Maintain ‘buy’ on M&M as our top pick in the sector

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December 19, 2020 8:31 AM

We estimate the carrying value of SYMC on M&M books to be ~Rs 12.6 billion, thus a write-off of this amount may also need to be taken in case SYMC files for bankruptcy and the stake sale does not take place. But this will not be a cash loss.

M&M india share price, investment in M&M sharesRevenue of the firm stood at Rs 14,057 crore, up 16% from the same period last year.

Mahindra and Mahindra (M&M) has notified the exchanges that its 74.65%-owned subsidiary Ssangyong (SYMC) has loans aggregating to Rs 6.8 billion that is committed by M&M to its bankers, of which SYMC has missed repayments on Rs 4.08 billion, which were due and payable on 14 December 2020.

We try to answer some of the key queries on the topic based on out views.

Why has SYMC defaulted? Is this negative for M&M’s stock price? M&M had made a commitment to not invest further in SYMC.

The default indicates that M&M is sticking to its commitment.

In that sense, we see it as a positive for M&M shareholders.

Does the default mean that the SYMC stake sale by M&M will not happen? The stake sale process is an independent process. It can still go on. SYMC may need to file for bankruptcy though.

What is the total expected loss for M&M from the SYMC default? Out of the Rs 6.8 billion commitment, recovery will be made from SYMC or any new investor and M&M will only need to pay the balance amount. Thus, actual cash loss could be lower than Rs 6.8 billion.

We don’t value M&M’s investment in SYMC, so the risk to our valuation is only to the extent of the cash loss.

We estimate the carrying value of SYMC on M&M books to be ~Rs 12.6 billion, thus a write-off of this amount may also need to be taken in case SYMC files for bankruptcy and the stake sale does not take place. But this will not be a cash loss.

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