Mahindra & Mahindra (MM IN, INR 762, maintain Buy)

Mahindra & Mahindra (M&M) posted excellent performance in Q4FY07, slightly above our expectations. Adjusted net profit, at INR 2.39 bn increased 36% Y-o-Y. EBITDA margin, adjusted for special items, at 11.3%, was down 60bps Y-o-Y and 70bps Q-o-Q due to increased input prices. The extent of the decline for M&M is however lower than most of its peers. Most importantly, the FY07 EBITDA margin has improved 50bps to 12.0%, given higher share of farm equipment and an overall reduction in input costs.

In Q4FY07, the automotive segment accounted for nearly 47% of the incremental Y-o-Y EBIT profit, compared with 15% in Q3FY07 and 52% in Q2FY07. We believe the quarterly difference in the seasonality of the two business segments (where automotive segment has higher contribution in Q2 and Q4, and the tractor segment in the other two quarters) provides stability to M&M's margins and profits.

On our revised FY08 volume assumptions, for both tractors and automotive segments, we have marginally revised the company's standalone parent and core business earnings estimates. We are also dropping our consolidated earnings estimate, given the issues in estimating earnings for a large and diverse range of businesses and in ascribing a single valuation multiple to the consolidated estimates. Henceforth, we will continue to look at the stock on the basis of sum-of-the-parts (SOTP).

We value M&M's investments at INR 421 per share with a 25% conglomerate discount to fair market value. Excluding this, the core business is available at 10.6x FY08E and 9.6xFY09E core EPS, which we find quite attractive. Given reasonable core business valuations and several possible triggers in the next 12-15 months such as ramp up of the Logan (which is margin accretive), launch of the Ingenio, significant value creation potential in the auto component businesses and the new joint ventures, and the expected IPO of Mahindra Holidays (in Q3FY08), we maintain 'BUY'.