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Marazzo launch cost and RM inflation take a toll on margins
* Volumes grew by 3.7% YoY, with UV volumes increasing 5% YoY and Tractors volumes declining 4% YoY. Realizations grew 2.6% YoY (-0.9% QoQ) to ~INR559.5k (our estimate: INR563.7k). Net sales (incl. MVML) increased 6.4% YoY to INR127.9b (in-line). EBITDA declined 4% YoY to INR18.5b (our estimate: INR19.7b), with the margin contracting 150bp YoY (-130bp QoQ) to 14.5% (our estimate: 15.3%). Auto PBIT margin shrank 160bp QoQ (-270bp YoY) to 7.9%. Tractor EBIT margin contracted 110bp QoQ (-70bp YoY) to 20.2%. Adj. PAT increased 19% YoY (+35% QoQ) to INR16.7b (our estimate: INR13.9b).
* Takeaways from the earnings call:
(a) Tractors industry to grow 12-14% in FY19 (biased toward lower end v/s upper end earlier, with YTD Oct-18 growth at ~12.5%). (b) Expects PV industry growth of 7-8% in FY19 (v/s 10% earlier) – witnessed growth during festive season (Navratri and Diwali combined). (c) PV demand: Rural grew at 9-10% (~51% of sales) v/s flat urban growth. (d) New launch: Alturas G4 (Nov-24), S201 (petrol & diesel) and Furio ICV (4Q), Jawa2W and EV 3WTreo (Nov-15). (e) Reached full production capacity for Marazzo (~130-150 units/day), with ~13.5k bookings currently and a waiting period of 6- 8 weeks. (f) New product launch impact of ~50-70bp and RM inflation impact of ~250bp in 2QFY19.
* Valuation and view :
While we maintain the FY20 EPS estimate, our FY19 consol. EPS estimate is lowered by 4.9% to factor in lower volumes in Auto/farm business and higher other expense. The stock trades at 16.4x FY20E and 14.2x core EPS. Maintain Buy with an SOTP-based TP of INR1,016 (Sep-20).
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