Stock Market Result Update on Mahindra and Mahindra for 1QFY2012

Stock Market Result Update on Mahindra and Mahindra for 1QFY2012 with a Buy recommendation and a Target Price of `815 (12 months).

Mahindra and Mahindra (M&M) registered an in-line performance for 1QFY2012, led by sustained volume momentum and increased average net realisation. Operating margin declined slightly due to raw-material cost pressures and withdrawal of tax incentives at MVML. As a result, net profit was marginally lower than our estimates. We largely retain our volume, revenue and earnings estimates for M&M and maintain our Buy view on the stock.

Strong top-line performance, but margin contraction restricts bottom-line growth: M&M reported a strong revenue performance for 1QFY2012, led by robust 22.6% yoy (down 2.9% qoq) growth in volumes and 6.2% yoy (2.9% qoq) growth in net average realisation due to change in product mix and price hikes. Strong volume performance in the automotive segment (24.2% yoy) and farm equipment segment (19.9% yoy) resulted in market share gains for M&M. EBITDA margin, however, came in marginally lower than our estimates at 13.3%, down 170bp yoy (up 61bp qoq), largely due to raw-material cost pressures, increased purchases from MVML and withdrawal of tax incentives at MVML. However, cost rationalisation measures coupled with lower staff cost and other expenses provided some respite. As a result, net profit for the quarter grew modestly by 7.6% yoy (flat qoq) to `605cr.

Outlook and valuation: M&M’s passenger utility vehicle (UV), four-wheeler pick-up and tractor volumes continued to surprise positively despite a challenging macroeconomic environment. We maintain our volume assumptions and have modeled a ~12% CAGR in passenger UV and four-wheeler pick-up volumes over FY2011–13E and a ~13% CAGR in tractor volumes over the same period. We expect M&M to leverage upon its dominant position in the UV and tractor segments and believe that strong rural demand will help M&M sustain its volume momentum. We retain our Buy view on M&M, valuing it on SOTP basis. Our SOTP target price for the stock works out to `815, wherein its core business fetches `622/share and the value of its investments works out to `193/share.