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Strong performance in a weak environment
Good performance in a challenging environment
Owing to the various industry challenges, we cut our earnings estimate by 4.1/7.9% for FY20/21E and reduce our target price from Rs878 to Rs815, while retaining our ‘BUY’ call. M&M’s performance over Q4FY19 exceeded our expectations on all grounds, with operating margins at 11.7% as against PLe of 10.3%, despite an unfavourable product mix wherein tractors formed ~26% of total volumes for Q4FY19 v/s 30% in Q4FY18 & 39% in Q3FY19. After a strong double digit growth for the last 2 years, tractors have entered a slow lane (FY19 M&M tractor growth rate at ~3% YoY). The management has however, guided for ~5% growth for the industry over the current fiscal. Channel inventory for M&M is currently ~3 weeks lower than the industry which should help M&M outpace industry growth. For the UV segment, on the back of its 3 new launches, M&M has been able to garner ~4% incremental market share in UVs to 27.9% over the last quarter. Going ahead, sustainence in this share should boost volume growth as well as provide operating leverage benefits for the auto segment margins (especially with launch costs accounted for in FY19 behind us). We hence, expect margins to inch up to 12.8%/12.5% in FY20/21E (expecting some margin pressure in FY21E owing to BS VI related costs). Given the valuation comfort, we maintain ‘BUY’ with a price target of Rs815, based on a core PE of 15x Mar’21E and value of subsidiaries at Rs273.
* Standalone performance:
M&M’s Q4FY19 total standalone revenues were up 5.5% YoY / 7.4% QoQ to Rs140.3bn ( ~8% above PLe). This was on account of realisations rising ~6% YoY / 7% QoQ, while volumes were flat YoY as well as QoQ. Operating margins came in at 11.7% (PLe: 10.3%), lower 150bps YoY / up 10bps QoQ. The dip in operating margins was mainly owing to gross margin decline of 210bps YoY, while staff costs as well as other expenses as a % of sales were lower 20bps & 40bps YoY respectively. Absolute EBITDA dipped 6% YoY (higher ~8% QoQ) to Rs16.5bn. Adjusting for impairment provision amounting to ~Rs1bn, net profit for the company stood at Rs9.3bn, down 9% YoY (above PLe of ~Rsbn).
* Segmental mix:
As for the segmental mix, tractors formed ~26% of overall volumes in Q4FY19 (v/s 30% in Q4FY18 & 38.8% in Q3FY19) with farm equipment segment EBIT margins for the quarter at 16.2%, lower 330bps YoY & 300bps QoQ. Automotive margins for the quarter however rose 300bps QoQ (lower 140bps YoY) to 6.8%.
* M&M+ MVML performance:
M&M+MVML revenues were up 5% YoY at Rs138bn, with OPM at 13.5% (down 160bps YoY / up 30bps QoQ). Adj. PAT dipped 3% YoY to ~Rs11bn (19% ahead of consensus). Auto EBIT margins for M&M + MVML came in at 8.8% (lower 170bps YoY / up 300bps QoQ).
* Key takeaways from the con-call:
(1) The management has guided for tractor industry growth of 5% over FY20 (with Q1FY20 expected to see decline), while the medium term outlook for the industry is higher at 8-10%.
(2) Over Q4FY19, M&M’s tractor volumes degrew ~15% YoY, more than the industry degrowth of ~8% YoY on account of inventory correction. Channel inventory for M&M stands at 4-5 weeks, while for the industry it is expected to be at ~3 weeks higher.
(3) For the auto industry, the management expects the industry growth to be better than Siam estimates of 3-6% for PVs & 10-12% for CVs.
(4) M&M has gained ~4% market share at 27.9% in the UV segment over Q4FY19.
(5) With the launch of Furio, M&HCV range for M&M is in place.
(6) 30% of PV sales for M&M are currently for petrol.
(7) The Ford alliance should bring in platform sharing benefits FY21E onwards.
(8) Capex spend over the next 3 years has been guided at Rs180bn, of which Rs120bn will be towards capacities and product development
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