Mahindra & Mahindra

Rural India outlook positive on good rabi procurement, cash flow – M&M

Update on the Indian Equity Market:

On Monday, NIFTY closed up at 15,834 (+0.7%). Top gainers in NIFTY50 were Hindalco (+3.8%), ONGC (+2.4%), and SBI (+2.2%). The top losers were Tech M (-1.6%), HDFC Life (-1.4%), and BPCL (-0.6%). The top sectoral gainers were REALTY (+2.7%), METAL (+1.2%) and PVT BANK (1.1%) and sectoral losers were IT (-0.2%) and PHARMA (-0.01%).

Excerpts of an interview with Mr. Hemant Sikka, President of Farm Equipment Sector, M&M (M&M) with CNBC-TV18 dated 2nd July 2021

  • In the month of June 21, the total tractor sales went up 32 per cent, exports jumped over 90 per cent and the market share rose to 42.5 per cent. The company is optimistic about tractor demand in the coming months. The farm sector equipment industry has grown by 19 per cent in June and M&M has outperformed showing 32 per cent growth.
  • The rural outlook looks bright as demand has increased in June. Overall, the rabi procurement has gone around very well. Cash flow in the rural heartland is very positive.
  • With the second wave of COVID subsiding, confidence is coming back. It was a play of two factors, clearly, a little bit of pent-up demand and also some fresh demand coming in that is why June has played out so well for the industry overall.
  • They are getting into a very high base in Q2, Q3, and Q4 FY21 so they will wait for July and August, see how the monsoon pans out, and then maybe at the beginning of September, they will be able to revise the guidance.
  • Overall guidance remains the same and they will try to maintain their usual high & healthy margins.
  • In June, pent-up demand was there due to lockdowns in April & May but there was a little bit of fresh demand as well. The tractor industry has been on the roll and if the monsoon progresses well then the industry will be able to perform much better.
  • None of the players has a very high inventory. M&M also has a very reasonable inventory. In fact, they have reduced inventory in Q1, so production will be running at full capacity.
  • Automakers have raised prices in recent times with most citing increased output costs as a reason. M&M plans to gradually do so.
  • They have taken their latest price increase on July 1. They have taken a 3 per cent price increase. Before that on April 1 and January 1, they had taken the previous 2 price increases. Another increase might be there in 2HFY22.
  • Some of the states have come back as far as supply is concerned like Maharashtra, all the suppliers are running at 100% capacity. In Karnataka, Bangalore, suppliers are running at 50-60% capacity.
  • Overall, they are looking at positive sentiment from the Rural side.

Asset Multiplier comments:

  • Due to positive sentiment building up in rural India, we expect the tractor industry to perform very well.
  • Overall waiting time has increased due to semiconductor shortage but there has been a good demand for their newly launched models (XUV, Thar, bolero).

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of M&M was ₹ 791/- as of 05-July-2021.  It traded at 20x/ 17x the consensus earnings estimate of ₹ 38.8/ 45.5 for FY22E/23E respectively.
  • The consensus price target is ₹ 947/- which trades at 21x the earnings estimate for FY23E of ₹ 45.5/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Three-box framework for SUV-focus in EV space – M&M

Update on the Indian Equity Market:
On Monday, Nifty closed in the red at 14,930 (-0.7%), recovering from the day’s low due to a rebound in the metals and technology stocks. JSWSTEEL (+2.4%), TECHM (2.4%), and TATASTEEL (+2.3%) led the index gainers while DIVISLAB (-2.9%), BAJAJFINSV (-2.7%), and GAIL (-2.6%) led the laggards. Among the sectoral indices, METAL (+1.0%), IT (+0.6%), and PSU BANK (+0.2%) were the only gainers while MEDIA (-1.4%), PHARMA (-1.3%), and FINANCIAL SERVICES (-1.2%) led the laggards.

