Mahindra and Mahindra Ltd Time to get on board…
With 3 healthy back-to-back cropping seasons and good monsoon, which has Vishal Srivastav Research Analyst resulted in strong rural sentiment, we reiterate our stance that the tractor [email protected] upcycle may last for a couple of years. Being the market leader in the tractor segment, Mahindra & Mahindra (M&M) the key beneficiary of this surge. The re-rating catalyst will be new management’s ability towards achieving key milestones it has laid down viz. 1) Gradual improvement in the financial health from FY22; and 2) Boost cash flow and Return on Equity (RoE). Hence stock is a CMP: INR 614 Tactical BUY with a target price of INR 758 per share, based on SoTP valuation. Rating: Tactical BUY
FES business to benefit from a revival in rural India Target price: INR 758
Our report, titled: ‘Automobile Industry - Coronavirus deals a decade blow’, lays Upside: 23% our case of the rural economy leading the economic revival. We continued to maintain our positive stance on the tractor industry is poised for multi-year upcycle (refer our report on Escorts dated July 6, titled: ‘Escorts – Journey from turnaround to excellence’). Back-to-back bountiful harvest seasons, increased government procurement, healthy monsoon are the key drivers. With over 45% market share, M&M is best placed to reap benefits of this surge. Bloomberg: MM:IN Automotive business to gradually recover from H2FY21 The light commercial vehicle (LCV) segment will drive growth for the automotive 52-week range (INR): 245/667 business in the short term. Being market leader, M&M will significantly benefit Share in issue (crore): 119 from the gradual revival in LCV demand. Course correction by the management in the utility vehicle (UV) segment off late and renewed focus towards strengthening M-cap (INR crore): 74,853 its strong hold in the conventional mid-size SUV segment through new launches Promoter holding (%) 19.58 may help it arrest the sharp market share loss. Focus on improving RoE across businesses – A key re-rating driver The new management’s focus on improving cash flows and RoE across all businesses and subsidiaries is encouraging. Willingness to exit business that do not fall in its strategic growth path or those unable to achieve 18% RoE is a clear change of stance. Turning around loss-making subsidiaries and scaling up its market share in the UV business will result in a significant valuation re-rating. Outlook and valuation We see a valuation re-rating catalyst will be new management’s ability towards achieving key milestones viz. 1) healthy revival in the standalone operations driven by FES business; 2) focus on gradually improving the financial health of subsidiaries from FY22; and 3) emphasis on improving cash flow and RoE across all businesses. The stock is a Tactical BUY with a target price of INR 758 per share.
Year to March FY18 FY19 FY20 FY21E FY22E Revenue (INR crore) 47,577 52,848 44,865 40,773 47,332 Revenue growth (%) 13.5 11.0 -15.0 -9.0 16.0
EBITDA (INR crore) 7,043 7,530 6,350 5,178 6,484 Adjusted PAT (INR crore) 4,320 5,418 3,889 3,025 4,031 P/E (x) 16.4 13.1 18.2 23.4 17.6 25.8 40.9 23.3
Price-to-book value (x) 2.3 2.0 2.0 1.9 1.7 EV-to-EBITDA (x) 9.7 9.0 10.9 13.0 10.0 RoACE (%) 19.9 20.0 14.6 10.6 13.1 Date: 6th November, 2020 RoAE (%) 15.1 16.5 11.1 8.4 10.3
Edelweiss Professional Investor Research 1
Mahindra and Mahindra Investment hypothesis
I. Rural India – The bright spot and key to economic growth In our April 28 research note, titled: ‘Automobile Industry - Coronavirus deals a decade blow’, we presented our case of the rural economy leading the economic revival. Back-to-back bountiful harvest seasons, increased government procurement, healthy water storage levels and expectations of a normal monsoon were the key drivers buttressing our expectation.
Six months from the release of our report, we see strong rural demand momentum. Despite increasing COVID-19, infections off late, sentiment remains buoyant, influenced by high income visibility, because of record kharif sowing this season and plentiful monsoon. Strong revival in tractor sales, 40% YoY growth since June, after easing in lockdown restrictions is evidence of healthy rural sentiment. We continue to maintain our positive stance on the tractor industry. In our initiation coverage on Escorts Ltd on July 6, titled: ‘Escorts – Journey from turnaround to excellence’, we estimated tractor demand to clock 2-4% growth and industry is poised for a next upcycle that would be for couple of years. We continue to maintain our view on the tractor cycle, however our channel checks indicates buoyancy in rural sentiments may push domestic tractor sales growth towards double digit levels for FY21.
