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Mahindra and Mahindra Q2FY12 Result Update

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					                                                                                                            Mahindra & Mahindra Ltd.




                                                                                                                                                                                                     Result Update
                                                                                                            Volume momentum to continue, Retain BUY

November 14, 2011
                                                                                       ¾   Adj EBIDTA/APAT (M&M+MVML) at Rs 9.8bn/Rs7.9bn is below
Reco                                             Previous Reco
                                                                                           our est. of Rs. 10.3bn/Rs8.3bn, largely due to M&M. M&M
Buy                                                                           Buy
                                                                                           disappointed with margins of 12.3% vs. est. of 13%
CMP                                                  Target Price
Rs 790                                                                 Rs 930          ¾   Demand outlook remains strong. Margin pressure to continue
EPS change FY12E/13E (%)                                               -3.9 /0.3
                                                                                           on higher production from MVML. RM cost pressures yet to
Target Price change (%)                                                    NA              play out fully.
                                                                         5,148
Nifty                                                                                  ¾   Raise M&M vol. est. by 5.7%/7.1% but lower EBITDA margins
                                                                        17,119
Sensex
                                                                                           by 140 bps in FY12/13. Raise MVML volumes ~2%/17%. Lower
Price Performance                                                                          FY12 EPS of M&M by 4% (Rs. 45.1), retain FY13 EPS (Rs. 53.6)
(%)                                     1M       3M           6M 12M
                                        (2)        7           17             2
                                                                                       ¾   Maintain TP at Rs. 930. Valued standalone business at Rs.
Absolute
Rel. to Nifty                           (2)        5           25             20           720, MVML at Rs. 65 (from Rs. 45) and listed subs at Rs. 145.
Source: Bloomberg                                                                          Key risks - complex business structure and loss at Ssangyong

Relative Price Chart
875     Rs                                                                %    30      Net Sales – Marginally below est.
810                                                                            20      Net sales at Rs 73.6bn was marginally below our est. of Rs 74.2bn. Average selling price
745                                                                            10      at Rs 428,047 was up 5.8% YoY, but declined 0.3% QoQ. Our estimate of ASP was Rs
680                                                                            0
                                                                                       431,400. Other operating income was also above our estimate
615                                                                            -10
                                                                                       Product Mix %                  Q2FY11         Q3FY11         Q4FY11         Q1FY12              Q2FY12
550                                                                            -20
 Nov-10      Jan-11       Mar-11        May-11    Jul-11      Sep-11                   UV's /Pick ups                     48.0            46.6            48.8           48.6             51.0
                      Mah & Mah (LHS)             Rel to Nifty (RHS)

                                                                                       Three Wheelers                     14.4            10.6            11.0            9.0             11.2
Source: Bloomberg
                                                                                       Tractors                           32.2            37.3            35.1           36.8             31.8
Stock Details
                                                                                       Export                              5.4             5.5             5.1            5.6              6.1
Sector                                                     Automobiles
Bloomberg                                                              MM@IN           Units Sold                     131,285        148,631        160,511        155,390             170,701

Equity Capital (Rs mn)                                                    3070         Source: Company, Emkay research