Mahindra & Mahindra (M&M) recently reorganized its EV (Electric Vehicle) strategy by setting up 2 new verticals, one for last-mile mobility, and the other for EV tech center. Mr. Rajesh Jejurikar, ED- Auto and Farm Sectors, M&M explained the rationale behind this strategy on CNBC TV-18 on 12th March 2021. Here are the excerpts of the interview:

  • To undertake a comprehensive look at the future, M&M has deployed a three-box framework. This framework suggests different businesses need different kind of attention and focus depending on company strategy and goals. Box 1 is the one that has the ability to scale up/Box 2 and 3 are more mid-long-term focus and need more technology and know-how.
  • According to M&M, Last mile mobility is a box 1 business, which has a ready customer market today and they have to drive growth and penetration. Their box 2 business is the SUV focus IC-derived electric vehicles, and box 3 is EV which is preparing M&M’s strategy for the longer term.
  • They have created a strong talent pool with good products at Mahindra Electric, which will help them in the future as well.
  • They want to be SUV-focused in EV space as well. Currently, there are no plans of manufacturing EVs in shared mobility space (Sedans and hatchbacks).
  • They believe the EV market penetration to be much higher by 2025-30, hence the need for a comprehensive SUV EV portfolio. They hope to have an electric variant for all price points they operate in.
  • The level of readiness should be for 50-80% conversion in FY2025-30. The extent of conversion is very hard to predict at this stage so they are not setting any targets per se.
  • They will launch eKUV100 and eXUV300 between CY21-CY22.
  • The last-mile mobility segment is at an inflection point and the pace of sales should pick up significantly. The goods carrier segment is completely ready and a committed sales team and channel will help drive sales for this segment. The PV (Passenger Vehicle) was also ready but the slowdown due to Covid-19 has hampered the sales and M&M expects sales to pick up in 2HCY21.
  • For last-mile mobility, export is a huge opportunity. M&M is already getting leads for alliances and partnerships in different markets across the world. Some of their key customers in the B2B segment are planning to take M&M products in their global ecosystem. While these deals will take some time to fructify, the initial response has been good.
  • When M&M canceled their JV with Ford, the rationale was the money saved from JV will be put into the EV business. Rs 30,000 mn has been set aside for creating a strong EV portfolio.

Asset Multiplier Comments

  • With the Covid-19 outbreak, the personal mobility demand has increased. Though Gen Z and millennials would prefer EVs for personal mobility, the success of EVs would largely depend on increasing penetration and availability of the infrastructure, which is currently lacking.
  • M&M has been stressing on reducing investments in non-profitable subsidiaries and focusing on the core business. This three-box framework for EV vertical is a step in the right direction.

Consensus Estimate: (Source: market screener and tickr websites)

  • The closing price of M&M was ₹ 846/- as of 15-March-2021. It traded at 31x/ 21x/ 18x the consensus earnings estimate of ₹ 27.4/ 41.1/ 46.8 per share for FY21E/FY22E/FY23E respectively.
  • The consensus target price of ₹ 959 implies a PE multiple of 20x on FY23E EPS of ₹ 46.8/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Expect reasonable revenue growth for the industry in FY21– M&M

Update on the Indian Equity Market:
On Wednesday, Nifty ended flat at 14,565 while PSU banks outperformed. The top gainers for Nifty 50 were M&M (+5.7%), SBI (+4.6%), and Adani Ports (+4.4%) while the losing stocks for the day were Bajaj Finance (-2.9%), Shree Cement (-2.8%), and HDFC (-2.8%). Top gaining sectors were PSU bank (+3.3%), Auto (+0.9%), and Bank (+0.7%) while Pharma (-0.9%), Financial Service (-0.6%), and Realty (-0.3%) were the losing sectors.

Edited excerpts of an interview with Mr Pawan Goenka, MD & CEO, Mahindra & Mahindra (M&M); dated 12th January 2021 from Economic times:

The demand is now no longer a pent-up demand, it is a structural demand that is coming back.

With the new product launches, all companies have plans for 2021. Many of the companies had held back on product launches and that is certainly going to spur demand now. On top of that, if the government comes in with some kind of stimulus to grow the auto demand, then the demand will really take off and will lead to a great year.
The Heavy Commercial Vehicle (HCV) industry which was lagging for the last several months has started showing signs of revival. There was good growth in November and December. Once HCV is also on the growth path, the auto industry overall should look pretty good in FY22E.

