distributor Private Ltd (MADPL) in Q4 FY12 which manufactures and sells Verito (previously Logan). Higher raw material costs lead to yoy decline in OPM During Q1 FY13, M&M reported an OPM of 11.8%, higher than our expectations. Operating profit was higher by 23.9% yoy and 14.4% qoq, while OPM was lower by 147bps yoy but improved 152bps sequentially. EBIT margins for automotive and tractors segment fell 193bps and 34bps on yoy basis. 325bps yoy increase in raw material costs as a percentage of sales was the key reason for the fall in margins. The company attributes this, especially for the automotive segment, to the fact that the standalone company earns only marketing margins on incremental production from MVML. Including MVML, OPM was lower by only 39bpsbps yoy and improved 181bps qoq to 13.9%. Benefits of operating leverage were seen as both staff costs and overheads declined as a percentage of net sales. Cost analysis
As a % of net sales Material costs Personnel Costs Other overheads Total costs Q1 FY13 75.1 4.8 8.2 88.2 Q1 FY12 71.9 6.0 8.9 86.7 bps yoy 325 (115) (63) 147 Q4 FY12 75.5 4.6 9.6 89.7 bps qoq (42) 25 (135) (152)

Source: Company, India Infoline Research

Cost analysis (M&M + MVML)

As a % of net sales Material costs Personnel Costs Other overheads Total costs Result Update Q1 FY13 71.5 5.4 9.2 86.1 Q1 FY12 70.3 6.2 9.2 85.7 bps yoy 120 (81) 0 39 Q4 FY12 72.2 5.0 10.7 87.9 bps qoq (71) 43 (154) (181)

Source: Company, India Infoline Research

Mahindra & Mahindra (Q1 FY13)

Key takeaways from the conference call In the tractor segment, the company lost some market share in Q1 FY13 as the company refrained from offering discounts to attract volumes. For FY13, the company has guided for a flat to 3% growth in tractor volumes. For XUV 500, the company so far sold ~32,000 units and currently has bookings for 20,000 units. The current production rate is 4,000 units per month. The company plans to raise the production capacity to 5,000 units over the next 3-6 months. Incremental investments would be minimal. The company currently has no plans to raise XUV 500 capacity beyond 5,000 units. The initial response to the new Verito has been good and the company aims to clock a monthly runrate of 1,800 to 2,000 units in the near term. Until Diwali, M&M plans to launch three vehicles which include 1) the Mini SUV, 2) a new electric car and 3) a model from the Ssangyong platform. Inventory for both automotive and tractor segment are at comfortable levels. For the automotive segment, while plant inventory is at 15 days, dealer inventory is at 26-28 days. In the farm equipment segment, the plant inventory is at 22 days and the dealer inventory is at 26-28 days. For Ssangyong H1 CY12 volumes and revenues have remained flat. However, in terms of EBIDTA the company has reported a profit of US$12.5mn as compared to a loss of similar magnitude in H1 CY11. The company has maintained its CY12 volume guidance of 123,000 units a growth of ~9% yoy. The company is confident of meeting its guidance in spite of flat volumes in H1 as Rexton-W which was launched a month back and Rodius whose emission norms issue has been sorted out will provide traction. Additional upsides would arise from export of CKD units to India. In terms of exports, tractor exports are likely to slowdown given the tough economic conditions in Bangladesh, which has been a major market for M&M. Automotive exports momentum is likely to sustain in terms of absolute volumes. Major export markets for auto segment include South Africa, Chile, Brazil (additional thrust on from last quarter), Sri Lanka, Nepal, Bangladesh, Australia (XUV launched last month). Maintain BUY We value M&M at Rs800/share (9-month target), which includes Rs592 for its automotive business (10x P/E for FY14E) and Rs208 for its subsidiaries. We believe, M&Ms automotive will continue to see robust growth as its UVs continue to be the market leader in their segments and its LCVs are well placed in the strong growth segments. Tractor volumes will continue to reel under pressure on the back of poor monsoons. Financial summary
Y/e 31 Mar (Rs m) Revenues yoy growth (%) Operating profit OPM (%) Pre-exceptional PAT Reported PAT yoy growth (%) EPS (Rs) P/E (x) Price/Book (x) EV/EBITDA (x) Debt/Equity (x) RoE (%) RoCE (%) FY11 234,603 26.1 34,543 14.7 25,446 26,621 27.5 43.3 16.7 4.1 12.8 0.2 28.1 28.8 FY12 318,535 35.8 37,707 11.8 27,706 28,789 8.1 47.0 15.4 3.5 11.9 0.3 24.6 25.0 FY13E 382,279 20.0 43,816 11.5 30,555 30,555 6.1 51.3 14.1 3.0 10.0 0.1 23.1 25.7 FY14E 427,077 11.7 50,993 11.9 35,685 35,685 16.8 59.3 12.2 2.6 8.4 0.1 22.9 28.0

Source: Company, India Infoline Research

Result Update

Recommendation parameters for fundamental reports: Buy Absolute return of over +10% Market Performer Absolute return between -10% to +10% Sell Absolute return below -10%

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