Mahindra & Mahindra - Execution on capital allocation remains on track - ICICI Securities

Mahindra & Mahindra's (M&M) Q3FY21 result was a beat on consensus estimates as EBITDA margin came in at 17% (up 221bps YoY). The beat was led by FES business (EBIT margin: 23.4%, up 407bps) while automotive held ground (EBIT margin: 7.4%, up 9bps). The performance reinforces our belief in resilience of M&M earnings even in wake of rising input costs thanks to high FES contribution (~65% in Q3) to EBIT. Management has largely walked the talk on capital allocation with re-organisation of loss making international subsidiaries largely complete (FY22E losses expected to drop sharply to ~Rs3bn vis-à-vis Rs34.3bn in FY20). Theme of FY22E is now growth which would be led by automotive (new ICE and electric products). We believe core valuations (adj. for subsidiaries valuation) remains attractive (<9x/7.5x EV/EBITDA FY22/FY23 respectively). Maintain BUY.

- Key highlights of the quarter: Revenues in Q3FY21 grew 16% YoY to ~Rs141bn due to ~24% improvement in FES revenue, while automotive sales grew ~12%. EBITDA margin improved 221bps to 17% even as gross margin faced commodity headwinds and dropped (119bps). Superior fixed costs reduction aided margins (other expenses down 284bps YoY). Adj. PAT jumped 78% boosted by other income which jumped 169%. M&M took an impairment charge of ~Rs12.1bn.

- Key concall takeaways: Management indicated: a) Supply-side issues on semiconductor are likely to continue till Q1/Q2FY22 while steel availability also remains a key sourcing challenge; b) tractor inventory creation was impacted due to stringent lockdown in Maharashtra and thus led to market share loss in key southern markets; auto segment was impacted due to shortage of imported BS-VI components and ECU shortages; c) FES International business is witnessing sequential improvements and has turned EBIT positive (~Rs10mn vis-à-vis loss of ~Rs2bn YoY); c) LCV segment including pick-ups are driving strong volumes from last mile connectivity for ecommerce and FMCG industry; d) Thar is witnessing very strong orderbook of 39k bookings; M&M plans to ramp-up production to 4k units per month from Q1FY22; XUV300 to is witnessing 8-10 weeks waiting; and e) cash generated from auto/farm business would not be deployed for other investments.

- Maintain BUY: The change in management and capital allocation strategy has been well appreciated by investors, hence the stock outperformance (up >3x since Mar'20). The next key target is delivering continued product success on automotive side (e.g. Replicating Thar). If they deliver on the same valuation re-rating is likely to continue. We raise our EPS estimates by ~10%/11% for FY22E/23E, respectively, upgrade our target multiple to 8.5x (earlier: 7.5x) FY23E (roll forward) EBITDA (Rs639/share) and value subsidiaries at Rs330/share to arrive at SoTP-based target price of Rs1,045/share (earlier: Rs836). We maintain BUY on the stock.

Shares of MAHINDRA & MAHINDRA LTD. was last trading in BSE at Rs.928.2 as compared to the previous close of Rs. 865.6. The total number of shares traded during the day was 1648471 in over 29712 trades.

The stock hit an intraday high of Rs. 952.15 and intraday low of 888. The net turnover during the day was Rs. 1531088840.

Source : Equity Bulls

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