Face Value(Rs)                                                                     5
                                                                                       Adj. EBIDTA – ~7% below est. (incl. MVML ~5% below est.)
No of shares o/s (mn)                                                         614
                                                                                       Adjusted EBIDTA at Rs 9bn (margin of 12.3%) was below our est. of Rs 9.8bn (margin of
52 Week H/L                                                            875/584
                                                                                       ~13%) primarily driven by higher production in MVML subsidiary. This led to
Market Cap (Rs bn/USD mn)                                       485/9,645
                                                                                       traded/purchased goods to sales at ~12.1% vs our est. of ~10.6%. Staff cost at Rs 4.3bn
Daily Avg Volume (No of sh)                                        2052510             and other expenses at Rs 6.8bn (adjusting for MTM forex loss of Rs 320mn) were in line
Daily Avg Turnover (US$mn)                                                    31.8     with est. M&M + MVML EBITDA at Rs 9.8bn (adjusting for forex loss of Rs 320mn) was
                                                                                       also lower than our est. of Rs 10.3bn.
Shareholding Pattern (%)
                              Sep-11 Jun-11 Mar-11                                     APAT- ~4% below est. (incl. MVML ~3% below est.)
Promoters                           25.2               24.9                   24.9     Standalone APAT at Rs 7.7bn (our est. Rs 8bn) benefited from higher other income and
FII/NRI                             36.7               33.8                   32.7     lower tax rates. Company had a seasonal dividend income of Rs 1.4bn (est. Rs 1.2bn)
Institutions                        20.6               22.6                   23.6     from subsidiaries which led to higher other income of Rs 2.3bn (our est. Rs 2.1bn).
Private Corp                            9.4            10.3                   10.2     Effective tax rate at ~23.6% was also lower than our est. of ~26% due to higher other
Public                                  8.2                8.5                 8.6     income. Depreciation expense at Rs 1.3bn was higher than our est. of Rs 1.1bn. APAT
Source: Capitaline
                                                                                       incl. MVML was ~3% below est. due to better operating performance in MVML.

                                                                                       Financial Snapshot
                                                                                       YE-          Net         EBITDA                     EPS     EPS      RoE                 EV/
Chirag Shah                                                                            Mar          Sales    (Core)      (%)     APAT      (Rs)   % chg      (%)   P/E      EBITDA        P/BV
chirag.shah@emkayglobal.com
                                                                                       FY10       185,296    28,828      15.6    19,459    31.7   145.3     29.8   24.9         15.0       6.2
+91 22 6612 1252
                                                                                       FY11       233,119    33,003      14.2    23,887    38.9    22.8     26.3   20.3         12.4       4.7
Siddhartha Bera                                                                        FY12E      309,394    37,357      12.1    27,685    45.1    15.9     24.5   17.5         10.5       4.0
Siddhartha.bera@emkayglobal.com                                                        FY13E      372,576    43,747      11.7    32,911    53.6    18.9     24.6   14.7          8.4       3.3
+91 22 6624 2494
                                                                                       Source: Company. Emkay Research


Emkay Global Financial Services Ltd                                                                                                                                                              1
                                                 Mahindra & Mahindra                                                       Result Update


  Quarterly Summary
  Rs mn                            Q2FY11    Q3FY11    Q4FY11    Q1FY12       Q2FY12    YoY (%)    QoQ (%)    YTD'12    YTD'11    YoY (%)
  Revenue                           53,635    61,211    67,782    67,335       73,606      37.2        9.3    140,942   105,236      33.9
  Expenditure                       45,135    51,973    59,163    58,362       64,547      43.0       10.6    122,909    88,980      38.1
  as % of sales                       84.2      84.9      87.3      86.7         87.7                            87.2      84.6
  Consumption of RM                 36,494    42,358    47,883    48,336       53,414      46.4       10.5    101,751    72,399      40.5
  as % of sales                       68.0      69.2      70.6      71.8         72.6                            72.2      68.8
  Employee Cost                      3,323     3,475     4,261     4,034        4,302      29.4        6.6      8,335     6,460      29.0
  as % of sales                        6.2       5.7       6.3         6.0        5.8                             5.9       6.1
  Other expenditure                  5,318     6,140     7,020     5,992        6,831      28.5       14.0     12,823    10,121      26.7
  as % of sales                        9.9      10.0      10.4         8.9        9.3                             9.1       9.6
  EBITDA                             8,500     9,238     8,619     8,973        9,060       6.6        1.0     18,033    16,256      10.9
  Depreciation                        970      1,022     1,171     1,099        1,257      29.6       14.4      2,356     1,946      21.1
  EBIT                               7,530     8,216     7,448     7,875        7,802       3.6       (0.9)    15,677    14,310       9.6
  Other Income                       1,998      419       474          249      2,315      15.9      830.9      2,564     2,203      16.4
  Interest                            (91)      (27)     (158)         (20)       49     (154.0)    (344.5)       29      (318)    (109.1)
  PBT                                9,618     8,662     8,080     8,143       10,069       4.7       23.6     18,212    16,830       8.2
  Total Tax                          2,483     2,490     2,015     2,095        2,376      (4.3)      13.4      4,470     4,071       9.8
  Adjusted PAT                       7,135     6,172     6,065     6,049        7,693       7.8       27.2     13,742    12,759       7.7
  (Profit)/loss from JV's/Ass/MI         -         -         -            -         -                               -         -
  Adj.PAT after MI                   7,135     6,172     6,065     6,049        7,693       7.8       27.2     13,742    12,759       7.7
  Extra ordinary items                467      1,175         -            -         -       467                     -      467     (100.0)
  Reported PAT                       7,602     7,347     6,065     6,049        7,693       1.2       27.2     13,742    13,226       3.9
  Reported EPS                        12.4      12.0       9.9         9.9       12.5       1.2       27.2       21.8      21.0       3.8


