Reiterate ADD on Mahindra & Mahindra - Tractors in the limelight - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

M&M's margins sustained at 17% levels in 3QFY21 as well, driven by strong tractor sales growth. The management has raised its tractor guidance to ~20% growth for FY21E, driven by the sustained agri momentum. M&M has provided another Rs 12bn as write-offs towards SsangYong in the quarter - which is now under bankruptcy process in Korea and the parent will no longer fund its operations. We reiterate our ADD rating on the stock and set a revised SOTP-based target price of Rs 880. Our estimates are increased by ~13% over FY22/23E to factor in the higher margin trajectory.

3QFY21 financials - Tractor segment: Revenue grew 23% YoY, led by a 20% volume growth. The segment reported record EBIT margin of 23.4% (+400bps YoY). Automotive: Volumes were down 8% YoY due to supply constraints. EBIT margin came in at 7.4% vs 6.5% QoQ. M&M+MVML: Revenue grew 16% YoY to Rs 140.5bn. EBITDA margin at 17% expanded 220bps YoY (-80bp QoQ), led by higher share of tractors in the mix/cost- cutting initiatives (other expenses down 14% YoY). There was an exceptional expense of Rs 12bn related to impairment on SsangYong. Adj. PAT came in at Rs 17.4bn (+33% QoQ), aided by higher dividend from subsidiaries.

Call takeaways: (1) Farm segment: The segment recorded the highest-ever EBIT margin of 23.4% due to positive rural sentiment/encouraging Kharif procurement. The management expects the tractor industry to register a growth of 20% YoY in FY21E as the outlook remains positive (2) Supply side issues: The semiconductor shortage continues and the sharp rise in precious metal prices will impact profitability. M&M is operating at the lowest system inventory in the automotive segment due to the above. (3) Positive on new models: The new Thar has an order booking of 39k+ units (6k+ in Jan-21, 200+/day). The target is to reach 4k units production. M&M will launch 2 new model refreshes to strengthen its SUV portfolio. (4) Subsidiaries: The management believes that substantial write downs have been taken over the year as the company has exited multiple loss-making ventures. This trend should moderate from here onwards.

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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