Tractors drive Q2 performance; Accumulate November 11, 2016 Rohan Korde rohankorde@plindia.com +91 22 66322235 Rating Accumulate Price Rs1,242 Target Price Rs1,503 Implied Upside 21.0% Sensex 26,819 Nifty 8,296 (Prices as on November 11, 2016) Trading data Market Cap. (Rs bn) 736.0 Shares o/s (m) 592.6 3M Avg. Daily value (Rs m) 1568.6 Major shareholders Promoters 26.80% Foreign 39.69% Domestic Inst. 18.96% Public & Other 14.55% Stock Performance (%) 1M 6M 12M Absolute (9.9) (7.7) (1.8) Relative (5.4) (12.5) (5.4) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 61.4 61.3 0.2 2018 78.3 72.3 8.3 Price Performance (RIC: MAHM.BO, BB: MM IN) (Rs) 1,600 1,400 1,200 1,000 800 600 400 200 0 Nov 15 Jan 16 Source: Bloomberg Mar 16 May 16 Jul 16 Sep 16 Nov 16 M&M s adjusted operating results in Q2FY17 were in line with estimates; Adjusted EBITDA margin was 10.8%, lower 10bps YoY and 80bps QoQ. However, the farm equipment segment benefitted from higher operating leverage YoY and its segmental EBIT margin improved 180bps YoY to 17.7%. Boosted by higher nonoperating income, adjusted profit in Q2FY17 grew 18.9% YoY to Rs10.9bn (v/s expectation of Rs10.1bn). While there is no new automotive platform scheduled for launch in FY17, M&M plans to have a new platform introduction annually w.e.f. CY17 till CY20. Focus in FY17 would be on ramping up sales on various products launched in FY16. In the tractor segment, M&M has upgraded its industry tractor volume growth outlook from ~13 16% YoY to 20% (we expect 25% YoY growth). The long term outlook for M&M remains good due to need for agri mechanisation and a good rural UV portfolio. However, launches from FY16 have stabilised at a lower than previously anticipated base. We lower our estimates by 7.6%/1.8% for FY17/18e. We maintain Accumulate with a price target of Rs1,503 (previously Rs1,551). Our target of Rs1,503 is based upon a core target PE of 14x FY18e (Rs962) and value of investments and subsidiaries at Rs541. M&M+MVML performance: Revenue growth was 14.4% YoY, with the adjusted EBITDA margin at 13.6%, which was lower 50bps QoQ and higher 60bps YoY. Gross margins were flat YoY and higher 60bps QoQ. Adjusted EBITDA growth was 19.6% YoY to Rs13.7bn. Higher depreciation YoY was off set by a decrease in interest cost and higher non operating income. As a result, while reported profit grew 28.8% YoY to Rs12.5bn, adjusted profit grew just 21.1% YoY to Rs11.8bn (exp Rs11bn). Contd...2 Key financials (Y/e March) 2015 2016 2017E 2018E Revenues (Rs m) 384,448 408,850 459,165 523,197 Growth (%) (5.1) 6.3 12.3 13.9 EBITDA (Rs m) 37,404 45,702 52,736 62,654 PAT (Rs m) 25,524 31,159 36,378 46,413 EPS (Rs) 43.2 52.6 61.4 78.3 Growth (%) (31.3) 21.8 16.7 27.6 Net DPS (Rs) 12.6 12.6 15.7 18.9 Profitability & Valuation 2015 2016 2017E 2018E EBITDA margin (%) 9.7 11.2 11.5 12.0 RoE (%) 14.1 15.2 15.8 17.7 RoCE (%) 12.2 13.5 14.3 16.2 EV / sales (x) 2.0 1.8 1.6 1.4 EV / EBITDA (x) 20.1 16.2 14.0 11.8 PE (x) 28.8 23.6 20.2 15.9 P / BV (x) 3.8 3.4 3.0 2.6 Net dividend yield (%) 1.0 1.0 1.3 1.5 Source: Company Data; PL Research Q2FY17 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Standalone performance M&M reported 13.3% YoY revenue growth to Rs105.1bn (v/s expectation of Rs107.5bn). Overall volume growth during Q2FY17 was 18.6%. Of this, tractor volume growth was 36.3% YoY, while automotive