Mr Goenka said GST rate cuts may not be possible because of the need for tax revenues in these difficult times, but GST rates should be simplified. There are eight or nine different GST rates. He hopes that the government will just keep two rates – 28% and 43% and not have all of these different rates. Right now, a rate reduction is not expected. When the economy is fully back on track, the government could reconsider rate reduction.
The massive cost cuts in 1Q & 2Q for the Company is not cost cutting but removing the fat. That is where a lot of the cost reduction has happened in terms of travel. Use of digital media for meetings has resulted in a significant reduction in cost in 1Q & 2Q FY21 and this will never come back. Maybe travel will go up somewhat but probably 75-80% will continue. The reductions have happened in events, inventory costs and communication costs. These will not come back to earlier levels, according to Mr Goenka. He said that more than half of the reduction is for good and continue to aid in the Company’s bottom line.

In the auto industry, this year there has not been any significant price cut or increased incentives given to propel demand.

Compliance with BS-VI emission norms has led to prices going up, therefore per unit revenue has gone up which will lead to a top-line increase for the Company. Given that volumes are also going up and the Company does not expect 2021 to be any worse than 2020 there will be a revenue growth for most companies. There are some companies that will do better, some will not and competition will continue. But overall for the industry, he sees reasonable revenue growth in 2021E.

Many companies have not passed on the full BS-VI cost increase yet and as the companies become more comfortable with the continued volume or continued demand, the gap in the BS-VI cost increase will get passed on during this year.

The big thing looming ahead of the industry is the commodity price increase, which will also lead to a price increase. That is not desirable if the auto industry were to pass on all the cost increases, then there could be a significant increase in prices. So commodity price increases are a matter of concern right now for the auto industry.

Most companies are coming back to their core where they have a right to win and have strength in India and globally and this is automatically leading to capital allocation which is going more towards the core.
The Company is going to be working on multiple platforms for personal mobility.

The overall positive sentiment in the rural area, in the agriculture area, somewhat tempered because of the farm agitation right now but that will be soon resolved. Mr Goenka remains very bullish on the Agri sector and on the overall rural demand coming from the income of the Agri sector for durables that are sold in rural areas.
M&M is one of those who had very robust demand this year. As a result, a marginal increase in prices is possible and usually in January every year, prices have increased. So M&M has announced a 2% price increase. It should not be a dampener on demand.

A partial increase is very much doable for most companies. Companies will have to do it because nobody can absorb the kind of commodity price increases that we are seeing and one will have to simply get used to it. Not only auto but the effect of commodity price rise will also be felt by users of almost all sort of durable goods.

The auto industry overall has gone through some very difficult times because of the investments in BS-VI which led to increasing in costs, most of which could not be passed on. The cost reduction that happened during Covid outbreak has come to the rescue and therefore most companies have managed to maintain their profit margin.

On an average, before Covid, in the passenger vehicle segment, a 30-35 days’ inventory was considered to be good. Now, most companies are saying 30-35 days is too high and they need to learn to work with 20-25 days of inventories.

If all companies bring down the inventory level to 20-25 days and also do very good inventory control in their plants and to the suppliers, the auto industry could take out as much as Rs 50,000 crore from the working capital. This is a learning from Covid that will help the industry reduce working capital and improve the balance sheet of almost all the companies.

Consensus Estimate: (Source: market screener website)
The closing price of M&M was Rs 838/- as of 13-January-2021. It traded at 31x/ 22x/ 20x the consensus EPS estimate of Rs 27.3/37.4/42.0 for FY21E/ FY22E/ FY23E respectively.

The consensus target price of Rs 762/- implies a PE multiple of 18x on FY23E EPS of Rs 42.0/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Not keen on diversifying at this point – M&M

Update on the Indian Equity market:
On Friday, Nifty50 ended 0.2% higher at 12,720. EICHERMOT (+7.4%), BAJAJFINSV (+3.7%), and COALINDIA (+3.1%) led the index gainers while TATAMOTORS (-3.3%), LT (-2.0%), and HDFC (-1.1%) led the laggards. Among the sectoral gainers, METAL (+1.7%), REALTY (+1.3%), and PHARMA (+1.1%) were the leaders while MEDIA (-0.9%), and FMCG (-0.1%) were the only index losers.

