Mahindra & Mahindra - Consistency of performance drives upgrade - ICICI Securities

Mahindra & Mahindra's (M&M) Q2FY21 results were a beat on consensus estimates as EBITDA margin came in at 17.8% (up 366bps YoY; one of the best ever). The heavy lifting of the beat was driven by FES (segment margins -24.4% up 512bps) while automotive didn't lose ground at 6.5%. The performance reflects the fantastic nature of FES business (low capital, high ROIC, sticky customer loyalty) and is the ideal A+ quality business in the M&M portfolio. Management continues to focus on capital allocation with RoE >18% target being used as kind of a gospel (we hope) for every business and continues to shed deadweight (e.g. GippsAero). On automotive side, we believe as M&M's future products succeed in re-energizing its channel and customers' valuations could further rerate. We find core valuations attractive (4.5x EV/EBITDA Sep'22). Upgrade to BUY.

- Key highlights of the quarter: Revenues in Q2FY21 grew 6% YoY to ~Rs116bn due to 10.3% improvement in FES revenues, while automotive sales dropped ~20%. EBITDA margin improved 366bps to 17.8% even as gross margin remained flat (-38bps) driven by lower A&P spends (digital marketing and launches) and manufacturing mix. Adj. PAT was down ~3% as other income declined 53% on lower yield. The company took an exceptional impairment charge of ~Rs11.5bn.

- Key concall takeaways: Management indicated: a) Supply side and labour availability issues persisted in FES segment leading to lower production causing market share loss of ~200bps in Q2 vis-à-vis FY20; b) FES International business is witnessing good demand and has turned PBIT positive (~Rs30mn) in Q2; c) pick-up segment including SCVs are witnessing strong demand due to ecommerce and FMCG industry driving demand; d) M&M has shut down the loss making GippsAero aircraft business; d) Thar has witnessed very good reception with >20k bookings and >78k enquiries; e) capex and investments in H1FY21 stood at Rs28bn of which Rs16.4bn investment in Mahindra Finance and balance was in reduction of debt in international subs ( conversion of debt to equity); and f) consolidated PAT was lower largely due to lower production and lower dividend income in Q2.

- Upgrade to BUY: The stock has outperformed peers (up ~121%) from its Mar'20 lows; as stock has benefitted from rural demand improvement along with change in management capital allocation philosophy. We rollover to Sep'22E and upgrade our PAT estimates by ~30%/16.3% for FY21E/22E, respectively. Confidence on consistency in delivery on capital allocation along with strengthening core business leads us to maintain our target multiple to 7.0x Sep'22 EBITDA (Rs471/share) and value subsidiaries at Rs316/share to arrive at SoTP-based target price of Rs787/share (earlier: Rs645). Upgrade to BUY from ADD.

Shares of MAHINDRA & MAHINDRA LTD. was last trading in BSE at Rs.631.6 as compared to the previous close of Rs. 629.65. The total number of shares traded during the day was 11247 in over 594 trades.

The stock hit an intraday high of Rs. 633.4 and intraday low of 630. The net turnover during the day was Rs. 7103826.

Source : Equity Bulls

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