volume growth was 11.5% YoY. Blended realisation declined 4.5% YoY. Tractors constituted 32.8% of the total volumes (v/s 28.6% YoY and 38% QoQ). Revenues have been adjusted by Rs1bn received on account of Incentive Promotion Scheme at the Chakan plant, which pertains to preceding quarters. Gross margins were lower 70bps YoY (higher 40bps QoQ), while Other expenditure to sales ratio was lower 50bps YoY. This led to EBITDA margin declining just 10bps YoY to 10.8%, while EBITDA grew 12.4% YoY to Rs11.3bn (exp Rs11.8bn). In the segmental mix, FES EBIT margin was good at 17.7% (higher 160bps YoY), while the adjusted automotive division EBIT margin disappointed at just 4.5% (lower 230bps YoY). Higher depreciation YoY was off set by a decrease in interest cost and higher non operating income. As a result, M&M reported standalone adjusted profit growth was at 18.9% YoY to Rs10.9bn (exp Rs10.1bn). Conference call highlights: Tractor industry volume growth outlook for FY17 has been increased from 13 16% to 20%. Outlook for H2FY17: The sentiment is very positive as is reflected by October volumes. Recent events might, however, temper growth. New product on Tivoli platform would be launched in India in H2FY19. November demand may see short term impact due to anxiety in customers; normalcy is likely to return in 2 3 months. Tractor inventory has gone below comfortable levels in October due to higher retails. November 11, 2016 2
Exhibit 1: Q2FY17 Result Overview Standalone (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Net Revenues 105,091 92,761 13.3 110,408 215,499 191,050 12.8 Raw Materials 75,981 66,440 14.4 80,289 156,270 136,282 14.7 % of Net Sales 72.3 71.6 72.7 72.5 71.3 Personnel 6,578 5,890 11.7 6,504 13,082 11,988 9.1 % of Net Sales 6.3 6.3 5.9 6.1 6.3 Manufacturing & Other Exp 11,201 10,349 8.2 10,760 21,960 20,253 8.4 % of Net Sales 10.7 11.2 9.7 10.2 10.6 Total Expenditure 93,760 82,678 13.4 97,553 191,312 168,523 13.5 EBITDA 11,331 10,082 12.4 12,855 24,187 22,528 7.4 EBITDA Margin (%) 10.8 10.9 11.6 11.2 11.8 Depreciation 3,340 2,390 39.8 3,117 6,458 4,624 39.7 EBIT 7,991 7,693 3.9 9,738 17,729 17,904 (1.0) Interest Expenses 257 426 (39.6) 242 499 815 (38.8) Non operating income 7,075 4,840 46.2 2,168 9,243 6,484 42.6 PBT 15,809 12,107 30.6 12,575 28,383 23,573 20.4 Tax Total 4,176 2,953 41.4 3,022 7,198 5,918 21.6 Tax Rate (%) Total 26.4 24.4 8.3 24.0 25.4 25.1 1.0 Reported PAT 11,633 9,154 27.1 9,552 21,185 17,655 20.0 Adj. PAT 10,883 9,154 18.9 8,870 19,275 17,655 9.2 Source: Company Data, PL Research Exhibit 2: Operating Metrics Standalone (Rs m) Y/e March Q2FY17 Q2FY16 YoY gr. (%) Q1FY17 H1FY17 H1FY16 YoY gr. (%) Sales Volume (nos) 187,837 158,380 18.6 196,123 383,960 330,305 16.2 Net Realisation/Vehicle 559,479 585,684 (4.5) 562,952 561,253 578,405 (3.0) Material cost / vehicle 404,507 419,498 (3.6) 409,379 406,996 412,595 (1.4) Gross Profit / vehicle 154,972 166,186 (6.7) 153,574 154,257 165,810 (7.0) Employee cost /vehicle 35,017 37,186 (5.8) 33,165 34,071 36,293 (6.1) Other expenses / vehicle 59,630 65,342 (8.7) 54,861 57,194 61,315 (6.7) EBITDA/vehicle 60,325 63,658 (5.2) 65,548 62,992 68,202 (7.6) Net Profit/vehicle 57,937 57,796 0.2 45,225 50,200 53,450 (6.1) Source: Company Data, PL Research November 11, 2016 3
