ADD on Mahindra & Mahindra - Subsidiary divestment continues - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

M&M reported healthy 2QFY21 margins of 17.8% as tractor's share increased in the overall product mix (its share is at 50% of total volumes vs. ~39% in FY20). While tractors continue to benefit from the above normal south-west monsoon, the outlook for SUVs remains impacted by intense competition (Kia Seltos was the key launch in 2Q). M&M has announced exit from one more international business - Gipps Aero - as management is attempting to increase RoEs to 18% across business lines. We reiterate our ADD rating on the stock. We are tweaking our FY22/23E earnings by 2% and set a revised SOTP-based target price of Rs 685 (14x Sep-22 for the core business). Key risks: weak response to new models on the downside and faster-than-expected economic recovery on the upside.

2QFY21 financials- Tractor segment: Revenue grew 33% YoY, led by 30% volume growth. The segment reported record EBIT margin of 24.4% Automotive: Revenue was down 8% YoY (though sales were 3x higher on QoQ basis). EBIT margin came in at 6.5% vs 5.8% YoY. M&M+MVML: Revenue grew 6% YoY to Rs 115.9bn. EBITDA margin at 17.8% came in at a multi-quarter high and expanded 370bps, owing to a higher share of tractors in the product mix and cost-cutting initiatives. The company reported an exceptional expense of Rs 11.5bn related to impairment on international subsidiaries. Adj. PAT came in at Rs 13.1bn (-3% YoY).

Call takeaways: (1) Inventory at below normal levels: Both farm equipment and auto segment currently have reduced inventories as the supply chain is gradually ramping up, amidst rising demand. M&M's market share in the FES segment has come down to 38.2% vs 39.1/41.2% QoQ/FY20, owing to the same. Tractor industry growth is now revised upwards to low double digits for FY21E. (2) Divestments continue: After scaling down investments in SsangYong, MANA and Genze, M&M is exiting Gipps Aero, its aerospace subsidiary in Australia. (3) Auto segment: The launch of new Thar has been well received and has secured 20k bookings. (4) Investments: M&M has invested Rs 28bn in subsidiaries in 2Q, including ~Rs 17bn in the MMFS rights issue and ~Rs 8bn in other subsidiaries.

Shares of MAHINDRA & MAHINDRA LTD. was last trading in BSE at Rs.629.65 as compared to the previous close of Rs. 632.55. The total number of shares traded during the day was 673818 in over 7102 trades.

The stock hit an intraday high of Rs. 638.2 and intraday low of 627.95. The net turnover during the day was Rs. 426507184.

Source : Equity Bulls

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