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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