Mahindra & Mahindra Accumulate Strong order backlog and cost reduction are key positives CMP Rs 846 . M&M revenue and EBITDA numbers were broadly in line estimates in Target / Upside Rs 950 / 12% 4QFY21. EBITDA (M&M+MVML) jumped by 60 % YoY to Rs.19.6 bn with NIFTY 15,338 expanded margin at 14.7% (+107bps YoY). EBIT margin for the automotive division expanded by 87bps YoY to 5% and FES 436bps to 22%. Scrip Details Equity / FV Rs 5,974mn / Rs 5 . The management looks bit cautious for tractors as 2nd wave of Covid-19 Market Cap Rs 1,052bn impacting the rural consumption. Expect low single digit growth in FY22 and confident to outperform industry growth with aspiration to gain in USD 15bn market share. Growth opportunity in farm machinery segment is high and 52-week High/Low Rs 952/ 431 expect double digit growth for next couple of years. Avg. Volume (no) 47,88,370 . In automotive the company is facing Supply side challenges including Bloom Code MM IN shortage semiconductor and supply of component, management expect Price Performance 1M 3M 12M things will get better from July onwards. Demand is strong with high waiting periods in UVs- Thar (10 months) and XUV300 (3 months.) Absolute (%) 9 5 94 Rel to NIFTY (%) 6 0 35 . Margin pressure visible due to sharp spike in RM prices, the company is attempting to mitigate it through price hike and cost reduction, the Shareholding Pattern company continued its focus on cost optimization and reduced its fixed Sep'20 Dec'20 Mar'21 expenses by over Rs 9bn over the last two years & hence keeping its margin resilience even under challenging times. Promoters 18.9 18.9 18.9 MF/Banks/FIs 30.5 28.3 27.4 . Company continues to follow up on its commitment to address capital allocation concerns by prudent capital spending and curtailing loss making FIIs 37.5 40.1 41.2 subs. The company generated operating cash flow of Rs. 100bn and free Public / Others 13.2 12.7 12.6 cash flow Rs.67bn in FY21. Losses from international subsidiaries have reduced from Rs.34bn in FY20, to Rs.23bn in FY21 and expected to be Valuation (x) Rs.3bn in FY22E. FY21A FY22E FY23E P/E 25.7 22.4 18.3 . Despite short term hiccups, we continue to maintain our positive stance Result Update on M&M on the back of strong order book in Automobile, cost reduction EV/EBITDA 15.2 13.6 11.6 exercise along with curtailing losses in subsidiaries and strong FCF ROE (%) 2.6 12.7 14.1 generation. We value the core business at Rs.702/share (18x FY23 core RoACE (%) 10.8 11.4 13.0 EPS) and subsidiaries at Rs.248/share, and Maintain Accumulate rating on the stock, with a SOTP based TP of Rs. 950. Estimates (Rs mn) Q4FY21 Result (Rs Mn) FY21A FY22E FY23E Particulars Q4FY21 Q4FY20 YoY (%) Q3FY21 QoQ (%) Revenue 4,45,744 5,39,028 6,12,782 Revenue 1,33,382 90,047 48.1 1,40,565 (5.1) EBITDA 69,775 77,081 89,466 Total Expense 1,13,777 77,773 46.3 1,16,709 (2.5) PAT 40,983 46,859 57,349 EBITDA 19,605 12,275 59.7 23,856 (17.8) EPS (Rs.) 33.0 37.7 46.1 Depreciation 5,899 6,172 (4.4) 6,042 (2.4) EBIT 13,706 6,103 124.6 17,814 (23.1) Other Income 1,178 3,155 (62.7) 5,618 (79.0) Interest 971 359 170.8 1,039 (6.6) Analyst: Abhishek Jain EBT 5,514 (26,877) (120.5) 10,253 (46.2) Tel: +9122 40969739 Tax 3,888 5,673 (31.5) 4,944 (21.4) E-mail: [email protected] RPAT 1,625 (32,550) (105.0) 5,309 (69.4) APAT 10,024 3,226 210.7 14,292 (29.9) Associate: Kripashankar Maurya (bps) (bps) Tel: +91 22 40969741 Gross Margin (%) 30.8 35.7 (487) 31.5 (66) E-mail: [email protected] EBITDA Margin (%) 14.7 13.6 107 17.0 (227) NPM (%) 1.2 (36.1) 3737 3.8 (256) Tax Rate (%) 70.5 (21.1) 9163 48.2 2230 EBIT Margin (%) 10.3 6.8 350 12.7 (240) May 29, 2021 Tractor demand to recover from June onwards . The tractor sales remained weak in the months of April and May as 2nd wave of the covid-19 has impacted the rural areas as well. Tractor demand is expected to recover to normal levels by end of Jun’21 and expected to grow in low single-digit in FY22. M&M is confident to outperform industry growth with aspiration to gain in market share. Growth opportunity in farm machinery segment is high and expect double digit growth for next couple of years. Management expect recovery in volume in coming months, the demand sentiment is expected to remain positive on account of strong macro- economic factors such as good crop production along with strong food grain prices, adequate and uniform availability of water, and availability of retail financing along with recovery in