Exhibit 1: Tractor industry to clock double digit growth in FY21 significantly surpassing our earlier expectation
20% 42% 18%
12% 12% 12% 23% 25% 7% 7% 12% 13% 5% 6% -6% 4% -10% -12% -14% -14% FY20 FY21E FY22E FY23E -5%
-10%
Q4FY20 Q1FY20 Q2FY20 Q3FY20 Q1FY21
Q2FY21E Q3FY21E Q4FY21E Pessimistic Optimistic Realistic Pessimistic Optimistic Realistic Source: TMA, Industry and Edelweiss Professional Investor Research
M&M: FES business will continue to provide strong support during challenging times Business-wise With over 45% market share in the tractor industry, Mahindra & Mahindra (M&M) will be one on the share in revenue major beneficiaries of the surge in tractor demand. Its farm equipment business (FES) contributes and profits around one-third of standalone topline and over two-third to Profit Before Interest and Tax (PBIT).
34% Exhibit 2: FES contributes one-third to topline and more than two-third to profits 69% 71% 62% 69% 30% 59% 61% 52% Revenue PBIT share 49% share 34% 31% 31% 32% 31% 34% Automotive FES Others
FY15 FY16 FY17 FY18 FY19 FY20 Topline share PBT share Source: Company reports and Edelweiss Professional Investor Research
Edelweiss Professional Investor Research 2
Mahindra and Mahindra Investment hypothesis
Despite increase in competition intensity in the last 6-7 years, the management has been able to maintain its market share of ~40-42% on the back of frequent model launches. The company plans to launch a new light weight tractor platform ‘K2’ in collaboration with Mitsubishi, which will help it strengthen its domestic market share going forward and also scale up exports.
Exhibit 3: FES business to reap significant benefits from the surge in tractor demand 22,000 20% 16% 15%
20,000 11% 15% 18,000 10% 5% 16,000 5%
14,000 19,753 0%
17,104
16,562 15,762
12,000 15,402 -5% -7% 10,000 -10% FY18 FY19 FY20 FY21E FY22E FES revenues (INR cr) Growth (RHS) Source: Edelweiss Professional Investor Research
UV segment: Last decade’s concerns still persist Dropping market share in the utility-vehicle (UV) segment has been a key concern for M&M’s automotive business. Although it has been at the forefront of new launches and has introduced models in high growing lower engine capacity UV market, it has not been able to rein in the market share slide. The company has been unable to lure customers as newer entrants like Maruti Suzuki, Hyundai Motor Co. and Kia Motors Corp. continued to eat into its market share.
Exhibit 4: M&M’s market share dropped by over 50% in the last decade…
11% 10% 13% 20% 18% 19% 15% 15% 27% 13% 13% 8% 31% 6% 3% 2% 6% 8% 12% 7% 17% 5% 12% 11% 11% 21% 19% 4% 13% 14% 15% 11% 12% 13% 28%
48% 29% 25% 25% 42% 38% 19% 54% 56% 37%
26% 28% 28% 25% 14% 12% 12% 16% 2% 2% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Maruti Suzuki M&M Hyundai+Kia Toyota Kirloskar Tata Motors Others Source: Edelweiss Professional Investor Research
Edelweiss Professional Investor Research 3
Mahindra and Mahindra Investment hypothesis
Exhibit 5: … as it couldn’t make significant inroads in the rapidly growing small SUV market despite a slew of model launches Segment FY11 FY12 FY15 FY16 FY17 FY18 FY19 FY20 Large SUV Scorpio Large SUV Bolero Large SUV Xylo Small SUV Quanto Large SUV XUV500 Small SUV KUV100 Small SUV NovoSport Small SUV TUV300 Large SUV Thar Large SUV Alturas Large SUV Marazzo Small SUV XUV300
Source: Edelweiss Professional Investor Research
Exhibit 6: Market share loss in smaller SUVs was even Exhibit 7: …as the sub-segment saw significant growth in sharper… overall UV market in the last decade
77%
74%
22%
29%
29%
33%
37%
42%
45%
51%
66% 68%
45% 36%
32% 78% 71%
30% 71%
67% 63%
25% 58% 55%
21% 49%
17% 34% 14% 32%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 Large SUV % in overall UV market Small SUV % in overall UV market
Source: SIAM and Edelweiss Professional Investor Research
FY21 will continue to remain a challenging year for M&M… A stronger revival in this segment is encouraging for M&M’s UV business. However, a sharp increase in competition from other leading players like Maruti and Hyundai through their new launches of Vitara Brezza, S-Cross, Creta, and Venue, coupled with successful launches of Seltos and Sonet from new entrant Kia, will only make the job tougher for M&M.
