India Equity Research Automobiles February 10, 2021 MAHINDRA & MAHINDRA POST-CONFERENCE NOTES KEY DATA Capital allocation at forefront Rating BUY Sector relative Outperformer Price (INR) 915 12 month price target (INR) 1,113 We hosted Mahindra & Mahindra (M&M) at the Edelweiss India e- Market cap (INR bn/USD bn) 1,154/15.8 Conference 2021–The New Order. Highlights: 1) Capital allocation Free float/Foreign ownership (%) 81.1/33.4 What’s Changed decision pertaining to international subsidiaries almost complete. Target Price ⚊ 2) Across products, M&M has minimal channel inventory currently. Rating/Risk Rating ⚊ 3) Supply chain challenges in tractors and CVs now mostly overcome. INVESTMENT METRICS UVs impacted by ECU shortage. 4) Low inventory, parts shortages and 250 wait list in key models across segments offer scope for mix 185 120 optimisation to cushion the spike in commodity costs. 55 -10 As two major RoIC drags – UVs and subsidiaries – get addressed, we Sales Growth EPS Growth RoE PE (%) (%) (%) (x) expect M&M’s valuation to re-rate as highlighted in (Mis)perceptions Automobiles MM IN Equity and misfires. Maintain ‘BUY’ with TP of INR1,113. FINANCIALS (INR mn) Key takeaways Year to March FY20A FY21E FY22E FY23E Subsidiary classification in Category A (MAgNA, Peugeot Motorcycles), B Revenue 4,48,655 4,56,843 5,63,129 6,16,631 EBITDA 63,506 73,323 81,091 88,178 (Mitsubishi, Sampo Rosenlew) and C (SYMC, GippsAero, GenZe, MFCS) almost Adjusted profit 43,534 45,162 51,537 57,039 complete. Decision pending on MANA, Automobili Pininfarina, Erkunt, Hisarlar. Diluted EPS (INR) 36.5 37.9 43.2 47.9 EPS growth (%) (19.7) 3.7 14.1 10.7 Core capex spend for next three years will be INR90bn (starting FY22) versus RoAE (%) 10.2 12.3 12.6 12.5 INR120bn in past cycle. Investment spend will also be lower compared to past. P/E (x) 25.4 24.5 21.5 19.4 EV/EBITDA (x) 18.0 15.0 13.0 11.5 SsangYong losses will not reflect from next quarter as it has been classified as Dividend yield (%) 0.4 0.4 0.5 0.5 discontinued operations. Deal with potential investor is moving forward. However, looking at pre-packaged rehabilitation plan versus ARS earlier. PRICE PERFORMANCE Thar and New XUV300 have been very well received and have a significant 950 52,000 waiting list. Cumulative bookings for Thar have crossed 38,500 as on Feb 1, 2021, 810 46,600 with 6,000 plus new bookings in January. 670 41,200 530 35,800 ECU shortage (impacting autos segment most) is expected to persist till June-July. 390 30,400 250 25,000 Feb-20 May-20 Aug-20 Nov-20 Steep increase in commodity prices, partially offset by sales prices increase (taken in Q2FY21) and value engineering actions. MM IN Equity Sensex Outlook and valuations: Re-rating potential; maintain ‘BUY’ Explore: M&M reiterated its commitment to focus on value creation and judicious capital allocation. At the same time, the company is not compromising on its culture of incubating new businesses. It will be much more focussed in approach, with attention on asset light businesses. We await more details regarding capital allocation to new ventures (within FES and autos) such as electrification, 2Ws, Financial model Podcast international subsidiaries, etc. As the RoIC drags gets addressed, the true franchise value of the tractor and LCV businesses will be recognised. Also, RoIC drags will start contributing to cash flow post-restructuring. We maintain ‘BUY/SO’ with SOTP-based TP of INR1,113. M&M is Corporate access Video trading at FY22/23E PER of 21.5x/19.4x (ex-listed subsidiaries). Chirag Shah Jay Mehta +91 (22) 6623 3367 +91 (22) 4088 6072 [email protected] [email protected] m Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited MAHINDRA & MAHINDRA Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 4,48,655 4,56,843 5,63,129 6,16,631 Share capital 5,965 5,965 5,965 