  Margins (%)                                                                             (bps)      (bps)                          (bps)
  EBIDTA                              15.8      15.1      12.7      13.3         12.3     (354)      (102)       12.8      15.4     (265)
  EBIT                                14.0      13.4      11.0      11.7         10.6     (344)      (109)       11.1      13.6     (247)
  EBT                                 17.9      14.2      11.9      12.1         13.7     (425)        159       12.9      16.0     (307)
  PAT                                 13.3      10.1       8.9         9.0       10.5     (285)        147        9.8      12.1     (237)
  Effective Tax rate                  25.8      28.7      24.9      25.7         23.6     (222)      (213)       24.5      24.2        36



                                               Segmental performance- MVML supports margins
                                               MVML (100% subsidiary) reported net profits at Rs 242mn in line with our est. Strong
                                               operating performance benefited earnings despite a weaker top line. Net Sales/EBIT were Rs
                                               660mn/558mn vs our est. of Rs 957/540mn. Higher incentives from state government due to
                                               higher production at MVML led to improved operating performance. Margin pressure was felt
                                               across both automotive and Farm equipment segments with a decline of 80 bps/70 bps QoQ.




Emkay Research          14 November 2011                                                                                                     2
                                     Mahindra & Mahindra                                                              Result Update


                                     Segmental details (Rs mn)              Q2FY11       Q3FY11       Q4FY11      Q1FY12    Q2FY12
                                     Farm Equipment
                                     Tractor (Units)                         45,508       58,608       59,388      60,152    57,394
                                     Net Sales (Rs mn)                       20,850       26,383       27,997      28,615    28,260
                                     Avg realizations                       458,159      450,157      471,418     475,708   492,379
                                     Results (Rs mn)                          3,561        4,872        4,756       4,574     4,325
                                     Margins %                                 17.1         18.5         17.0        16.0      15.3
                                     Capital Employed (Rs mn)                13,436       11,324       10,316      12,927    19,406
                                     ROCE %                                    26.5         43.0         46.1        35.4      22.3
                                     Automotive
                                     UVs and 3-wheelers (units)              85,777       90,023      101,123      95,238   113,307
                                     Net Sales (Rs mn)                       33,239       34,716       39,598      38,579    45,177
                                     Avg realizations                       387,502      385,634      391,581     405,084   398,716
                                     Results (Rs mn)                          4,473        4,266        4,182       4,139     4,481
                                     Margins %                                 13.5         12.3         10.6        10.7       9.9
                                     Extraordinary inc/(exp)                   726             -            -           -         -
                                     Capital Employed (Rs mn)                25,869       28,856       27,548      29,365    33,923
                                     ROCE %                                    17.3         14.8         15.2        14.1      13.2
                                     MVML
                                     Net Sales (Rs mn)                         240          386         1247         874        660
                                     Results (Rs mn)                            60          283          729         490        558
                                     Margins (%)                               25.0         73.3         58.4        56.0      84.5
                                     Net Profit (Rs mn)                         14          236          682         134        242
                                     Capital Employed (Rs mn)                16,401       17,473       18,609      18,947    19,463
                                     ROCE(%)                                    0.4          1.6          3.9         2.6       2.9



