Challenges to persist; Downgrade to Hold
MM’s 1QFY20 performance exceeded expectations on all grounds, with standalone (S/A) EBITDA margins at 12.6% (PLe: 12%). We believe, not only MM is highly exposed to BS6 transition and related cost increase challenge (with ~90% of its product portfolio is diesel dependent) but also increasing competion in its core forte (UV2 segment due to MG) to also dent auto segment performance. Additionally, with tractor segment contribution is expected to decline over FY20/21, margin profile too is expected to deteriorate with S/A FY20/21 margins at 12.3%/11.7%. With significant correction in valuations, we downgrade the stock to Hold with price target of INR547 (based in 12x Mar’21E core PE plus value of investment in key subsidiaries).
Key upside risk:
1) Higher than expected growth in tractor volumes led by better spread out of monsoon and
2) GST rate cut in key business segments.
* S/A performance above estimates: Revenues declined 4.4% YoY (-8% QoQ) at Rs129.2b (in-line), led by volume decline of 9.5%. Blended realization grew 5.6% YoY (-0.5% QoQ) to Rs592.7k/unit (PLe: 586.5k/unit). Gross margins came in line at 29%, lower than expected decline in other expense at 10.5% (PLe: 11%) led to EBITDA margins beat at 12.6% (PLe: 11%), contracting 120bp YoY (-90bp QoQ). Adjusting for exceptional gain on sale of share by MM trust worth ~Rs13.6bn, net profit for the company stood at Rs11.6bn, down 4% YoY (PLe of ~Rs9bn).
* M&M + MVML performance: Revenues fell 4% YoY at Rs128bn, with OPM at 14% (-180bps YoY/ +50bps QoQ). Adj. PAT grew 4.6% YoY to Rs12.9bn.
* S/A segmental performance: Auto segment realization increased 5.3% YoY (2.9% QoQ) to Rs615k/unit, with margins declining ~200bp YoY and QoQ to 4.7%. These was led by negative operating leverage and product mix impact Farm realization increased 2.2% YoY (-3.6% QoQ) to INR507.5k/unit.
* Ssangyong loss was led by lower revenues due to lower volumes in its domestic and exports markets. As indicated by the management, along with significant slowdown in Korean markets many exports markets too have witnessed slowed down.
* Key takeaways from the con-call:
(1) The management has guided for flat volume growth in FY20 (residual growth at 6-8%).
(2) Tractor market share flat at 44.3% YoY.
(3) Not witnessing any serious issue as dealers are well capitalized.
(4) RM price declined by ~5% in 1QFY20. Expect benign RM to help margins in coming quarters too.
(5) Small price increase in both automotive and tractor segment helped realizations growth.
(6) Auto PBIT margin impacted by higher negative operating leverage and inferior product mix.
(7) The loss in Ssangyong were led by slowdown in its domestic and exports markets. Ssangyong was EBITDA positive.
(8) The latest cut in GST on EV should help bring demand from 3W and shared mobility segments.
(9) Peugeot – Investing money in EV. 2W EV will be made in India and exported to Europe for which first shipment to start soon.
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