Mahindra and Mahindra
Cluster: Apple Green
Recommendation: Buy
Price target: Rs565
Current market price: Rs384
Price target revised to Rs565
Result highlights
*
The Q2FY2009 results of Mahindra and Mahindra (M&M) are better than our expectations, mainly due to a higher other income. The stand-alone net sales of the company grew by 17.4% to Rs3,066 crore in the quarter. This growth was led by an overall volume growth of 13%. The automotive segment recorded a volume growth of 18.1%; the sales volume of the farm equipment (FE) segment grew by 4.1%.
*
On a segmental basis, the automotive revenues rose by 12.4% to Rs1,921 crore (adjusting for octroi refund) whereas the FE division’s revenues grew by 28.6%. The profit before interest and tax (PBIT) margin in the automotive segment dropped drastically by 800 basis points to 6.9% during the quarter. The PBIT margin of the FE division witnessed a drop of 160 basis points to 10.9%. The overall operating profit margin (OPM) declined by 210 basis points to 8.5%, leading to a decline of 7.8% in the operating profit to Rs265.91 crore.
*
On account of a higher other income, the adjusted net profit grew by 9.3% to Rs237.75 crore. After taking into account the extraordinary items (octroi refund, foreign exchange loss and profit on the sale of stake in Mahindra Holding and Finance [MHFL], the reported profit after tax (PAT) declined by 35% to Rs185.69 crore.
*
On a consolidated basis, the total income (including the other income) grew by only 19.1% yoy to Rs7,741 crore. The consolidated profit before tax (PBT; before exceptional items and tax) declined by 10.3% yoy to Rs623 crore and the consolidated net profit (post-minority) dropped by 4.9% yoy to Rs373.3 crore.
*
We expect the growth in the utility vehicle (UV) segment to slow down till the launch of the new UV, Ingenio. Overall, sales in the automotive and FE segments will be affected by the high interest rates and increase in excise duty on UVs. M&M’s core business remains under pressure and the company has huge capital expenditure (capex) plans which will lead to higher interest and depreciation charges. Segments other than automotive and FE contribute ~44% of the consolidated revenues and ~65% of the operating profits of the company.
*
We continue to value M&M on a sum-of-the-parts basis, valuing the core business at Rs314 and the subsidiaries at Rs251. We maintain our Buy recommendation on the stock with a revised price target of Rs565.