                                    Revision in Estimates
                                    Given the strong volume momentum across segments, we increase our volume estimates by
                                    5.7%/7.1% in FY12/13. Our volume upgrade in UV segment is largely driven by XUV5OO est.
                                    of 15,000 units/37,500 units in FY12/13. Adjusting for the same, we forecast UV segment
                                    growth at ~10% for FY13. Our net sales est. is revised upwards by 7%/11% in FY12/13. We
                                    factor in margin pressure in the standalone business due to higher production in MVML and
                                    input cost pressures. We increase our production est. for MVML by ~2%/17% in FY12/13 to
                                    94,700 units/134,100 units. We lower our net profit for M&M by ~4% in FY12 to Rs 27.7bn
                                    while maintain our FY13 est. at Rs 32.9bn.

                                                                               FY12E                              FY13E
                                     Volumes
                                                                  Earlier     Revised % Change          Earlier   Revised % Change
                                     Uv's                         344,268      360,508         4.7     401,219    434,578       8.3
                                     Three Wheelers (Inc Gio)      65,339       68,639         5.1      71,175     71,731       0.8
                                     Tractors                     232,052      246,176         6.1     259,898    275,718       6.1
                                     Exports                       33,059       37,737        14.2      38,416     43,679      13.7
                                     Total                        674,717      713,061         5.7     770,708    825,706       7.1
                                     Sales ( Rs. Mn)              289,265      309,394         7.0     335,205    372,576      11.1
                                     EBIDTA ( Rs. Mn)              38,937       37,357        (4.1)     43,746     43,747       0.0
                                     EBIDTA margins (%)              13.5         12.1                    13.1       11.7
                                     Net Profits (Rs Mn)           28,822       27,685        (3.9)     32,807     32,911       0.3
                                     EPS                             46.9         45.1        (3.9)       53.4       53.6       0.3




Emkay Research   14 November 2011                                                                                                     3
                                     Mahindra & Mahindra                                                            Result Update


                                    Valuations and View
                                    We have valued the company on SOTP basis. We have valued the standalone business at Rs
                                    720 (down ~1%) which implies ~8x FY13E EV/EBIDTA. We increase the value of MVML
                                    business to Rs 65 (vs Rs 45 earlier) to factor in higher production from MVML. We have valued
                                    the listed subsidiaries and Tech Mahindra at Rs 145 per share (vs Rs 160 earlier).

                                    Valuation Summary
                                                                                                            Value per share (Rs)
                                     Particulars                           Basis              Discount
                                                                                                                   FY13E
                                     M&M                              EV/EBIDTA (8x)                                720
                                     MVML *                          EV/EBITDA (7.5x)                               65
                                     Listed Subsidiaries
                                     Mahindra Finance                      CMP                   20                 50
                                     Mahindra Forgings                     CMP                   20                  4
                                     Mahindra Life                         CMP                   20                  8
                                     Mahindra Holidays                     CMP                   20                 29
                                     Mahindra Ugine                        CMP                   20                  1
                                     Tech Mahindra                         CMP                   20                 52
                                     Total                                                                          930
                                    * Source: Annual Report FY10


                                    Key extracts from the con call
                                    n    Demand remains strong and all plants are operating at full capacity. Company is facing
                                         production constraints in MDI engine supply. Pick up sales could have been higher by
                                         ~2,000 to 2,500 units per month but for constraints. Management expects supply
                                         constraints to be resolved from mid-February.

                                    n    Tractor demand continues to surprise positively. Expect some moderation in H2FY12 vs
                                         H1FY12. Upgrade industry growth to ~17-18% in FY12..

                                    n    Tractor capacity is adequate and there are no constraints currently. Oct. inventory levels
                                         are low.