commercial-use demand. M&M remains the undisputed leader and has largely maintained its market share due to its strong rural network and product development capabilities. Going ahead we expect the company to gain market share in tractor segment led by capacity addition and new launches. Farm Int’l subsidiaries turned profitable in Q4FY21. High waiting period for Automotive division, supply side constraint continue . M&M Automotive segment underperformed in FY21 due to supply side constraint. Strong demand was witnessed across segment like LCVs, UVs- Thar and XUV300, however shortage of semi- conductor continues to constrain production till July-21. Demand for New Thar is encouraging and cumulative booking has crossed to 55K with 16k+ new bookings 4Q. 47% buyer opting for automatic variant. The company has ramped up. XUV300 has also seen a strong demand with 90% growth in bookings in H2FY21 over H2FY20 and waiting period stands at 3month. Bolero and Scorpio had strong sales with 10k/month during the quarter with waiting period of 6-8 weeks. The company is looking to launch 9 new products in PVs and 14 in LCV by 2026. EVs - in FY22F/23F the company will work on launching e-KUV and e-XUV300 mainly for shared mobility, Reducing losses of Subsidiaries and capital allocation . On a consolidated level, losses from international subsidiaries have reduced from Rs 34 bn in FY20, to Rs 23bn in FY21 and expected to be Rs 3bn in FY22E. Subsidiaries of the Farm Equipment sector registered positive PBIT for the third consecutive quarter with a turnaround in its international operations The company has classified all subsidiaries in 3 parts. Category A – Have a clear path to 18% RoE (MAgNA, Peugeot Motorcycles). – MagNa and Peugeot Motorcycles business are showing promising recovery and expected to achieve breakeven in FY22 Category B – No clear path to RoE, but are a clear strategic benefit (Mitsubishi and Sampo Rosenlew). May 29, 2021 2 Mahindra & Mahindra Category C – No clear path to 18% RoE and no strategic benefit. So M&M will exit from these (SYMC, GippsAero, GenZe, MFCS). The company has taken an impairment of Rs. 12.14b and Losses from SYMC will not show up from next quarter. The company has guided a capex of Rs 120bn (including Rs 9bn for Auto and 3bn for Farm equipment) and investment Rs 50bn over the next three years. Reduction in losses from international Subsidiary PAT (Rs. Bn) (After Non-controlling interest, before extraordinary Item ) FY20 FY21 Key Farm Subsidiaries (8.07) (1.32) MAgNA (4.83) (1.28) Erkunt (0.55) 0.11 Hisarlar (0.57) 0.12 MAMJP (0.78) (0.07) (1.34) (0.2) Others Key Auto Subsidiaries (9.66) (5.86) Automobili Pininfarnia (1.23) (1.81) MANA (4.74) (2.91) PMTC (2.19) (0.44) GENZe (1.09) (0.31) Others (0.41) (0.39) Source: DART, Company Actual vs DART Estimates Particulars (Rs mn) Actual Dart Estimates Variance (%) Comments Revenue 1,33,382 1,30,460 2.2 EBIDTA 19,605 20,310 (3.5) Higher RM cost EBIDTA Margin (%) 14.7 15.6 (87.0) APAT 10,024 13,180 (24) Lower other income Source: Company, DART Change in Estimates (Rs mn) FY22E FY23E New Previous % Cng New Previous % Cng Net sales 5,39,028 5,33,959 0.9% 6,12,782 5,98,546 2.4% EBITDA 77,081 80,094 -3.8% 89,466 92,176 -2.9% EBITDA margin (%) 14.3 15.0 (70) 14.6 15.4 (80) APAT 46,859 49,528 -5.4% 57,349 59,135 -3.0% EPS (Rs.) 37.7 39.8 -5.4% 46.1 47.6 -3.0% Source: Company, DART May 29, 2021 3 Mahindra & Mahindra Assumption table (in '000 units) FY19 FY20 FY21 FY22E FY23E Total PV 255 187 157 212 265 % YoY 2 (26.6) (15.9) 35.1 24.9 LCV 238 193 153 188 215 % YoY 15 (18.7) (20.8) 22.5 14.5 MHCV 11 5.9 3.1 4.7 6.3 % YoY 14 (46.0) (46.9) 50.0 35.0 Three wheelers 67 62 21 33 44 % YoY 22 (7) (67) 60 35 Total Domestic 570 448 334 437 531 % YoY 10 (21) (26) 31 21 Exports 39 27 18 24 30 % YoY 37 (30.0) (32.0) 30.0 25.0 Total Auto 609 475 352 461 560 % YoY 10.9 (21.9) (25.9) 30.9 21.5 Tractor Domestic 317 292 344 347 326 % YoY 4 (8) 18 1 (6) Export 14 10 11 12 14 % YoY (12) (27) 7 15 14 Total tractor 330 302 354 360 340 % YoY 4 (9) 17 1 (5) Source: Company, DART SOTP valuation table Particular Per share value Core business EPS FY23E (Multiple 18x) 702 Subsidiaries Tech Mahindra 145 MMFS 58 Mahindra Lifespace 8 Mahindra Holidays 13 Swaraj Engines 4 MCIE 13 Mahindra Logistics 7 Total valuation for Subs and others with 25% discounts 248 Price (INR) 950 Source: Company, DART May 29, 2021 4 Mahindra & Mahindra Key conference call highlights Outlook .