Mahindra & Mahindra - Management continues to walk the talk - ICICI Securities

Mahindra & Mahindra (M&M) hosted an investor call on developments related to a) exit from the planned JV with Ford Motor Company (Ford), b) SsangYong Motor(SYMC). M&M and Ford have reassessed their capital allocation priorities, both companies have mutually decided to not proceed further on the JV which was supposed to develop, market and distribute Ford vehicles in India. M&M's management has again reinforced investors that capital allocation remains the key tenet (target RoE of >18) for decision making. On the automotive side, M&M's plans to sharpen focus on its core SUV products and succeed in establishing a strong presence in electrics as well. We believe continued product success (post Thar's performance) would be critical in re-energizing its channel and create a wow factor for its customers. Valuations have scope to improve. Maintain BUY.

Key highlights of the concall:

- M&M is in discussion with a potential investor for sale of SYMC and is likely to sign the term sheet soon. SYMC has entered into restructuring (ARS) and the Court has granted two months, i.e. up to 28th Feb'21, to close the transaction. If this timeframe is not complied with, then the Court would take over and SYMC would enter into a pre-packaged bankruptcy deal.

- M&M's stake would eventually fall below 30%. M&M has a maximum financial exposure of ~Rs9.3bn (of which Rs2.45bn was already paid in H1FY21) towards SYMC. It owes Rs6.8bn to foreign banks (with guarantee from M&M). Management expects most of the exposure to be recoverable from the SYMC transaction.

- On Ford JV, management indicated the capital requirement for the JV increased from the initial Rs14bn estimated in 2018 leading to lower RoE. As the JV was still in discussion, no investment had been made with Ford.

- M&M is entering a strong product cycle in FY21 with the development of W601 and Z101 platforms, and further new launches of XUV500 and Scorpio are likely to aid its growth.

- Company has not changed its earlier announced capex of Rs90bn over the next three years mainly towards product development and R&D (Rs120bn in last three years). Platform consolidation, better asset utilization and cost efficiencies are likely to drive improvements in RoE.

- On EVs, the company has aggressive plans to launch vehicles in the last mile connectivity segment (both passenger and cargo) through its EV subsidiary (Mahindra electric) and enter core EV-based SUV segment starting next year via standalone entity.

- M&M has the necessary intellectual property rights for all six of its powertrains and has no dependence on SYMC or Ford for the same.

- M&M is currently facing supply-side issues for semiconductor material for ECU, the impact of which is likely to linger till Q4FY21.

Valuation

The stock has risen 3x from its Mar'20 lows as the company benefitted from rural demand improvement along with change in the management's capital allocation philosophy. We upgrade our earnings estimates by ~8% / 7% / 10% for FY21E / FY22E / FY23E respectively. Focus on profitability and confidence on consistent delivery on capital allocation along with strengthening of the core SUV business leads us to maintain our target multiple at 7.5x Dec'22E EBITDA (Rs559/share) and value subsidiaries at Rs322/share to arrive at an SoTP-based target price of Rs881/share (earlier: Rs836). Maintain BUY.

Shares of MAHINDRA & MAHINDRA LTD. was last trading in BSE at Rs.748.9 as compared to the previous close of Rs. 732.9. The total number of shares traded during the day was 295113 in over 7711 trades.

The stock hit an intraday high of Rs. 750.5 and intraday low of 727.35. The net turnover during the day was Rs. 218292879.

Source : Equity Bulls

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