Excerpts of an interview of Mr. Anish Shah, MD & CEO-designate, M&M published in Business Standard on 12th November 2020:
• The stock price has more than doubled since March. The board’s decision to not invest in SsangYong was important and signaled to investors that the management is serious about capital allocation.
• The next re-rating will happen once the international subsidiaries turn around and start contributing to earnings. The second set of actions is toward driving the growth of the domestic business. Third, they have identified significant growth drivers for the future, which are termed ’10 gems’.
• They are conducting a detailed analysis of growth drivers of international subsidiaries’ performance; does it have the potential for an 18 percent return on equity? They are working to see if they can revisit their go-to-market, product, and channel strategies. The subsidiaries will have to show a profitable path.
• M&M was the best performing stock in the Nifty for 17 years. Though acquisitions were made even then, that was driven by a very high level of fiscal discipline. Now, the acquisitions will be made, just that the bar in terms of fiscal discipline will be as high as it was in the past.
• They don’t expect to diversify even when they make an acquisition. There are 10 businesses right now and they believe there is a lot of potential to grow. They are keen on scaling up the diversified footprint.
• The joint venture with Ford has been delayed because of the pandemic and government approvals.
• There is a lot of synergy from material costs in the auto and farm equipment segments. They announced the best-operating margins and that is why those segments will be together.

Consensus Estimate: (Source: market screener website)
• The closing price of M&M was ₹ 629/- as of 13-November-2020. It traded at 23x/ 17x/ 15x the consensus earnings estimate of ₹ 26.9/ 36.7/ 41.1 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 667 implies a PE multiple of 16x on FY23E EPS of ₹ 41.1/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Plants running at 100% capacity- M&M

Update on the Indian Equity Market:
On Thursday Nifty closed -0.1% lower at 11,527. Among the sectoral indices Bank (-1.4%), PVT Bank (-1.4%), FIN Services (-1.0%) closed lower. IT (+1.50%), Pharma (+0.9%) and FMCG (+0.8%) closed higher. ICICI Bank (-2.1%), Bharti Airtel (-1.9%) and Axis Bank (-1.9%) closed on a Negative note. Infratel (+10.9%), GRASIM (+7.2%) and Titan (+5.9%) were among the top gainers.
Excerpts from an interview of Mr. Hemant Sikka, President Farm Equipment Sector, M&M with CNBC-TV18 dated 2nd September 2020:
• Tractor sales were up 65% YoY, M&M remains positive because of good harvest and bountiful monsoon.
• The production started from mid-May and now plants are running at 100% capacity.
• The demand is robust throughout the country. The kharif sowing is going well which gives a confidence to farmers.
• The domestic market grew by 69% in August 20.
• On Finance, the availability is better compare to 3-4 months back. Initially finance was an issue as offices were not open, it was difficult for people to reach offices.
• The improvement in financing is seen from middle of June. The collection is also good as farmers have a better cash flow.
• Mr. Sikka said that for the next 3 months the company is expecting a full blast of production.
• The stock is at historic low levels.
• The challenges on supply side had eased out. All suppliers have ramped up their production.
• A good festive season is expected as supply chains are coming back on track and all factories running.
Consensus Estimate: (Source: market screener and Investing.com websites)
• The closing price of M&M was ₹ 642/- as of 03-September-2020. It traded at 25x/ 18x/ 16x the consensus Earnings per share estimate of ₹ 26.1/35.7/41.1 for FY21E/ FY22E/ FY23E respectively.
• The consensus average target price for M&M is ₹ 585/- which implies a PE multiple of 14x on FY23E EPS of ₹41.1/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Tractor demand will continue to remain buoyant – M&M

Update on the Indian Equity Market:
On Thursday, NIFTY ended up 99 pts (+0.89%) at 11,200.
Among the sectoral indices, IT (+1.8%), FMCG (+1.4%) and METAL (+1.4%) were top gainers while PSUBANK (-0.32%) was the only loser.
Among the stocks, TATASTEEL (+3.8%), INFY (+2.9%) and GAIL (+2.6%) were the top gainers. EICHERMOT (-1.3%), SHREECEM (-1.2%) and ADANIPORTS (-0.9%) were the top losers.

Tractor demand will continue to remain buoyant – M&M

Edited excerpts of an interview with Mr. Hemant Sikka, President, Farm Equipment Sector (FES), Mahindra & Mahindra Ltd with Business Standard dated 5th August 2020:

Hemant Sikka commented that the company noticed a turnaround in tractor business in December. Things were going very well.