Although M&M has the XUV300, which is a popular model, the company dearly requires the success of recently launched Thar (upgrade), near term expected launches of W601 (i.e. Scorpio upgrade) and Bolero (upgrade) to turn the tide in its favour.
Edelweiss Professional Investor Research 4
Mahindra and Mahindra Investment hypothesis
Exhibit 8: Recovery in the UV segment has been faster… Exhibit 9: …with growth continuing to outpace that of the overall PV industry
25% 15% 28% 12% 9% 18% 15% 7% 5% 12% -5% -3% -5% 10% -15% 5% 2% -10% -7% -72% -11%
-17%
Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q4FY21E Q3FY21E FY20 FY21E FY22E FY23E
Pessimistic Optimistic Realistic Pessimistic Optimistic Realistic
Source: SIAM and Edelweiss Professional Investor Research
…however, focus on its conventional segment may help arrest near term market share loss R&D as a % to The management’s focus on strengthening its position in the mid-sports utility vehicle (SUV), i.e. revenue conventional sub-segment, with the launch of Thar (upgrade); expected launch of new models -- W601 6.6% or Scorpio upgrade (through the M&M and Ford joint-venture) and Z101 in Q1 and Q3FY22, 5.0% 5.0% 4.4% respectively; and the launch of the Bolero upgrade over the next 3-4 quarters.
3.8% 4.2% Renewed focus on its stronghold mid-SUV sub-segment is the right strategy because of its strong acceptance among its conventional SUV customer segment.
FY16 FY15 FY17 FY18 FY19 FY20 Exhibit 10: New launch pipeline comprises more large SUVs indicating a change in management’s stance Segment FY21E FY22E FY23E Large SUV Thar upgrade Large SUV W601 Large SUV Z101 Large SUV Bolero upgrade Small SUV S 204
Source: Edelweiss Professional Investor Research
Ford JV can help the UV business to scale up to the next level l Acquisition of 51% stake in the JV with Ford, may help M&M scale up the business to the next level, which the management has always strived off. In addition to gaining use of Ford’s 4.4 lakh unit manufacturing capacity in India, which will help it reap the benefits of economies of scale, M&M will also get access to any future model technology by Ford.
The benefits from this JV will start accruing from next year, with the launch of model W601. In FY23, a new model (S 204) will be launched by this JV in the compact SUV space. There are also plans of developing a new electric vehicle (EV) platform under this JV.
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Mahindra and Mahindra Investment hypothesis
M&M also plans to use this facility as a manufacturing base for exporting vehicles to Ford’s overseas markets. The company will initially invest INR 650 crore in this entity, which will be gradually raised to INR 1,400 crore.
LCV demand to drive overall CV revival in FY21 Exhibit 11: Revival influenced by pick-up in consumption Exhibit 12: LCVs to witness healthy growth momentum in the levels short to medium term
35% 20% 40% 35% 25% 10% 5% -2% 25% 22% -6% -6% -8% -25% 12% -12% -43% -5% -21% -78% -21%
-30%
Q4FY20 Q1FY20 Q2FY20 Q3FY20 Q1FY21 Q2FY21
FY20
Q3FY21E Q4FY21E
FY21E FY22E FY23E Pessimistic Optimistic Realistic Pessimistic Optimistic Realistic Source: SIAM, Edelweiss Professional Investor Research
Edelweiss Professional Investor Research 6
Mahindra and Mahindra Investment hypothesis
Mahindra and M&M’s strong hold over the LCV segment may see it benefit from a pick-up in demand Mahindra Ltd Frequent model launches, based on different applications, have led M&M to surpass Tata Motors as market leader in FY20. We expect demand for light commercial vehicles (LCVs) to recover much faster as compared to other segments in the commercial vehicle (CV) industry, with increased traction from the rapidly growing e-commerce sector.
The recent pick-up seen in LCV sales in the last few months indicates encouraging signs of a swift recovery in demand.