                                    n    Lower HP tractor Yuvraj continues to do well with a run-rate of ~1,200-1,300 per month.
                                         Also, contribution from >40 HP segment continues to rise leading to higher average selling
                                         prices. New emission norms have come into effect for >50 HP tractors from Oct. onwards.
                                         However, do not expect to impact demand significantly due to low contribution (~9.5%)
                                         and demand shift to lower HP tractors due to price sensitive nature of the customer.

                                    n    No visible shift is seen in financing levels of tractors (~75%).

                                    n    MVML net debt is at Rs 9bn. This is over and above working capital debt

                                    n    XUV5OO: Demand is robust. Plan to gradually ramp up production capacity from ~2,000
                                         units in Nov, ~2,500 in Dec, 3,000 in Jan to ~5,000 by end of June 2012. Further ramp up
                                         would depend on sustainability of demand going ahead.

                                    n    Management expects commodity prices to moderate in H2FY12 but do not see decline
                                         from current levels. Expects margins pressure to continue though per unit EBIDTA may
                                         not be under pressure.




Emkay Research   14 November 2011                                                                                                     4
                                                     Mahindra & Mahindra                                                          Result Update


  Financials

 Income Statement                                                              Balance Sheet
 Y/E, Mar (Rs. mn)                   FY10        FY11     FY12E      FY13E     Y/E, Mar (Rs. Mn)              FY10      FY11     FY12E     FY13E
 Net Sales                         185,296     233,119   309,394    372,576    Equity share capital           2,910     3,276     3,276     3,276
 Growth (%)                           42.0        25.8      32.7       20.4    Reserves & surplus            75,393    99,858   119,196   142,184
 Expenditure                       156,469     200,116   272,038    328,829    Minority Interest             78,302   103,134   122,472   145,460
 Materials Consumed                123,462     162,633   226,065    275,139    Net worth                          -         -         -         -
 Employee Cost                      11,985      14,197    17,181     19,814    Secured Loans                  6,025     4,072     4,072     4,072
 Other Exp                          21,022      23,287    28,792     33,875    Unsecured Loans               22,777    19,981    19,981    17,981
 EBITDA                             28,828      33,003    37,357     43,747    Loan Funds                    28,802    24,053    24,053    22,053
 Growth (%)                          175.1        14.5      13.2       17.1    Net deferred tax liability     2,403     3,544     3,544     3,544
 EBITDA margin (%)                    15.6        14.2      12.1       11.7    Total Liabilities            109,507   130,731   150,069   171,056
 Depreciation                        3,708       4,139     4,616      5,138
 EBIT                               25,120      28,864    32,740     38,610    Gross Block                   52,763    62,277    73,277    80,277
 EBIT margin (%)                      13.6        12.4      10.6       10.4    Less: Depreciation            25,378    28,417    33,034    38,172
 Other Income                        1,994       3,095     3,497      4,414    Net block                     27,385    33,860    40,243    42,106
 Interest expenses                     278       (503)     (191)      (280)    Capital work in progress       9,642     9,859     9,000     9,000
 PBT                                26,835      32,462    36,428     43,304    Investment                    63,980    93,253   109,253   127,253
 Tax                                 7,376       8,575     8,743     10,393    Current Assets                60,424    61,435    80,661   100,241
 Effective tax rate (%)               27.5        26.4      24.0       24.0    Inventories                   11,888    16,942    22,963    27,657
 Adjusted PAT                       19,459      23,887    27,685     32,911    Sundry debtors                12,581    13,547    19,289    23,232
 Growth (%)                          145.3        22.8      15.9       18.9    Cash & bank balance           17,432     6,146     6,917    11,640
 Net Margin (%)                       10.5        10.2       8.9        8.8    Loans & advances              18,014    23,732    30,425    36,645
 (Profit)/loss from JV's/Ass/MI           -          -          -          -   Other current assets            509      1,067     1,067     1,067
 Adj. PAT After JVs/Ass/MI          19,459      23,887    27,685     32,911    Current lia & Prov            51,965    67,676    89,089   107,543
 E/O items                           1,418       2,734          -          -   Current liabilities           34,000    47,617    55,898    67,568
 Reported PAT                       20,878      26,621    27,685     32,911    Provisions                    17,965    20,059    33,191    39,976
 Growth (%)                          149.5        27.5       4.0       18.9    Net current assets             8,458   (6,241)   (8,428)   (7,302)
                                                                               Misc. exp                        41          -         -         -
                                                                               Total Assets                 109,507   130,731   150,069   171,056


