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Spark Capital: M&M 3QFY13 Results Review: Strength in UVs to stay; high base implies a slower growth ahead. Maintain Add.




Spark Capital Advisors(India) Private Limited


11 Feb 2013





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Strength in UVs to stay; high base implies a slower growth ahead. Maintain Add. Combined revenues of M&M and MVML grew 25% yoy to Rs 102.43bn. EBITDA declined 40bps qoq. EBIT margins in the automotive segment declined 100bps qoq while margins in the farm equipment segment (FES) expanded 70bps qoq. PAT grew 30% yoy. We remain positive on the stock and expect the company to maintain its dominance in the UV segment. We don’t expect significant downsides to tractor volume growth from here. We expect volume growth in the UV segment to be slower than that seen in FY13 due to a higher base from 2HFY14. Management indicated that the focus in FY14 will be more on product refreshes rather than on new launches. In passenger UVs, we believe upgrades can have a reasonable potential to drive growth in mature products. Although growth in FY13 was driven by new launches, the new Bolero enabled a volume growth of 17.2% YTD for that product. We understand that a new Scorpio is likely in 4QFY13 and believe this product and others such as a sub four metre Verito could be meaningful growth drivers in FY15. In our view, the risks of rising diesel prices to UV demand are muted and expect higher prices to drive a shift in engine preferences in hatchbacks/sedans more than in UVs. We believe volume growth in the Mini Trucks (Maxximo and Gio) will remain weak (down 27% YTD) and expect growth 2.5 to 3 ton GVW pick-ups to drive growth (up 42% YTD). Accordingly, we expect a volume growth of 10% and 11% for the automotive division in FY14 and FY15 respectively. In the FES, we factor in a tractor volume growth of 5% and 7% in FY14 and FY15 respectively. We expect this growth to be driven by a low base driven demand recovery, launch of new variants and a new brand launch in 2014. Estimates and valuations: We expect net sales of M&M + MVML to grow at 13% CAGR for FY13-15E to Rs. 484bn. We expect EBITDA margins to come in at 13.7% in FY13 and decline 40bps to 13.4% by FY15 due to increase in the share of revenues from the automotive segment. We expect PAT to grow at 11% CAGR for FY13-15E to Rs. 42.96bn. We value the company on an SOTP basis and arrive at a target price of Rs. 992. We value the core business (M&M + MVML) at 11x FY15E EPS (earlier 12x FY14E EPS) of Rs 69.86 and arrive at a value of Rs 769 per share. Conference Call Takeaways: (1) Price increase in FES of 4.6%. Last hike of ~Rs 20,000 was taken in October. 1-3% price hike in automotive segment (2) Zaheerabad tractor plant to start production by end FY13. (3) Target CY13 volumes for Ssangyong at 149,000 (4) Plant inventory is <3 weeks, and dealer inventory is <5 weeks in FES; Company inventory is <2 weeks, dealer inventory is slightly more than 3 weeks in the automotive segment. (5) Rs 10bn revenues expected from Powerol in FY13. Agri business (ex-tractors, ex-Powerol and ex-implements) revenues came in at Rs 3bn.

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