Exhibit 13: Growth in LCV sales for M&M
9% 8% 8% 15% 13% 10% 11% 12% 12% 10% 2% 4% 4% 2% 7% 6% 7% 7% 8% 8% 9% 9%
48% 43% 38% 38% 40% 56% 58% 57% 41% 39%
42% 42% 35% 39% 40% 38% 39% 29% 28% 27%
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 M&M Tata Motors Ashok Leyland Maruti Others Source: Edelweiss Professional Investor Research
Although competition has intensified with recent launches by all major competitors (like Bada Dost from Ashok Leyland and Intra V20 from Tata Motors), M&M’s strong offerings will help it keep pace with competition and maintain its stronghold over this segment.
Exhibit 14: A pick-up in sales will lead to revival in the automotive business from FY22
40,000 50% 37% 35,000 30%
30,000 10% 0% 10% 25,000 -20% -10% 20,000 35,328
32,081 -28%
28,069 28,069 -30%
15,000
28,409 20,527 10,000 -50% FY18 FY19 FY20 FY21E FY22E Automotive revenues (INR crore) Growth (RHS) Source: Edelweiss Professional Investor Research
Edelweiss Professional Investor Research 7
Mahindra and Mahindra Investment hypothesis
Mahindra and Management’s focus on reducing subsidiary losses and rise in RoE will boost investor confidence Mahindra Ltd The board’s recent decision to reject the INR 3,000 crore restructuring plan for SsangYong Motor Company in April and the new management’s willingness to cede majority or even its entire stake in the latter indicates a clear change in its approach. The 3 key focus areas laid down to categorise all subsidiaries are detailed below:
a. Subsidiaries should have clear path towards 18% Return on Equity (RoE) b. Unclear path to profitability but with strategic benefits like Sampo Rosenlew – M&M will continue to invest c. Unclear path to profitability with no strategic benefits – M&M will exit
This shift in focus towards improving RoE to 18% in the medium term by scaling up profitability across businesses and laying parameters for evaluating all potential investments will be key towards improving investor confidence and result in a re-rating in valuations.
Exhibit 15: Tough market scenario and heavy subsidiary losses significantly deteriorated M&M’s RoE profile 18%
15% 15% 15% 15%
6% 4% 3% 3% 3% 3%
-1%
FY15 FY16 FY17 FY18 FY19 FY20
Standalone RoE Consol RoE
Source: Edelweiss Professional Investor Research
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Mahindra and Mahindra Investment hypothesis
Exhibit 16: Subsidiaries like SsangYong Motor Company, Mahindra USA, Mahindra Aerospace and Mahindra Tractor Assembly has been a consistent drag on M&M’s performance
Investments (INR cr) Sector % Holdings FY19 FY20 Listed subsidiaries, JVs, associated companies Ssangyong Motor Co. Automotive 72% (283) (2,268) Mahindra Lifespace Dev. Real Estate 52% 30 (116) Mahindra Holidays & Resorts India Leisure 67% 43 (73) EPC Industrie Limited Agriculture 55% 6 13 Swaraj Engines Limited Agriculture 33% 28 25 Mahindra CIE Automotive Agriculture 17% 66 41 Mahindra Logistics Limited Logistics 59% 80 56 M&M Financial Services NBFC 51% 801 466 Tech Mahindra Limited IT services 26% 1,245 1,165 Gems recognised by the management Mahindra Electric Automotive 100% (53) (55) Mahindra First Choice Automotive 100% (50) (38) Mahindra Agri Solutions Agriculture 99% (63) (19) Meru Mobility 86% - (18) Classic Legends Automotive 60% (11) (4) Bristlecone IT services 75% 31 26 Mahindra Susten Pvt Ltd Renewable 100% 63 42 Mahindra Rural Housing Finance NBFC 51% 128 76 Loss making unlisted subsidiaries Mahindra USA Inc Agriculture 100% (549) (507) Mahindra Aerospace Aerospace 90% (161) (287) Mahindra Vehicle sales Automotive 100% (127) (248) Peugot Motorcycles SAS Automotive 100% (282) (256) Mahindra Aerospace Aus Aerospace 90% (81) (241) Mahindra Tractor Assembly (incl. Genze) Automotive 100% (243) (222) Automobili Pininfarina Automotive 100% (101) (130) Source: Company reports and Edelweiss Professional Investor Research
Revival in the demand environment for its standalone operations and management’s focus on
turning around its loss-making businesses… With a revival in demand across key businesses, we expect a gradual YoY increase in topline from H2FY21 and a significant surge in FY22. Benefits of economies of scale and focus of the new management on reducing cost and increasing profitability across businesses will lead to substantial improvement in the profitability of standalone operations in the short to medium term.
