Mahindra & Mahindra (MAHMAH) CMP: | 758 Target: | 1000 (32%) Target Period: 12 months BUY August 9, 2021 Healthy performance, firing on all cylinders… About the stock: Mahindra & Mahindra (M&M) is a conglomerate with a presence Particulars in auto, IT, financial services, logistics, hospitality, real estate among others. At the Particular Amount standalone level, it is India’s largest tractor manufacturer (38.2% FY21 market share) Market Capitalization (₹ crore) 94,483 & second largest CV, fourth largest PV maker (27.5%, 5.8% FY21 market share). Total Debt (FY21, ₹ crore) 7,667 FY21 standalone revenue mix – ~56% automotive, ~41% tractors Cash and Inv (FY21, ₹ crore) 10,744 EV (FY21, ₹ crore) 91,406 Best-of-class 20%+ tractor EBIT margins 52 week H/L (₹) 952 / 566 Result Update Result Equity capital (₹ crore) (FY21) 597.4 Face value (₹) ₹ 5 Q1FY22 Results: The company posted healthy Q1FY22 results. Shareholding pattern Sep-20 Dec-20 Mar-21 Jun-21 Standalone net sales declined 12.9% QoQ to | 11,763 crore Promoter 19.6 19.4 19.5 19.5 EBITDA margins at 13.9% were higher by 63 bps sequentially FII 34.7 37.9 38.9 40.1 Consequent standalone PAT for the quarter came in at | 856 crore DII 30.7 28.2 27.4 26.1 Other 15.0 14.4 14.3 14.4 Price Chart What should investors do? The stock price performance has been largely flattish 1200 20,000 over the past five years, in step with the wider Nifty Auto index. 900 15,000 We retain BUY rating on pivot towards capital efficiency, EV proactiveness 600 10,000 300 5,000 Target Price and Valuation: We retain SOTP-based target of | 1,000 for M&M (10x 0 0 EV/EBITDA to standalone business; 35% holding company discount to investments). Feb-19 Feb-20 Feb-21 Aug-18 Aug-19 Aug-20 Aug-21 M&M (LHS) Nifty (RHS) Key triggers for future price performance: Recent event & key risks Leadership in tractor space, post Covid rebound in the automotive domain Posted healthy Q1FY22 results amid continued LCV momentum to aid topline growth, going forward. We Research Equity Retail Key Risk: (i) Semiconductor build 12.7%, 14.8% total volume, sales CAGR, respectively, in FY21-23E – shortage impact on volumes/new New launches, differentiated products to aid UV market share gains launch momentum, (ii) Input cost pressure on margins Operating leverage benefits to result in healthy margins (13.5% in FY23E) Research Analyst Focus on prudent capital allocation (18% RoE vision), EV thrust (six fully electric PV, LCV launches by 2026) remain structural positives Shashank Kanodia, CFA [email protected] Securities ICICI Jaimin Desai Alternate Stock Idea: Apart from M&M, in our OEM coverage we like Tata Motors. [email protected] Long term value drivers (EV transition, deleveraging & FCF focus) intact BUY with a target price of | 375 Key Financial Summary 5 year CAGR 2 year CAGR Particulars FY19 FY20 FY21 FY22E FY23E (FY16-21) (FY21-23E) Net Sales 53,614.0 45,487.8 45,041.0 2.0% 52,410.0 59,356.7 14.8% EBITDA 6,639.6 5,798.0 6,506.1 7.1% 7,029.8 8,028.9 11.1% EBITDA Margins (%) 12.4 12.7 14.4 13.4 13.5 Net Profit 4,796.1 1,330.4 268.6 -39.1% 4,003.0 4,659.5 316.5% Adjusted Net Profit 4,818.6 2,190.4 942.5 -21.5% 4,061.8 4,659.5 122.4% EPS (₹) 40.2 11.2 2.3 33.6 39.1 P/E 18.9 68.2 337.6 22.7 19.5 RoNW (%) 14.1 6.4 2.7 10.9 11.4 RoCE (%) 12.3 8.8 9.5 9.8 10.9 Source: Company, ICICI Direct Research Result Update | Mahindra & Mahindra ICICI Direct Research Key takeaways of recent quarter & conference call highlights Q1FY22 Results: Margin, profit performance above estimates M&M’s automotive revenues declined 24.6% QoQ to | 6,050 crore tracking 19.8% volume drop to 86,848 units & 6% ASP dip to | 6.97 lakh/unit M&M’s performance is not strictly comparable on Tractor revenues rose 6.9% QoQ to | 5,319 crore amid 6.4% rise in volumes QoQ, YoY basis as it has restated base quarter to 99,929 units and flattish ASPs at | 5.32 lakh/unit numbers pursuant to absorption of MVML into M&M Standalone margins posted QoQ increase of 63 bps to 13.9% (I-direct estimate 11.3%), primarily on the back of ~190 bps gross margin expansion (vs. our estimate of ~130 bps contraction). Automotive segment posted ~320 bps EBIT margin decline to 1.7% while tractor margins dipped ~170 bps to 20.3% Q1FY22 Earnings Conference Call highlights Automotive demand is picking up pace for the company and the industry. On the tractor side, South India has been performing better thus far but monsoon has now progressed well in north and east India as well. The company continued to guide for low to mid-single digit FY22E tractor industry growth purely due