Accumulate Mahindra and Mahindra; target of Rs 692: Dolat Capital

Dolat Capital's research report on Mahindra and Mahindra

MM's Q1FY21 standalone + MVML EBITDA at Rs.5.73bn was slightly below estimates due to weak performance in the Auto segment offset by higher-than-expected margin in the farm equipment segment (FES). EBIT margin for FES improved by 114bps YoY to 20.4%. Management highlighted that the near term demand outlook is promising fueled by improved rural sentiment, but difficult to make long-term forecasts. Outlook for the tractor remains strong led by good monsoon and better prospects for Kharif crop. We expect low channel inventory (auto and farm) is expected to support wholesale in the near term. Moreover, new launches like new Thar (expected to launch in festive season) and strong rural demand for Bolero, Scorpio and the pick-ups will provide support after the festive season. The company is focused on strengthening core business, tightening capital allocation and turning around its core/strategic subsidiaries. The management is looking to bring down its stake to below 50% in Ssangyong Motors and in talks with potential investors.

Outlook

M&M’s exposure (Tractor+ Auto) to the rural market at about 65% is one of the highest among its peers. These areas are not expected to be as impacted by the on-going COVID-19 disruption as urban ones. We value the core business at Rs.537/share (16x FY23 core EPS) and subsidiaries at Rs.155/share, and recommend Accumulate the stock, with a TP of Rs.692.

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