Few key loss-making subsidiaries, which will cease to exist in FY21, are: 1) Mahindra Tractor Assembly, which reported a loss of INR 222 crore in FY20; and 2) Mahindra Aerospace Australia, which incurred a loss of ~INR 240 crore in FY20.
Few loss-making subsidiaries which we believe are next in line are: 1) SsangYong Motor, which reported a loss of INR 2,268 crore in FY20; 2) Peugeot Motocycles, which posted a loss of INR 256 crore; and 3) Mahindra Aerospace, which incurred a loss of INR 287 crore. These loss-making subsidiaries contribute over 85% of overall subsidiary losses.
FY21 will be challenging for subsidiaries with weak financial health. The management’s focused approach towards turning around subsidiary operations and sale of significant loss-making subsidiaries will start adding meaningful benefits to the bottomline as well as cash flow from FY22 onwards.
Edelweiss Professional Investor Research 9
Mahindra and Mahindra Investment hypothesis
…will result in a valuation re-rating from current levels l We believe parameters like; 1) A healthy revival is expected in the standalone operations of major businesses from H2FY21; 2) Renewed focus of the management on gradually improving the financial health of subsidiaries from FY22; and 3) Emphasis on improving cash flow and achieving 18% RoE across all businesses and investments, will lead to a valuation re-rating from current levels. Hence we initiate Tactical BUY on M&M with a target price of INR 758 per share.
Exhibit 17: SoTP valuation methodology M&M % in M Value per share Listed subsidiaries M Cap (INR cr) % Holding CMP (INR) Cap (INR cr) (INR) Mahindra Lifespace Dev. 1,196 51.1% 611 267 5 Mahindra Holidays & Resorts India 2,298 67.5% 1,551 175 13 Swaraj Engines Limited 1,709 33.2% 567 1413 5 Mahindra CIE Automotive 5,218 17.3% 903 143 8 Mahindra Logistics Limited 2,508 58.8% 1,475 379 12 M&M Financial Services 16,006 51.2% 8,195 130 69 Tech Mahindra Limited 79,501 26.7% 21,227 839 178
Total value 289 Investment valued at 50% discount (A) 203 EPS FY22E 35 Estimated FES EPS FY22 23 Estimated Automotive EPS FY22 11 Target P/E FES business 18 Automotive business 12 Core business value (B) 555 Target Price (A+B) 758 Source: Company reports and Edelweiss Professional Investor Research
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Mahindra and Mahindra Investment hypothesis
Exhibit 18: Core P/E valuation
30 26 22 19 17 20 17
FY15 FY16 FY17 FY18 FY19 FY20
P/E 2 year froward Average P/E for last 10 years Source: Edelweiss Professional Investor Research
Exhibit 19: Key assumptions for our estimates Key assumptions of our estimates FY19 FY20 FY21E FY22E Domestic Tractor industry growth 11% (11%) 12% 12% Domestic UV industry growth 2% (2%) (11%) 18% Domestic LCV industry growth 17% (21%) (21%) 25% Domestic MHCV industry growth 13% (42%) (30%) 31% Growth in M&M FES business 5% (7%) 14% 15% Growth in M&M Automotive business 10% (20%) (21%) 34% Capex (INR cr) 3,640 2,148 1,500 3,000 Source: Edelweiss Professional Investor Research
New management team The new management team led by Dr Anish Shah, who currently is Deputy Managing Director and Group Chief Financial Officer (CFO), will be taking over as MD and CEO from Dr Pawan Goenka from April 1, 2021. Before joining M&M, Shah was President and CEO at GE Capital India, where he led the turnaround of the SBI Card venture.
Rajesh Jejurikar has been appointed as Whole-time Director and Executive Director of the FES business from April 1. He was part of the development team of Scorpio and has headed businesses like FES and Mahindra Two Wheeler in his earlier assignments with M&M.
