Mahindra & Mahindra shares: Smooth drive for tractors

Utility vehicles slow down on higher duty,fuel price and competition

Solid quarter; mixed outlook for Mahindra & Mahindra shares: M&M reported 31% year-on-year increase in Ebitda driven by 10% y-o-y growth in revenues and 240 bps y-o-y expansion in margin. Key surprise was 9% y-o-y improvement in tractor ASPs (average selling prices) despite a 5% y-o-y decline in volumes. We expect utility volume growth to slow down to single digit in FY2014e while tractor volume growth to accelerate due to expectations of normal monsoons and recovery in market share for M&M. Maintain Add rating on the stock.

Tractor growth outlook improves: The management was optimistic of the tractor volume growth outlook and indicated they see an upside potential of 6-8% y-o-y growth in tractor volumes for the industry in FY2014e. A strong surge in tractor demand in April and May 2013 has inspired confidence in industry growth. We forecast a 8% y-o-y increase in tractor volumes in FY2014e for industry and 13% y-o-y for M&M as we reckon M&M will gain share with growth rebounding in the western region where M&M has a higher market share. We expect M&M UV (utility vehicle) segment to remain flattish in FY2014e as we expect M&M to lose 400 bps market share in this segment. Automotive business growth is likely to be driven by light commercial vehicles and pick-ups. We expect the domestic UV/SUV segment to grow at 8-17% y-o-y over the next two years,slowing from 53% y-o-y growth in FY2013. We have cut our UV industry volume growth assumptions by 5% as we expect slower growth in volumes due to the reducing gap between diesel and petrol prices.

Sharp improvement in tractor ASPs: Adjusted M&M+ MVML (Mahindra Vehicle Manufacturers Ltd) profit of R8.7 billion (-4% y-o-y) was 23% ahead of our estimates. Net sales of R99.8 bn (+10% y-o-y) were 6% ahead of our estimates. Automotive revenues grew by 12% y-o-y while tractor revenues grew by 3% y-o-y (despite a 5% y-o-y decline). Automotive ASPs were flat y-o-y and improved 3% q-o-q despite decline in XUV500 in the mix. Tractor ASPs increased by 9% y-o-y and

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q-o-q despite a decline in tractor volumes. The company took a 2% price hike in the tractor segment during the quarter. Automotive Ebit increased by 29% y-o-y while tractor Ebit increased by 5% y-o-y aided by improvement in margins. Automotive Ebit margin improved by 120 bps q-o-q while tractor Ebit margin increased by 50 bps. We expect Ebitda margin to decline by 60 bps y-o-y in FY2014e as pressure on UV segment intensifies. We maintain our Add rating on the stock driven by expectations of strong recovery in tractor demand,which will offset weaker growth trajectory in the UV business. We have increased our earnings by 6-7% due to positive surprise in average selling prices in tractor and automotive divisions in Q4FY13. Our target price is R1,050 (versus R950 earlier) based on sum-of-the-parts valuation methodology.

Expect growth in UV segment to moderate: We expect the domestic UV/SUV segment to grow at 8-17% y-o-y over the next two years,slowing from 53% y-o-y growth in FY13. Weak economic growth,a hike in excise duties on SUVs from April 2013 and a narrowing gap between diesel and petrol prices are likely to result in slower growth of the segment. We expect M&M to lose 700 bps market share over the next two years due to new launches by competitors,notably Ford Ecosport (June 2013),Nissan SUV (Q4FY14) and Marutis SUV (Q4).

We expect Ford Ecosport to gain 7% market share due to its aggressive design and price point. M&M does not have any major launch in FY2014e and is likely to come out with its all-new Scorpio by end of FY2015e. M&M has lost market share to Renault Duster,which has continued to surprise us and currently has waiting periods. We estimate M&M domestic UV/ SUV volumes to grow by 5% CAGR over the next two years.

We forecast a decline in M&Ms average selling prices by 1% y-o-y in FY2014e,driven by (i) a higher share of the lower-priced Quanto in the product mix and (ii) a rise in discounts in Xylo,XUV500 and Scorpio. We expect Xylo and Scorpio volumes to be impacted by rising competition and expect discounts to rise to 2% of the sale price in these models in FY2014e.

Kotak Institutional Equities