Arihant Capital recommended hold rating on Mahindra and Mahindra with a target price of Rs 621 in its research report dated June 16, 2020.
Arihant Capital 's research report on Mahindra and Mahindra
M&M + MVML reported weak operating performance was offset marginally by margin expansion. Net sales stood at Rs. 90,047 mn (-34.8% YoY / -27.1% QoQ). Gross margins expanded by 40 bps to 35.7% driven by commodity cost benefits and cost rationalization measures by the company. EBITDA was at Rs. 12,275 mn (-34.3% YoY / -25.6% QoQ) with margin of 13.6% (+1bps YoY / +3bps QoQ). PAT was at Rs 3,226 (-70% YoY / -64.4% QoQ). PAT after exceptional items was primarily impacted due to write down of investment in Ssangyong and some other international subsidiaries. The total volumes (auto + tractors) de-grew by 35.6% YoY to 1.51L units led by subdued demand. The blended realisation has seen an increase of 36% YoY to Rs 8.02L per unit on account of better product mix. On the Concall, the management indicated quicker recovery in rural areas, driven by record rabi production, higher MSPs, outlook of a normal monsoon, and increased rural spending by the government. Further, the pace of recovery in tractors has surprised positively (May wholesales reached near normal) and the company is ramping production in the tractor space. The board also recommended a final dividend of Rs 2.35 per equity share for the financial year 2019-20.
At CMP of Rs 508, M&M currently trades at FY20 PE of 17.2x.M&M earnings were ahead street estimates as company managed to maintain margins despite the steep fall in the topline. However Prolonged COVID-19 infection could dampen consumer sentiments and impact demand. Further, increased competitive intensity in the utility vehicles segment could affect stock. Further, the pace of recovery in tractors has surprised positively (May wholesales reached near normal) and the company is ramping production in the tractor space led by strong margin execution and guidance of further cost-cutting initiatives. At CMP of Rs 508, stock is trading at core PE of 17.5x FY22. We upgrade our rating to Buy from Hold earlier and value it with SOTP valuation for a target price of Rs 621.
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