Income Statement (Rs m) Net Revenue 384,448 408,850 459,165 523,197 Raw Material Expenses 279,555 295,666 332,895 377,748 Gross Profit 104,893 113,184 126,270 145,449 Employee Cost 23,169 23,422 26,172 29,822 Other Expenses 44,320 44,060 47,362 52,972 EBITDA 37,404 45,702 52,736 62,654 Depr. & Amortization 9,749 11,086 13,602 12,271 Net Interest 2,143 1,553 1,050 1,050 Other Income 11,171 9,236 12,967 12,551 Profit before Tax 36,683 42,299 51,051 61,884 Total Tax 8,478 10,624 12,763 15,471 Profit after Tax 28,205 31,675 38,288 46,413 Ex Od items / Min. Int. 2,682 687 1,910 Adj. PAT 25,524 31,159 36,378 46,413 Avg. Shares O/S (m) 591.4 592.6 592.6 592.6 EPS (Rs.) 43.2 52.6 61.4 78.3 Cash Flow Abstract (Rs m) C/F from Operations 37,796 48,901 54,396 61,727 C/F from Investing (37,360) (29,010) (40,000) (45,000) C/F from Financing (9,292) (17,568) (11,643) (13,762) Inc. / Dec. in Cash (8,856) 2,323 2,753 2,965 Opening Cash 29,504 20,648 22,970 25,723 Closing Cash 20,648 22,970 25,723 28,689 FCFF 22,233 17,838 26,436 35,677 FCFE 19,065 9,723 26,436 35,677 Key Financial Metrics Growth Revenue (%) (5.1) 6.3 12.3 13.9 EBITDA (%) (20.8) 22.2 15.4 18.8 PAT (%) (31.1) 22.1 16.7 27.6 EPS (%) (31.3) 21.8 16.7 27.6 Profitability EBITDA Margin (%) 9.7 11.2 11.5 12.0 PAT Margin (%) 6.6 7.6 7.9 8.9 RoCE (%) 12.2 13.5 14.3 16.2 RoE (%) 14.1 15.2 15.8 17.7 Balance Sheet Net Debt : Equity 0.1 Net Wrkng Cap. (days) (14) (28) (28) (28) Valuation PER (x) 28.8 23.6 20.2 15.9 P / B (x) 3.8 3.4 3.0 2.6 EV / EBITDA (x) 20.1 16.2 14.0 11.8 EV / Sales (x) 2.0 1.8 1.6 1.4 Earnings Quality Eff. Tax Rate 23.1 25.1 25.0 25.0 Other Inc / PBT 25.0 20.5 22.5 20.3 Eff. Depr. Rate (%) 8.3 7.8 8.1 6.4 FCFE / PAT 74.7 31.2 72.7 76.9 Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Shareholder's Funds 193,347 217,121 244,816 278,518 Total Debt 37,285 29,169 29,169 29,169 Other Liabilities 9,797 12,475 12,475 12,475 Total Liabilities 240,428 258,766 286,461 320,163 Net Fixed Assets 81,082 95,184 106,581 119,311 Goodwill Investments 131,382 135,204 150,204 170,204 Net Current Assets 27,169 28,329 29,626 30,599 Cash & Equivalents 20,648 22,970 25,723 28,689 Other Current Assets 96,337 110,766 119,673 130,338 Current Liabilities 89,816 105,407 115,770 128,428 Other Assets 796 50 50 50 Total Assets 240,428 258,766 286,461 320,163 Quarterly Financials (Rs m) Y/e March Q3FY16 Q4FY16 Q1FY17 Q2FY17 Net Revenue 110,083 107,717 110,408 105,091 EBITDA 12,425 10,739 12,855 11,331 % of revenue 11.3 10.0 11.6 10.8 Depr. & Amortization 2,960 3,206 3,117 3,340 Net Interest 397 381 242 257 Other Income 886 1,142 2,168 7,075 Profit before Tax 10,581 8,354 12,575 15,809 Total Tax 2,502 2,248 3,022 4,176 Profit after Tax 8,080 6,106 9,552 11,633 Adj. PAT 7,609 6,061 8,870 10,883 Key Operating Metrics PV & pick up sales (units) 399,177 433,064 472,784 534,050 Three wheeler sales (units) 56,764 54,975 53,876 54,953 CV sales (units) 8,910 6,059 7,028 7,907 Total automotive volume (units) 464,851 494,098 533,688 596,910 Tractor sales (units) 234,023 213,591 266,989 300,362 Total volume (units) 698,874 707,689 800,677 897,272 Realisation per vehicle (Rs) 542,172 570,825 566,697 576,382 Gross margin per vehicle (Rs) 150,089 159,934 157,705 162,101 EBITDA per vehicle (Rs) 53,520 64,579 65,864 69,827 Profit per vehicle (Rs) 36,521 44,030 45,458 51,727 Source: Company Data, PL Research. November 11, 2016 4
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