M&M continues to walk the talk on two key ROIC drags (refer to (Mis)perceptions and Misfires)--UVs and subsidiary losses. Maintain ‘BUY’ with SOTP-based TP of Rs 1,089.
We hosted Mahindra & Mahindra (M&M) at the Edelweiss India CXO e-Conference 2021, US & UK edition. Highlights: i) Capital investment guidance for FY22–24 at INR17bn – partly is discretionary and is guided by 18% RoE. ii) Momentum in tractors has started to revive, though auto has not yet seen same momentum; expects the same with a lag. iii) UVs – clear focus on right to win.
M&M continues to walk the talk on two key ROIC drags (refer to (Mis)perceptions and Misfires)–UVs and subsidiary losses. Maintain ‘BUY’ with SOTP-based TP of Rs 1,089.
Key takeaways: Management guided core capex spend for next three years will be Rs 120bn· (starting FY22) versus Rs 90bn guided earlier. Rs 30bn increase is due to spend towards EV. M&M also guided for INR5bn of investments – Rs 1.5bn in auto and farm subsidiaries and balance in group companies. The funding in group companies will be via dividend and other monetisation of assets.
Focus on 18% RoE for investment stays. If capex or investment needs are not justifiable by underlying growth· drivers/RoE, management will not pursue theme. Management is confident of regaining market share in tractor/UV segment.·
Market share loss in FY21 was mainly due to supply-side issues coupled with low inventory to cater pent-up demand post unlock of wave one of covid-19. It expects single digit industry growth in tractor in FY22 (on high base of FY21).· The company is seeing sharp recovery in tractor demand in June post unlock. It remains confident of 7-8% CAGR in tractor industry over the next 8-10 years.
Outlook and valuations: Growth story intact; maintain ‘BUY’ As concerns around tractor volumes get addressed with uptick in agri economy as well as revival in its commercial vehicle and UV demand, we expect the Street to recognise its strong franchise in tractors and commercial vehicles. Also, as the ROIC drags get addressed, the true franchise value of the tractor and LCV business will be recognised. Furthermore, ROIC drags will start contributing to cash flow post-restructuring. We maintain ‘BUY/SO’ with SOTP-based TP of Rs 1,089.