Mahindra & Mahindra
Cluster: Apple Green
Recommendation: Hold
Price target: Rs676
Current market price: Rs689
Q3FY2012 results: First-cut analysis
Result highlights
Q3FY2012 PAT in line adjusted for one time exchange reversal
Our profit after tax (PAT) estimate for Mahindra & Mahindra (M&M) at Rs625 crore was the lowest among the consensus estimates. The company reported a standalone PAT of Rs662 crore. This includes a one time gain of Rs39.86 crore related to reversal of an exchange difference charge. Adjusting for this extraordinary gain, the company reported a post tax PAT of Rs635 crore, marginally higher than our estimates.
Positive surprises
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The company reported a 30bps sequential improvement in the earnings before interest tax (EBIT) margin for the tractor business. Our concerns of deteriorating profitability in tractors due to raw material price escalations were unfounded.
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A favourable operating leverage was witnessed in staff costs which moderated to 5.4% of sales - the lowest in the last six quarters.
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Other expenses after adjusting for Rs39.86 crore exchange reversal were the lowest ever for any quarter at 8.6% to sales.
Negative surprises
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The Q3FY2012 automotive EBIT was the lowest in the last two years at 8.2%, ie lower by 170bps quarter on quarter (QoQ), in spite of a 10% sequential jump in automotive realisations. The lower EBIT margins would also have a higher depreciation effect post the launch of the XUV5OO. However margin pressure due to cost escalation was quite evident.
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The Q3FY2012 raw material (RM)/sales at 74.3% was the highest ever for any quarter. This was on account of very aggressive pricing of the XUV5OO and limited ability to take price increases in the tractors segment.
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The operating margin adjusting for exchange reversal was the lowest in the last two years at 11.7%.
Outlook and valuation
The demand for tractors and automotive profitability are our key concerns related to the company. The company has guided for a 17-18% tractor growth for FY2012 which in all probability is likely to be lowered. On the automotive side, the company took a 3% price hike from January 2012 to protect margins. We will incorporate inputs from the management during the results conference call to revise our estimates if required. Our target price as well as 'Hold' recommendation remain unchanged as of now.
Hindustan Unilever
Cluster: Apple Green
Recommendation: Hold
Price target: Under review
Current market price: Rs382
Personal product segment disappoints
Result highlights
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Q3FY2012-trimming of ad spends aided bottom line growth: It was yet another quarter when Hindustan Unilever Ltd (HUL) posted strong profitability at the operating level by trimming its advertisement and promotional spends and controlling its operating cost. The operating profit margin (OPM) improved by 271 basis points year on year (YoY) to 15.1% and the operating profit grew by 41.9% YoY to Rs885.6 crore during the quarter. The sales volume growth sustained in higher single digits at 9.1% in Q3FY2012. The same was largely in line with the 9.8% volume growth in Q2FY2012. However, the 14% year-on-year (Y-o-Y) growth in the revenues of the personal product segment and a 294-basis-point Y-o-Y decline in its profit before interest and tax (PBIT) margin were the key disappointers for the quarter.
Outlook and valuation
We have fine-tuned our earning estimates for FY2012 and FY2013 to factor in the higher than expected operating performance during the quarter. The sustenance of a high single-digit volume growth and a sequential improvement in the GPM were the highlights of the quarter. Having said that, the personal product business performance failed to meet the Street's expectations. The performance of the same has to be keenly monitored in the coming quarters.
At the current market price the stock is trading at 32.8x its FY2012E EPS of Rs11.6 and 27.6x its FY2013E EPS of Rs13.8. The stock is trading at a substantial premium of mean average of 26x. Though the company's business fundamentals are intact, the same is already factored in its stock's current valuation. Hence, we do not see any upside in the stock price from the current level. In view of this, we maintain our preference for ITC over HUL. We also maintain our Hold recommendation on the stock with price target under review.
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