 Cash Flow                                                                     Key Ratios
 Y/E, Mar (Rs. mn)                   FY10        FY11     FY12E      FY13E     Y/E, Mar                       FY10      FY11     FY12E     FY13E
 PBT (Ex-Other income)              24,842      29,367    32,931     38,890    Profitability (%)
 Depreciation                        3,708       4,139     4,616      5,138    EBITDA Margin                   15.6      14.2      12.1      11.7
 Interest Provided                     278       (503)     (191)      (280)    Net Margin                      10.5      10.2       8.9       8.8
 Other Non-Cash items                6,032       1,956                     -   ROCE                            26.8      26.6      25.8      26.8
 Chg in working cap                 (4,119)      3,413     2,957      3,597    ROE                             29.8      26.3      24.5      24.6
 Tax paid                           (7,376)    (8,575)    (8,743)   (10,393)   RoIC                           162.1     144.7     141.2     160.7
 Operating Cashflow                 23,365      29,798    31,571     36,952    Per Share Data (Rs)
 Capital expenditure                (6,999)    (9,731)   (10,141)    (7,000)   EPS                             31.7      38.9      45.1      53.6
 Free Cash Flow                     16,366      20,067    21,430     29,952    CEPS                            37.7      45.6      52.6      62.0
 Other income                        1,994       5,829     3,497      4,414    BVPS                           127.5     168.0     199.5     236.9
 Investments                        (8,449)   (33,448)   (16,000)   (18,000)   DPS                              9.4      10.8      11.2      13.3
 Investing Cashflow                 (6,456)   (27,619)   (12,503)   (13,586)   Valuations (x)
 Equity Capital Raised                 118        366           -          -   PER                             24.9      20.3      17.5      14.7
 Loans Taken / (Repaid)            (11,726)    (4,749)        (0)    (2,000)   P/CEPS                          20.9      17.3      15.0      12.8
 Interest Paid                       (278)        503        191        280    P/BV                             6.2       4.7       4.0       3.3
 Dividend paid (incl tax)           (6,238)    (8,026)    (8,347)    (9,923)   EV / Sales                       2.3       1.8       1.3       1.0
 Income from investments                  -          -          -          -   EV / EBITDA                     15.0      12.4      10.5       8.4
 Others                             10,103       8,173          -          -   Dividend Yield (%)               1.2       1.4       1.4       1.7
 Financing Cashflow                 (8,021)    (3,733)    (8,156)   (11,642)   Gearing Ratio (x)
 Net chg in cash                     1,890    (11,286)       770      4,723    Net Debt/ Equity                0.00      0.09    (0.00)    (0.10)
 Opening cash position              15,618      17,432     6,146      6,917    Net Debt/EBIDTA                 0.00      0.29    (0.00)    (0.34)
 Closing cash position              17,432       6,147     6,917     11,640    Working Cap Cycle (days)     (18.78)   (26.82)   (16.10)   (16.34)



Emkay Research              14 November 2011                                                                                                        5
                                                                       Mahindra & Mahindra                                                                                                   Result Update



                                                                       Recommendation History: Mahindra and Mahindra – MM IN

                                                                         Date                Reports                                                                   Reco                    CMP        Target

                                                                         07/09/2011          Auto Sector Report_Cruising through barriers

                                                                         08/08/2011          Mahindra and Mahindra 1QFY12 Result Update                                Buy                      666            780

                                                                         30/05/2011          M&M 4QFY11 Result Update                                                  Buy                      665            810

                                                                         09/02/2011          M&M Q3FY11 Result Update                                                  Buy                      654            830


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Emkay Research                 14 November 2011                                                                                                                                   www.emkayglobal.com

				
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