Edelweiss Professional Investor Research 11
Mahindra and Mahindra Financials
INR Cr Income statement FY18 FY19 FY20 FY21E FY22E Income from operations 47,577 52,848 44,865 40,773 47,332 Materials costs 31,628 35,997 29,866 27,237 31,239 Manufacturing expenses 5,742 6,037 5,424 5,096 6,058 Employee costs 3,162 3,283 3,223 3,261 3,549 Total operating expenses excluding depreciation and amortisation 40,533 45,318 38,514 35,595 40,848 EBITDA 7,043 7,530 6,350 5,178 6,484 Depreciation & Amortization 1,625 2,003 2,363 2,243 2,337 EBIT 5,418 5,527 3,987 2,934 4,147 Interest expenses 188 146 124 150 180 Other income 951.71 1,630.26 1,539.13 1,223.21 1,372.65 Profit before tax 6,181 7,010 5,402 4,007 5,340 Provision for tax 1,991 1,586 1,851 981 1,308 Exceptionals (before PBT) 433 -22 -2,811 0 0 Reported PAT 4,623 5,401 739 3,025 4,031 Less: Exceptional Items (Net of Tax) 303 -17 -802 0 0 Adjusted PAT 4,320 5,418 3,889 3,025 4,031 Basic shares outstanding (mn) 113 113 113 113 113 Adjusted basic EPS (INR) 37.9 47.5 34.1 26.5 35.3 Diluted equity shares (mn) 113 113 113 113 113 Adjusted diluted EPS (INR) 37.9 47.5 34.1 26.5 35.3 CEPS (INR) 52.1 65.1 54.8 46.2 55.8 Dividend per share (INR) 7.8 8.8 7.4 6.6 8.1 Dividend payout (%) 22.7 21.9 136.7 29.8 27.3
Common size metrics FY18 FY19 FY20 FY21E FY22E Materials costs 66.4 68.1 66.5 66.8 66 Employee expenses 6.6 6.2 7.1 8 7.5 S G & A expenses 12 11.4 12 12.5 12.8 Operating expenses 85.1 85.7 85.8 87.3 86.3 Depreciation 3.4 3.7 5.2 5.5 4.9 Interest expenditure 0.3 0.2 0.2 0.3 0.3 EBITDA margins 14.8 14.2 14.1 12.7 13.7 Net profit margins 9 10.2 8.6 7.4 8.5
Growth ratios (%) FY18 FY19 FY20 FY21E FY22E Revenues Growth 13.5 11 -15 -9 16 EBITDA Growth 24.5 6.9 -16 -18 25.2 PBT Growth 19.8 13.4 -23 -26 33.2 Net profit Growth 15.4 25.4 -28 -22 33.2 EPS Growth -40 25.4 -28 -22 33.2
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Mahindra and Mahindra Financials
Balance sheet (INR Cr) FY18 FY19 FY20 FY21E FY22E Equity capital 594 595 596 596 596 Reserves & surplus 29,892 34,397 34,032 36,505 39,955 Shareholders funds 30,487 34,993 34,629 37,101 40,552 Long term debt 2,545 2,231 2,039 2,039 2,039 Short term debt 668 448 1,113 1,113 1,113 Borrowings 3,214 2,680 3,153 3,153 3,153 Deferred Tax liability 455 789 1,506 1,506 1,506 Sources of funds 34,157 38,463 39,288 41,761 45,212 Gross block 19,648 23,829 23,496 25,496 27,496 Net block 9,682 11,853 10,394 10,098 9,622 Capital work in progress 3,324 2,643 6,514 6,067 7,206 Total fixed assets 13,006 14,496 16,909 16,165 16,828 Non current investments 15,462 17,383 15,343 16,843 17,643 Cash and equivalents 5,360 5,534 4,513 6,443 9,122 Inventories 3,327 4,763 4,040 4,000 4,644 Sundry debtors 3,098 3,811 2,901 3,050 3,541 Loans and advances 1,018 861 651 597 615 Other current assets 8,055 8,065 7,458 7,478 7,497 Total current assets (ex cash) 15,499 17,501 15,052 15,126 16,298 Trade payable 9,373 10,360 7,200 7,596 8,818 Others current liabilities 5,798 6,092 5,328 5,221 5,862 Total current liabilities & provisions 15,172 16,453 12,529 12,817 14,680 Net current assets (ex cash) 327 1,048 2,523 2,309 1,617 Uses of funds 34,157 38,463 39,288 41,761 45,212 Book value per share (INR) 267.4 307 303.8 325.5 355.7
Free cash flow FY18 FY19 FY20 FY21E FY22E Net profit 4,623 5,401 739 3,025 4,031 Depreciation 1,625 2,003 2,363 2,243 2,337 Interest (Net of Tax) 131 113 35 113 135 Others -895 -1,404 2,282 -1,186 -1,328 Less: Changes in WC -1,320 721 1,474 -213 -691 Operating cash flow 6,805 5,391 3,945 4,410 5,867 Less: Capex 3,287 3,492 4,775 1,500 3,000 Free Cash Flow 3,518 1,899 -829 2,910 2,867
Edelweiss Professional Investor Research 13
Mahindra and Mahindra Financials
