Mahindra & Mahindra’s (M&M) Q4 FY3/18 earnings of Rs10.2bn beat our estimate of Rs9.3bn, mainly due to better operating performance than we expected in the auto segment. The Q4 EBITDA margin rose by 330bp YoY (from a low base) and 30bp QoQ to 13.2%. We see this as commendable given that the volume contribution from high-margin tractors fell by 9ppt QoQ to 30%. The key surprise for us was the auto segment, where the margin rose by 220bp QoQ, driven by the commercial vehicle (CV) business breaking even at the EBIDTA level amid strong volume growth. We expect M&M to record 10% volume growth in tractors in FY3/19. We expect demand for its Bolero and Scorpio models to pick up as these are largely rural products. In addition, M&M plans to launch three new utility vehicle (UV) models in FY3/19: a large sport-utility vehicle (SUV, the U321); a compact SUV (the S201); and a model based on the Rexton platform. We believe that these new launches and a rural revival should help M&M recover some of its lost market share in UVs. Steady volume growth in these segments should help offset rising input costs, in our view. We revise up our EPS forecasts by 4% for FY3/19 and 5% for FY3/20.Overall, we project a 17% adjusted earnings CAGR over FY3/19–20. We raise our target price from Rs890 to Rs1,000, still based on our sum-of-the-parts model, to factor in our earnings-forecast revisions and the recent rise in valuations for other listed Mahindra Group entities.
Target Price Rs1000
What event has happened? Mahindra & Mahindra’s (M&M) Q4 FY3/18 earnings of Rs10.2bn beat our estimate of Rs9.3bn, mainly due to better operating performance than we expected in the auto segment.
Why is it significant? The Q4 EBITDA margin rose by 330bp YoY (from a low base) and 30bp QoQ to 13.2%. We see this as commendable given that the volume contribution from high-margin tractors fell by 9ppt QoQ to 30%. The key surprise for us was the auto segment, where the margin rose by 220bp QoQ, driven by the commercial vehicle (CV) business breaking even at the EBIDTA level amid strong volume growth. We think that the Indian government’s recent budgetary focus on boosting the rural economy bodes well for M&M’s tractor segment. We expect M&M to record 10% volume growth in tractors in FY3/19. Once the rural segment recovers, we expect demand for its Bolero and Scorpio models to pick up too as these are largely rural products. In addition, M&M plans to launch three new utility vehicle (UV) models in FY3/19: a large sport-utility vehicle (SUV, the U321); a compact SUV (the S201); and a model based on the Rexton platform. We believe that these new launches and a rural revival should help M&M recover some of its lost market share in UVs.
Steady volume growth in these segments should help offset rising input costs, in our view. Overall, we project a 17% adjusted earnings CAGR over FY3/19–20. Excluding its subsidiaries, the standalone entity trades at 12.9x our FY3/20 EPS forecast, which we see as attractive versus its peers. We maintain our BUY rating.
Implications for earnings forecast? revised up EPS forecasts by 4% for FY3/19 and 5% for FY3/20.
How do valuations look now? We raise our target price from Rs890 to Rs1,000, still based on our sum-of-the-parts model, to factor in our earnings-forecast revisions and the recent rise in valuations for other listed Mahindra Group entities such as Tech Mahindra (TECHM IN) and Mahindra & Mahindra Financial Services (MMFS IN). We value M&M’s core business at 16x our one-year forward core EPS forecast and its stakes in listed entities at the current market prices. Our valuation multiple for the core business is a 10% premium over M&M’s longterm median of 15x and in line with the BSE Sensex’s current premium over its long-term average.
The main risks rating and the attainment of our target price are a slower recovery in tractor volumes than we expect and a sharp rise in input costs. What is distinctive about our stock view? We see M&M’s tractor and UV segments as among the main beneficiaries of a rural recovery in India.
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