Lower margin lugs top-line outperformance
Maintain BUY; CMP Rs 707; Target Rs 950
M&M's Q1FY08 results were better than expectations on the top-line front, but the company failed to carry the momentum into a commensurate bottom-line growth. The CRR hike of 50bps may lead to poor liquidity conditions, against an earlier expectation of softening of lending rates by the end of Q2FY08. Under the prevailing circumstances, we believe that the lending rates may continue to remain on the higher side for some more time, thereby impacting the volume growth of auto companies, including M&M. Yet, we continue to believe that M&M is one of the best plays on the Indian automotive industry from a long-term perspective. Maintain BUY with a target price of Rs 950.
Results Highlights
Strong revenue growth of 16.8% to Rs 26.1billion was better than our
expectations, driven by better realization (up 3.6% YoY).
OPM at 10.5%
was down 80bps QoQ and 150bps YoY, resulting in operating profits of Rs.
2.76billion (up 2% YoY). Higher sales of the new low-end Bolero variant impacted
automotive margins.
Adjusted net profit for the quarter was up by 6.8%
YoY to Rs 1.93billion, much below our estimate of Rs 2.5billion. Reported net
profit dipped by 6.4% YoY to Rs 1.91billion.
Consolidated net profit
(post minority) stood at Rs 3billion, up 3.3% YoY.
Outlook
We revise our standalone earnings downward to Rs 37.4 and Rs 41.7 vis-à-vis Rs 42 and Rs 45.5 for FY08E and FY09E, respectively.
Prolonged higher interest rate scenario could impact volume growth.
Valuation
At the current market price of Rs 707, the stock is trading at PER of 11.3x and 9.8x FY08E and FY09E PoEA EPS, respectively. Maintain BUY with a revised target price of Rs 950, an upside of 35%. At our target price, the stock would trade at 12.9x and 11.6x FY08E and FY09E core EPS, respectively. However, in the absence of any material positive trigger, the stock may remain under pressure in the near term.
