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Spark Capital: Mahindra & Mahindra 1QFY15 Outlook Review (Rating: Add; TP: 1,345)




Spark Capital Advisors(India) Private Limited


13 Aug 2014





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Mahindra & Mahindra 1QFY15 Outlook Review (Rating: Add; TP: 1,345) How does our one year outlook change? We remain neutral on M&M on primarily on the back of FY15 remaining muted for both UVs and Tractors. However, FY16 is expected to see UV growth for M&M on the back of new product launch. Tractors are expected to grow in FY16 on the back of a low base. We have an Add rating with a price target of Rs. 1,345 based on SOTP valuations (slide 2) We expect automotive segment volume CAGR of 7% from FY14-FY16 driven by a de-growth of ~1% in FY15. The company is missing products in the growing compact UV segment as its Xylo and Quanto continue to lose significant market share to competition. With expected two new launches in the compact segment, we see FY16 volume growth of 16%. However, success of the products determine growth beyond FY16 Tractor industry has seen a slowdown post a strong FY14, resulting in flat volumes for M&M in 1QFY15. We expect the industry and M&M to grow 3-4% in FY15, followed by 12% in FY16. The company has maintained its market share in tractors and we believe it would continue to do so. EBITDA margin in 1QFY15 at 14.3% is expected to taper off and result in 14% margins in FY15 and 14.2% in FY16. Expect other expenses to see an increase driven by a number of new launches planned in the UV and tractor space over the next 15 months. On a yoy basis, we expect EBITDA margin to improve from 13.5% in FY14 despite subdued volumes as we expect MTBL to see reduction in losses driven by synergies and volume improvement How does our 3 year Outlook change? For tractors we expect M&M to maintain its leadership position resulting in maintaining / growing its market share of ~42% through FY18. Management also hinted at new launch being a segment creating product In UVs, we believe that , a lot hinges on the planned new launches in the compact segment where market share languishes at ~13%. Within the larger UVs, growth to be in-line with the industry and hence market share of ~65% would be stable. Expect competition in compact UVs to result in competitive pricing and potentially dilute margins. Hence we expect improvement in tractors (higher EBIT %) to offset expected dilution in auto margins and maintain the company level EBITDA % at ~14.5%

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