Profitability and efficiency ratios FY18 FY19 FY20 FY21E FY22E ROAE (%) 15.1 16.5 11.1 8.4 10.3 ROACE (%) 19.9 20.0 14.6 10.6 13.1 Inventory day 31.0 35.0 45.0 45.0 42.0 Debtors days 22.0 23.0 27.0 26.0 25.0 Payable days 99.0 100.0 107.0 99.0 95.0 Cash conversion cycle (days) -44.0 -41.0 -34.0 -27.0 -28.0 Current ratio 1.3 1.4 1.5 1.6 1.7 Gross Debt/EBITDA 0.4 0.3 0.4 0.6 0.4 Gross Debt/Equity 0.1 0.0 0.0 0.0 0.0 Adjusted debt/equity 0.1 0.0 0.0 0.0 0.0 Net Debt/Equity 0.0 0.0 0.0 0.0 0.0 Interest coverage 28.7 37.6 32.0 19.5 23.0
Operating ratios FY18 FY19 FY20 FY21E FY22E Total asset turnover 1.4 1.4 1.1 1 1 Fixed asset turnover 5.0 4.9 4.0 3.9 4.8 Equity turnover 1.6 1.6 1.2 1.1 1.2
Du pont analysis FY18 FY19 FY20 FY21E FY22E NP Margin % 9.0 10.2 8.6 7.4 8.5 Total Assets Turnover 1.4 1.4 1.1 1.0 1.0 Leverage multiplier 1.1 1.1 1.1 1.1 1.1 ROAE % 15.1 16.5 11.1 8.4 10.3
Valuation parameters FY18 FY19 FY20 FY21E FY22E EPS (INR) diluted 37.9 47.5 34.1 26.5 35.3 Y-o-Y growth (%) -40.0 25.4 -28.0 -22.0 33.2 Cash EPS 52.1 65.1 54.8 46.2 55.8 Diluted PE (x) 16.4 13.1 18.2 23.4 17.6 Price/BV (x) 2.3 2.0 2.0 1.9 1.7 EV/Sales (x) 1.4 1.2 1.5 1.6 1.3 EV/EBITDA (x) 9.7 9.0 10.9 13.0 10.0
Edelweiss Professional Investor Research 14
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Rating Expected to
BUY appreciate more than 15% over a 12-month period
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Edelweiss Professional Investor Research 15
Disclaimer
Edelweiss Broking Limited (“EBL” or “Research Entity”) is regulated by the Securities and Exchange Board of India (“SEBI”) and is licensed to carry on the business of broking, depository services and related activities. The business of EBL and its Associates (list available on www.edelweissfin.com) are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance.
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This Report has been prepared by Edelweiss Broking Limited in the capacity of a Research Analyst having SEBI Registration No.INH000000172 and distributed as per SEBI (Research Analysts) Regulations 2014. This report does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable. This report is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors.
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Research analyst has served as an officer, director or employee of subject Company: No EBL has financial interest in the subject companies: No
EBL’s Associates may have actual / beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report. Research analyst or his/her relative has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No
EBL has actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of research report: No Subject company may have been client during twelve months preceding the date of distribution of the research report.
There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. A graph of daily closing prices of the securities is also available at www.nseindia.com
Analyst Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
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Disclaimer
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Disclosures under the provisions of SEBI (Research Analysts) Regulations 2014 (Regulations) Edelweiss Broking Limited ("EBL" or "Research Entity") is regulated by the Securities and Exchange Board of India ("SEBI") and is licensed to carry on the business of broking, depository services and related activities. The business of EBL and its associates are organized around five broad business groups – Credit including Housing and SME Finance, Commodities, Financial Markets, Asset Management and Life Insurance. There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years. This research report has been prepared and distributed by Edelweiss Broking Limited ("Edelweiss") in the capacity of a Research Analyst as per Regulation 22(1) of SEBI (Research Analysts) Regulations 2014 having SEBI Registration No.INH000000172.
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