to high base effect Semiconductor shortage worries remain, with recent lockdown in Malaysia (key supplier) being a fresh concern. XUV700 launch, however, would not be delayed due to supply constraints Commodity prices may start to cool from Q3FY22E. The company has thus far experienced some under-recovery in absolute costs per unit on the automotive side (with entire margin component yet to be passed on) Current employee cost run rate is sustainable Material cost reduction via value engineering, control over fixed costs (e.g. marketing), product mix improvement & price hikes are auto margin levers The size of the domestic organised farm equipment industry is ~| 5,000 crore, with M&M’s share in it at ~10%. Globally, farm equipment industry is double the size of the tractor industry Cargo electric 3-W segment is witnessing decent demand from last mile mobility standpoint. However, lengthy approval/paperwork process is an issue. Passenger electric 3-W segment has been hit hard by Covid M&M has built up tractor inventory (currently within usual ~1 month level) Status of open bookings - >39,000 for Thar (~10 month waiting period), XUV700 has received >40,000 enquiries before >10,000 for XUV300, >4,000 for Bolero, >6,000 for Scorpio, ~30,000 for reveal Bolero Pickup All international farm subsidiaries were profitable (PBT) in Q1FY22 Peer comparison Exhibit 1: ICICI Direct coverage universe (4-W OEMs, tractor OEM’s) CMP TP Rating Mcap Total lakh volumes EBITDA margin (%) RoCE (%) P/E Company ₹ ₹ ₹ crore FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E M&M (MAHMAH) 758 1,000 Buy 94,483 7.1 8.1 9.0 14.4 13.4 13.5 9.5 9.8 10.9 NM 22.7 19.5 Maruti Suzuki (MARUTI) 7,150 6,400 Reduce 2,15,987 14.6 17.7 19.8 7.6 7.2 9.0 4.3 5.9 9.5 51.1 46.7 31.3 Tata Motors (TATMOT) 300 375 Buy 1,14,870 4.9 6.2 7.2 14.3 13.4 14.9 6.3 7.9 14.8 NM NM 7.9 Escorts (ESCORT) 1,225 1,325 Hold 15,016 1.1 1.2 1.2 16.3 13.0 13.5 18.7 14.7 15.1 17.2 18.1 15.7 Source: Company, ICICI Direct Research; Note – Total volumes above are for Tata Motors’ Indian operations and Escorts’ tractor division We believe M&M’s renewed pivot towards efficient capital allocation (vision for 18% RoE at consolidated level), aggressive EV launch pipeline (six fully electric launches in PV, LCV by 2026) and tractor leadership are structural positives. Its standalone return ratios look optically muted vs. peers due to high quantum investments in subsidiaries (listed and unlisted). ICICI Securities | Retail Research 2 Result Update | Mahindra & Mahindra ICICI Direct Research Exhibit 2: Variance Analysis Q1FY22 Q1FY22E Q1FY21 YoY (%) Q4FY21 QoQ (%) Comments Total operating income came in slightly lower than Total Operating Income 11,762.8 12,384.8 5,602.2 110.0 13,512.4 -12.9 expected amid miss on automotive ASPs which declined by 6% QoQ Gross margins expanded by ~210 bps QoQ as Raw Material Expenses 8,192.2 9,039.3 3,788.2 116.3 9,690.0 -15.5 against our expectation of ~130 bps contraction Employee costs rose substantially on QoQ basis; as Employee Expenses 885.5 705.9 678.0 31 723.6 22 per management commentary the same is the new usual run rate Other expenses 1,053.4 1,238.5 586.8 79.5 1,309.6 -19.6 EBITDA 1,631.7 1,401.0 549.2 197.1 1,789.3 -8.8 Margins rose by 63 bps QoQ surprisingly, primarily EBITDA Margin (%) 13.9 11.3 9.8 407 bps 13.2 63 bps tracking gross margin expansion Other income 205.2 326.9 127.8 60.6 131.0 56.7 Other income came in much lower than expected Depreciation 558.6 597.1 548.4 1.9 558.7 0.0 Interest 71.4 103.9 66.9 7 95.2 -25 Tax 272.8 258.8 14.0 1,848.4 331.3 -17.7 PAT beat was on account of higher than expected PAT 855.6 768.2 112.0 663.9 48.4 1,666.3 EBITDA EPS 7.7 6.4 0.5 1,569.1 1.4 466.5 Key Metrics Automotive ASPs declined by 6% QoQ to ₹ 6.96 Auto revenues (| crore) 6,050.2 6,595.9 2,051.8 194.9 8,026.7 -24.6 lakh/unit FES revenues (| crore) 5,318.6 5,454.2 3,340.8 59.2 4,975.5 6.9 Tractor ASPs were flattish QoQ at ₹5.32 lakh/unit EBITDA margins (%) 13.9 11.3 9.8 407 bps 13.2 63 bps Source: Company, ICICI Direct Research; Pl Note: Base quarter numbers have not been reinstated to reflect merger of MVML into M&M Exhibit 3: Change in estimates FY22E FY23E (| Crore) Old New % Change Old New % Change Comments Revenue 53,465 52,410 -2.0 60,630 59,357 -2.1 We marginally trim our revenue estimates for FY22E & FY23E EBITDA 6,286 7,030 11.8 7,859.0 8,029 2.2 FY22E margin estimates are revised upwards to reflect beat in Q1FY22 while FY23E margin estimates are raised modestly by 56 EBITDA Margin (%) 11.8 13.4 166 bps 13.0 13.5 56 bps bps.