Maintain ADD on Mahindra & Mahindra - A tepid quarter, sustained focus on capital allocation - HDFC Securities

Ms. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

M&M reported a weak 1Q (PAT of Rs 389mn, -96% YoY), impacted by the automotive segment. While tractor outlook remains upbeat due to encouraging monsoon trends, the demand for SUVs continues to be impacted by intense competition (multiple new competitor launches are lined up). Mahindra continues to focus on efficient capital allocation (targeting RoEs of 18% across business lines) and is seeking partners for SsangYong and EV segment. We reiterate our ADD rating on the stock.

1QFY21 financials: Automotive/tractor volumes were down 77/24% YoY. Revenue declined 56% YoY to Rs 55.8bn. EBITDA margin at 10.3% contracted 375/340bps YoY/QoQ owing to negative operating leverage. Profitability at the tractor division improved with EBIT margin at 20.4% (+280bps QoQ). Automotive segment reported an EBIT loss of Rs 5.8bn. The company reported an exceptional income of Rs 288mn as gain on certain investments. Thus, adj. PAT came in at Rs 389mn (-96% YoY).

Call takeaways: (1) Supply side issues: FES division is currently operating at >90% utilisation and automotive at >50% levels. M&M's market share in tractors contracted by 210bps to 39.1% in 1QFY21, owing to supply-side constraints. (2) LCV segment gaining traction: Volumes in pick-ups and SCV segment have improved due to good rural demand and improving e-com industry. (3) No major shift to gasoline in rural markets: The semi-urban consumers continue to prefer diesel models such as Scorpio, Bolero etc. However, the urban side has witnessed a shift - thus share of diesel has reduced to 44% (vs. 50% YoY) in UVs. (4) Focus on 18% RoE: M&M's subsidiary MANA has cancelled its bid to supply trucks to US postal services as focus remains on efficient capital allocation. The company is also seeking strategic investors for Mahindra Electric. M&M's board has approved the reduction in stake at SsangYong to below 50%.

Maintain ADD: Our SOTP-based target price is unchanged at Rs 610 (14x Jun-22 for the core business). Key risks: Weak response to new models on the downside, faster-than-expected economic recovery on the upside.

Shares of MAHINDRA & MAHINDRA LTD. was last trading in BSE at Rs.629.25 as compared to the previous close of Rs. 629.15. The total number of shares traded during the day was 150139 in over 4114 trades.

The stock hit an intraday high of Rs. 640.5 and intraday low of 622.5. The net turnover during the day was Rs. 94403495.

Source : Equity Bulls

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