Mahindra & Mahindra Q2FY17: LKP upgrade rating from 'Neutral' to 'Buy'

LKP Securities | Jan. 27, 2010, midnight

Decent set of numbers in Q2:

M&M’s standalone Q2FY17 revenues came in at  ₹ 104 bn, growing at 13.8%  yoy and a fall of 4.5% sequentially. The topline this time includes  Rs1 bn of Incentive Promotion Scheme benefit arising from their Chakan plant. Automotive volumes in the quarter grew by 11.5% yoy despite increasing competition. FES volumes zoomed up  by 36% yoy as the country witnessed a good monsoon this year. On profitability front, EBITDA margins went up to 11.6% from 10.9% yoy while remained flattish qoq. The improved product mix in favour of tractors did the trick this time on margins. RM costs/Sales as a result of operating leverage went down to  71.6% from 72.7% qoq, despite RM costs inching up a bit. Depreciation costs went up by 40% yoy while tax rate  was  at  26.4%.  Other  income  came  in  way  above  our  expectations  at  ₹ 7.07  bn.  PAT increased 27% yoy and 34.6% qoq to Rs.11.6 bn.

Outlook and valuation:

M&M’s  volume  growth  has  picked  up  well  in  FY17.The  UV  segment  has  been  performing strongly on the existing models. New model launches in the couple of next years are expected to  increase  volumes  by  a  good  number.  FES segment  has  been  the  star performer  as  strong >30%  growth  has  been  registered  by  the  company  year  to  date.  Good  monsoons  and  rural income growth have been the positives for this segment. Uptick in the M&HCV segment after dull  four  months  will  augur  well  hereon  for  the  company  considering  the  GOI’s  push  on infrastructure  and  changing  regulations.  To  everyone’s  surprise  the  company  has  been performing strongly in exports too bucking the trend. Implementation of GST may result into a negligible positive impact on the company while the demonetization issue may result into short term negative impact but postponement of buying of vehicles. Margins will move northwards hereon  considering  the  improving  product  mix  tilting  towards  FES.  We  hence  upgrade  the stock on the back of increasing volume to  BUY  from  NEUTRAL with a target price of  ₹ 1,513. Robust  subsidiary  valuation  and  the  strong  other  income  component  in  the  standalone business coming from dividends from these subsidiaries is actually bolstering the intrinsic value of the stock.

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