Stellar Q2 on the back of improvement in automotive profitability
M&M’s standalone Q2FY18 revenues came in above street’s expectations at Rs122 bn, growing at 17% yoy and 5.2% sequentially. Automotive volumes in the quarter grew by 17.6% qoq and 9%yoy rising from the weakness of last quarter. While the auto revenues moved up by 1% yoy and 2.7% qoq, FES revenues zoomed up more than 12% yoy and fell by 8.4% qoq on seasonality. FES volumes moved up by 31% yoy, moving de-growing a bit by 4% qoq. On profitability front, EBITDA margins went up to 14.2% from 11.6% yoy and 10.9% qoq. Auto margins improvement was the highlight of the quarter, at 8.6% due to better product mix and tight cost control at other expenses & employee cost levels. Even FES margins zoomed up at 21.3% due to sharp surge in tractor margins along with the volumes offering operating leverage. While other income grew upwards qoq, tax rate moved up to 30%. PAT went up by 14.5% yoy and 73% qoq at Rs13.3 bn on operating outperformance.
Outlook and Valuation
M&M’s volume growth has picked up well in Q2 FY18. Going forward, new launches SUV segment will help the company to gain market share, which has been moving down the spiral since last several quarters. Better product mix in the form of new model launches will enable M&M to post elevated margins as it did in Q2 on the Auto business front. In line with the company’s thrusted efforts on the EV business which is the future of the auto industry, we believe the company to fetch first mover advantage. With new model Jivo in the FES business and upcoming model pipeline, the FES business is poised to report even better performance hereon. Additionally, on good monsoon this year, management has revised the tractor industry growth upwards for FY18E. Also with GOI’s added emphasis on the rural markets, we expect FY19E too to be a good year for the tractor industry. Margin performance to improve hereon as the company is bringing tighter control on other expenses and employee costs. Price hike would somewhat negate the impact of RM costs moving up. Lower losses at 2W subsidiary would aid the consolidated profitability. In view of this improved performance, we raise our target price to ₹ 1,678 which includes ₹ 505 of the subsidiary valuation. Maintain BUY.
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What started as one of India’s first securities brokerage houses in 1948 is today one of the country’s largest multi dimensional financial services group. LKP Securities is a Non Banking Finance Company (NBFC) registered with Reserve Bank of India & a listed public limited company having a networth of Rs.142 crores as on FY10. They are India's first financial group to be awarded the prestigious ISO 9002 certified KPMG Quality Registrar, USA, for certain businesses.
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