Above est.; Superior operating performance despite weak volumes
* Total volumes declined ~16% YoY. Realizations grew 2.1% YoY to ~INR571.3k (v/s est. ~INR580.2k). Net revenues (incl. MVML) declined 14.5% to ~INR109.4b (v/s est. ~INR111b). EBITDA margins declined 40bp YoY (flat QoQ) to 14.1% (v/s est. 12.2%). Margin beat was driven by better mix, price increases and lower RM costs. PBIT margins for Autos declined ~210bp YoY (-70bp QoQ) to 5.8% and for Tractors, it declined 90bp YoY (flat QoQ) to 19.3%. Adj. PAT declined 19% YoY to ~INR13.5b (v/s est. ~INR14.7b). It is yet to adopt new tax regime.
* 1HFY20 revenue/EBITDA/PAT has grown -9%/-16%/19%. CFO in 1HFY20 has declined ~90% due to weak operating performance and increase in working capital. With capex (incl. investments in subsidiaries) stable at ~INR27.9b, FCFF was negative at ~INR26.5b (v/s -INR11.5b in 1HFY19).
* Takeaways from the earnings call:
(a) MM’s festive season retail sales for Tractor declined 4%, while it grew 23% for the Auto segment;
(b) 2HFY20 PV industry outlook - UVs to grow 12-13%, cars to decline 8-10% and overall PVs to decline 5-6%;
(c) Tractors should decline 7-8% (v/s earlier guidance of up to 5% decline) in FY20;
(d) Inventory – Autos 5-6k units short of target and Tractors are at targeted level but would further reduce by 1-1.5k in 3QFY20; and
(e) It has reduced discounts in Auto segment post the festive season.
* Valuation and view
We are upgrading our EPS estimates by 8-9% to factor in the strong margins. M&M’s UV business is facing cyclical headwinds, along with rise in competitive intensity. Further, we expect it to face headwinds in the diesel portfolio during the BS6 transition. The stock trades at implied core P/E of ~11.3x/10.4x. Maintain Buy with TP of ~INR680 (Sep’21 SOTP-based)
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