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In-line; Auto margins recover, Tractor stable
* MM’s 3QFY20 performance was in line with our expectation at the operating level, with margin improving led by a better mix and lower RM cost. While Tractor outlook is improving, Auto business could face BS6 transitory pain along with intense competition in SUVs.
* We maintain our EPS estimate for FY20/21. Near-term performance is expected to be a mixed bag, which is largely in the price. We maintain Buy as valuations are very cheap (implied core P/E of 9.6x/8.6x FY20/21E).
Op. performance broadly in line, EBIT flat YoY; one-offs distort PAT
* M&M (incl. MVML) revenue/adj. PAT declined 1%/26% YoY, while EBITDA was up 5% YoY in 3QFY20. For 9MFY20, revenue/EBITDA/adj. PAT was down 8%/9.5%/24% YoY.
* Net realization grew ~1.5% YoY (-2% QoQ) to ~INR559k (est. of INR566k).
* Gross margin improved ~190bp YoY (-130bp QoQ) to 32.7% (est. of 33.6%), driven by lower commodity prices and a favorable mix in Auto.
* EBITDA margin expanded 160bp YoY (+60bp QoQ) to ~14.8% (est. of ~15%). Sequential improvement in the EBITDA margin, despite a lower gross margin, was driven by operating leverage (+13% QoQ volume growth).
* EBIT was flat YoY at ~INR12b (est. of ~INR12.5b). Auto PBIT margin improved 150bp YoY/QoQ to ~7.3% led by mix. Tractor PBIT margin improved 20bp YoY (+10bp QoQ) to ~19.4%, as the benefit of commodity prices was offset by the inventory reduction impact.
* Adj. PAT declined 26% to ~INR8.5b (est. of ~INR11.1b).
Highlights from management commentary
* Inventory for Auto was lower than normal and for tractors at normal level (Dec’19). It plans to stop BS4 production by third week of Feb’20.
* FY21 outlook: (a) PVs: 2-4% growth, (b) CVs: 4-6% growth and (c) Tractors: 5% growth (FY20 decline of 7% based on 5-7% growth in 4QFY20).
* MM has a strong product pipeline for Auto: (a) e-KUV100 (1QFY21), (b) new Thar (1QFY21), (c) Atom (e-quadricycle, 2QFY21), (d) W601 (crossover SUV, 4QFY21), (e) new Scorpio (1QFY22) and (f) e-XUV300 (mid-CY21). In Tractors, it plans to launch the new platform K2 (developed with Mitsubishi) in mid-CY21 with launches spanning over two years across four HP range.
* Capex (incl. investment in subs): It has lowered guidance to ~INR170b over three years (v/s ~INR180b earlier) based on savings of ~INR10b already realized through Ford JV. Based on the expected further savings from the Ford JV, capex could further reduce to ~INR150b.
* For BS6 petrol UVs, it has taken price hike of ~INR20k, which is for BS6 cost (incl. contribution margin). For diesel BS6, it expects cost increase of INR50- 70k, but the extent of pass through would depend on competitive intensity.
Valuation and view
MM’s UV biz is facing BS6 challenges for its diesel portfolio and also intense competition. However, Tractor appears to be recovering. Valuations at ~14.2x/12.8x FY21/22E EPS largely factor in risks in UV. Buy with a TP of INR686.
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