For 3QFY2009, Mahindra and Mahindra (M&M) clocked net sales of Rs2,519 crore, which was above our expectation.
Growth was aided by 9% y-o-y growth in average realization per vehicle while core business Volumes were down by 21.7% primarily due to overall slowdown witnessed in Auto industry.
The company’s bottomline for the quarter at Rs1.2 crore was much below our expectation mainly due to lower OPM and foreign currency losses of Rs120 crore (Rs9.2 crore net of tax).
EBITDA margins witnessed a sharp 760bp y-o-y decline owing to higher raw material costs, which increased by 453bp y-o-y and accounted for over 71.9% of sales (67.4% in 3QFY2008). M&M’s raw material costs increased substantially y-o-y mainly due to high-cost inventory.
Reported net profit stood at Rs1.2 crore during the quarter. Net Profit post adjusting for exchange loss on FCCBs and ECBs to the tune Rs30.4 crore stood at Rs31.6 crore, a decline 86.3% y-o-y. Higher other income of Rs43.6 crore (Rs30.1 crore) restricted further decline in net profit.
Outlook and valuation
Reduced financing by banks and NBFCs continues to hurt the domestic business. Management has guided higher production at its Rudrapur plant to reap the benefits of lower excise and income tax. This will improve performance of its Farm Equipment Division.
However, owing to disappointing performance of its auto division, we have modeled almost flat CAGR in topline for M&M over FY2008-10E. At the same time, margin pressure would result in negative CAGR of 7% over FY2008-10E.
M&M has substantial investments on its books including some of its key subsidiaries, which may get impacted due to overall slowdown in the domestic and overseas market.
We believe that M&M’s non-automotive subsidiaries like Tech Mahindra, Mahindra Financial Services (MMFSL) and Mahindra Gesco may get impacted more and are at high risk.
On account of the uncertain business scenario, we value M&M’s key subsidiaries at 30% discount, while calculating SOTP valuation for M&M. At Rs291, M&M is trading at 13.2x FY2009E and 9.2x FY2010E earnings.
Our SOTP Target Price for M&M works out to Rs336 wherein its core business fetches Rs207 and value of investments works out to Rs129. We maintain a BUY on the stock, with a target price of Rs336.