Buy Mahindra and Mahindra; target of Rs 600: Motilal Oswal

Motilal Oswal 's research report on Mahindra and Mahindra

Our last report on M&M – ‘A generational shift underway’ (3rd Jun’20), highlights big changes within the company (CEO change) and its operating environment (agri reforms). The CEO Designate laid out a clear path to address underlying issues and create value through (a) tough actions on loss-making subsidiaries, (b) tightening of capital norms, (c) differentiation of the core SUV positioning, and (d) the realization of nine businesses’ potential identified as billion-dollar candidates. - One of the key questions from the investors has been regarding how much of the recent outperformance of MM was driven by change in the CEO and capital allocation promise. M&M’s top-quartile stock performance is lagging other rural focus names. The analysis of DII portfolio suggests they remain skeptical of the change (under-weight at 0.47% of AUMs v/s 1.07% weight of M&M in Nifty). - We believe M&M’s operating performance on its own warrants a good 17% upside as the stock is trading at ~29% discount to 5-year average P/E, with scope of re-rating if capital allocation is indeed corrected. Maintain Buy with TP of INR600.

Outlook

Our Jun’22E-based SOTP TP is ~INR600/share – an upside of ~20%. At our TP, implied Core P/E is ~13.9x (v/s 5-year average core P/E of ~15.9x and 10-year average of ~14.3x). Maintain Buy.