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Mahindra & Mahindra Market Impact Note Q3FY20 For Target Rs.701 - HDFC Securities
Key highlights of the quarter:
* M&M reported for Q3FY20 numbers, which were lower than market expectation. Revenue fell by 6.0% YoY owing to sharp fall in volumes due to subdued demand conditions, while EBITDA grew by 14.5% YoY due to better operating efficiency. However, PAT declined by 72.8% YoY, owing to one off impairment charge of ~Rs.6.0 bn for a major listed subsidiary. Adjusting for one off, the PAT would have fallen by 33.6% YoY.
* On the segmental basis, Automotive segment’s revenue fell by 6.2% YoY and Farm Equipment Segment’s (FES) revenue fell by 7.7% YoY. However, it witness improvement in EBIT margin for both segment, driven by better product mix and lower RM cost.
* The management expects domestic tractor industry to grow by 5-7% YoY in Q4FY20 and by 5% ( + 2%) in FY21. On the Automobiles, the management expects domestic passenger vehicle industry to grow at 2-4% YoY, commercial vehicle industry to grow by 4-6% YoY leading to overall industry growth of around 3-5% YoY.
* On the products, the management highlighted that company has started working on new tractor platform on which four new products of different HP ranges would be launched from mid-2021 onwards. In the auto electric vehicle segment, M&M plans to launch eKUV100 in Q1FY21, ATOM (last mile connectivity EV) in Q2FY21 and eXUV300 in Q2FY22.
* The management highlighted that its subsidiary company Ssangyong’s board has approved a three year business plan to achieve breakeven in CY22 through material cost reduction, synergy with M&M for new product development, increase in volumes through new export markets like Russia and Vietnam, personnel cost reduction through negotiation of compensation with labour union. Ssangyong would require 450-500 bn Korean won for loan repayment and new product development, which would be funded through a combination of external borrowing, investment from third parties and/or investment from the parent company, i.e. M&M.
View: M&M continued to see mixed performance where topline was impacted due to general slowdown in the industry, while increased focus on cost management and favorable product mix led to better operating performance. While auto industry is expected to see improvement in FY21, M&M is building its products pipeline, including in electric space, with series of products lined up for launch in coming years, which would help company to drive its revenue going ahead. While M&M is likely to see a near term pressure in the Auto segment due to its higher exposure to diesel vehicles, tractor segment is expected to perform well owing to better rabi sowing, higher MSPs and various government reforms targeting to improve rural income. We remain positive on the medium term potential of the company on the back of new product launches, healthy return ratios of 15% plus (i.e, RoCE in FY19) and attractive valuation. We maintain our Buy rating on the stock with the target price of Rs.701 at 13x FY21E EPS of Rs.37.9 adding Rs.209 as value of subsidiaries at 30% holding company discount. Any earning/target price revision would depend on the performance of new launches, improvement in market share, any regulatory changes, changes in the value of subsidiaries, rollover to next financial year and changes in general business momentum.
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