Mahindra & Mahindra rating – Buy: Results a little below consensus estimates

Mahindra & Mahindra rating – Buy: Results a little below consensus estimates

A Mahindra & Mahindra Ltd. Roxor off-road vehicle sits on display during the 2019 North American International Auto Show (NAIAS) in Detroit, Michigan, U.S., on Tuesday, Jan. 15, 2019. With the largest concentration of top automotive and technology executives, designers, engineers and thought leaders, the NAIAS serves as the global stage for companies to debut brand-defining vehicles and industry-shaping announcements. Photographer: Daniel Acker/Bloomberg

Mahindra & Mahindra’s (M&M’s) Q4FY21 results were slightly below consensus estimates as Ebitda margin came in at 14.7% (down 227bps q-o-q). Margins were dragged by the automotive segment (Ebit margin: 5%, down 243bps), while FES was resilient (Ebit margin: 22%, down 139bps). Management shared a new product plan (5-years) for SUVs (9 products) /LCVs (14 products); pure EV options (6 products) would also be developed.

Investments into electric (Rs 30 bn) signal clarity of strategy as M&M would be able to build a learning curve advantage vis-a-vis domestic peers who are investment shy on EVs. Mahindra & Mahindra management’s aggression to gain market share in FES business is likely to sound sweet to investors and their long-term growth outlook also remains bullish (15-20% CAGR over the next 3-5 years). Valuations remain attractive. Maintain Buy.

Key highlights of the quarter: Revenues in Q4FY21 grew 48% y-o-y to ~Rs 133 bn due to ~60% improvement in FES revenue, while automotive sales grew ~43%. Ebitda margin improved 107bps to 14.7% even as gross margin faced headwinds (commodity rise, regulatory costs) and dropped to 30.8% (down 487bps). Superior fixed cost reduction supported margins (other expenses down 399bps y-o-y). Adj. PAT jumped 211%. M&M took an impairment charge of ~Rs 8.8 bn.

Maintain BUY: The change in management and the evolution of focused capital allocation strategy (RoE>18%) has been well appreciated by investors. The strategy now is entering growth acceleration phase; we expect H2 to witness strong pick-up across PVs (led by new launches) as supply-chain woes fade away.

We revise our EPS estimates by -1%/2.8% for FY22e/23e, respectively, maintain our target multiple at 8.5x FY23e Ebitda (Rs 710/share) and value subsidiaries at Rs 330/share to arrive at SoTP-based target price of Rs 1,040/share (earlier: Rs 1,045). We maintain Buy on the stock.

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