5,965 Gross profit 1,49,988 1,48,931 1,77,386 1,94,239 Reserves 3,40,326 3,79,955 4,25,682 4,76,621 Employee costs 32,237 33,121 37,730 41,314 Shareholders funds 3,46,291 3,85,920 4,31,647 4,82,586 Other expenses 54,245 42,486 58,565 64,746 Minority interest 0 0 0 0 EBITDA 63,506 73,323 81,091 88,178 Borrowings 31,530 31,530 31,530 31,530 Depreciation 23,631 23,711 24,472 25,662 Trade payables 72,006 85,111 1,04,912 1,14,879 Less: Interest expense 1,245 3,500 3,000 3,000 Other liabs & prov 51,305 53,514 62,459 66,961 Add: Other income 15,391 13,705 14,641 16,032 Total liabilities 5,18,179 5,73,974 6,49,342 7,15,691 Profit before tax 54,021 59,817 68,260 75,549 Net block 1,69,093 1,60,382 1,65,910 1,70,248 Prov for tax 18,513 14,655 16,724 18,509 Intangible assets 0 0 0 0 Less: Other adj (28,112) 0 0 0 Capital WIP 0 0 0 0 Reported profit 35,509 45,162 51,537 57,039 Total fixed assets 1,69,093 1,60,382 1,65,910 1,70,248 Less: Excp.item (net) (8,026) 0 0 0 Non current inv 1,53,433 1,68,433 1,76,433 1,84,433 Adjusted profit 43,534 45,162 51,537 57,039 Cash/cash equivalent 45,132 85,303 1,28,307 1,72,713 Diluted shares o/s 1,192 1,192 1,192 1,192 Sundry debtors 29,012 34,178 42,130 46,133 Adjusted diluted EPS 36.5 37.9 43.2 47.9 Loans & advances 6,511 6,072 6,333 6,490 DPS (INR) 3.8 4.0 4.2 4.5 Other assets 79,069 83,677 94,299 99,744 Tax rate (%) 34.3 24.5 24.5 24.5 Total assets 5,18,179 5,73,974 6,49,342 7,15,691 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Gross profit margin (%) 33.4 32.6 31.5 31.5 Reported profit 35,509 45,162 51,537 57,039 Staff cost % sales 7.2 7.3 6.7 6.7 Add: Depreciation 23,631 23,711 24,472 25,662 Other expenses % sales 12.1 9.3 10.4 10.5 Interest (net of tax) 355 2,643 2,265 2,265 EBITDA margin (%) 14.2 16.1 14.4 14.3 Others (5,287) (12,848) (13,906) (15,297) Net profit margin (%) 9.7 9.9 9.2 9.3 Less: Changes in WC (14,749) 6,831 10,806 5,805 Revenue growth (% YoY) (15.1) 1.8 23.3 9.5 Operating cash flow 39,458 65,499 75,173 75,474 EBITDA growth (% YoY) (15.7) 15.5 10.6 8.7 Less: Capex (47,755) (15,000) (30,000) (30,000) Adj. profit growth (%) (19.7) 3.7 14.1 10.7 Free cash flow (8,297) 50,499 45,173 45,474 Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) 10.2 12.3 12.6 12.5 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) 14.6 15.9 16.2 16.1 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 54 51 47 50 Tractor - dom. vol. (% (7.0) 18.0 8.0 5.0 Receivable days 27 25 25 26 YoY) Payable days 107 93 90 95 UV - dom. vol. (% YoY) (12.0) 8.0 8.0 8.0 Working cap (% sales) 1.4 0.1 (1.7) (2.3) LCV - dom. vol. (% YoY) (25.0) (20.0) 15.0 15.0 Gross debt/equity (x) 0.1 0.1 0.1 0.1 M&M Total vol (nos) 7,77,953.0 7,36,102.7 9,16,170.3 9,98,500.8 Net debt/equity (x) 0 (0.1) (0.2) (0.3) % Growth (17.2) (5.4) 24.5 9.0 Interest coverage (x) 32.0 14.2 18.9 20.8 EBITDA/vehicle 81,631.7 99,610.2 88,510.4 88,310.6 Valuation Drivers Valuation Metrics Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E EPS growth (%) (19.7) 3.7 14.1 10.7 Diluted P/E (x) 25.4 24.5 21.5 19.4 RoE (%) 10.2 12.3 12.6 12.5 Price/BV (x) 3.2 2.9 2.6 2.3 EBITDA growth (%) (15.7) 15.5 10.6 8.7 EV/EBITDA (x) 18.0 15.0 13.0 11.5 Payout ratio (%) 12.9 10.7 9.8 9.3 Dividend yield (%) 0.4 0.4 0.5 0.5 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited MAHINDRA & MAHINDRA Company Description Mahindra & Mahindra (M&M) operates through various segments—automotive (sales of UVs/CVs and 3Ws, spare parts and related services); farm equipment (tractors, spare parts and related services); financial services (services related to financing, leasing and hire purchase of automobiles and tractors); steel trading & processing; infrastructure; hospitality, IT services and telecom It also acquired majority (~75%) stake in Korea-based Ssangyong Motors Company in FY11 to become a global SUV company.