• Comments on key factors driving sales: This is the peak season for tractors. The strong demand momentum continued, aided by positive sentiments due to good cash flows to farmers, higher kharif sowing, a timely and normal monsoon cumulatively across June and July, and continued higher rural spending by the government. While it is too early to share target figures for the entire year, it is expected that this demand will continue to remain buoyant in the coming months.
• He informed that 75% of the tractor sales are on finance, M&M have aligned finances very well starting in May itself building out further in June and July. In addition to land preparation, tractors provide machine power for performing various farm applications and can be used to pull a variety of farm equipment, while also relieving the burden on farm labor and improving farmer’s livelihood.
• When asked about the supply chain constraints he replied that with tractor capacity at nearly 95%, some localized lockdowns enforced in certain cities are hampering the ramp-up of the supply chain, thus affecting production at OEMs. More than 90% of the dealers have started.
• When asked about the Capex plans, he said that K2 is a large investment, and K2 will be over by the end of FY21, some will be before FY22. (Under K2 project, the company is creating a new platform on which a new range of tractors, developed in collaboration with Mitsubishi of Japan, to further strengthen its position, both in the domestic).
• The company also made engine investments in the recent past. Investment in Swaraj tractor was also made by M&M. He further added that they are not compromising with the products for the future. It’s just that the company is completing a peak of Capex in this Capex cycle.
• While FES has a strong tractor portfolio, M&M is building technology skill sets beyond it and working on introducing a range of farm machinery, with the idea of taking technologies used in large landholding farms around the world and making them affordable and accessible to small landholding farmers. This is based on having established three global technology Centers of Excellence in Japan, Finland & Turkey, through acquisitions made over the last couple of years, from new products will be launched in FY21.
• Simultaneously, M&M is also focusing and developing Farming as a Service vertical (FaaS), which will focus on giving farmers advisory and precision farming technologies to help our farmers increase their productivity and get more output from their efforts.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of M&M was ₹ 610/- as of 06-Aug-2020. It traded at 24x/18x/16x the consensus earnings estimate of ₹ 25.7/34.0/39.5 per share for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 585/- implies a PE multiple of 15x on FY23E EPS of ₹ 39.5/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

Update on the Indian Equity Market:

 

On Thursday, Nifty closed 1.0% higher at 10,755. Within NIFTY50, HINDALCO (+6.6%), HDFC (+4.3%), and SBIN (+4.1%) were the top gainers, while INFRATEL (-1.9%), COALINDIA (-1.5%) and TECHM (-1.2%) were the top losers. Among the sectoral indices, METAL (+1.9%), FIN SERVICE (+1.6%), and BANK(+1.4%) gained the most.  FMCG(-0.3%) was the only sector to close in red.

 

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

 

Excerpts of an interview with Mr. Anish Shah, Joint MD–Mahindra & Mahindra published on ET Auto dated 7thJuly2020:

  • M&M’s loss making subsidiaries had a difficult couple of years. M&M is now looking to take direct action.
  • The loss-making subsidiaries are being evaluated and categorized into 3 groups – Category A: companies with clear path to 18% Return on Equity (ROE). Category B: companies with unclear path to profitability but can deliver quantified strategic benefit, and Category C: Calls for a possible exit through alliance or sale as it does not fit into A or B.
  • This review of subsidiaries will be carried out every 6 months to ensure businesses are on track and milestones are being achieved.
  • Over the last 4 years, profits of M&M were being eroded by the loss-making subsidiaries- 1% in FY17, 12% in FY18 because of international subsidiaries, 25% in FY19, and over 1.7% in FY20.
  • 2 years ago, M&M management started ‘challenge round’ where as Head of Group Strategy, Mr. Anish Shah was asked to challenge all proposals and recommend to the board whether to invest or not. In the process, tough calls have been taken on two-wheeler business, Baby Oye, and Mom and Me among others.
  • In 4QFY20, M&M took a call to stop further investments in SsangYong and Gen Z. Almost 60% of losses came from SsangYong and Gen Z.
  • By the end of this FY21E, the remaining loss making subsidiaries will be addressed and shut down in absence of a clear path. Entering into FY22, a lot of these problems will be history.
  • M&M aims to have a simpler structure going forward. While the focus is looking at the loss making subsidiaries and getting them back on track, M&M does not want to change the spirit of entrepreneurship.
  • Multiple reasons led to the losses in last 2 years. The environment is one reason and excess confidence in some business is the other. Essentially, there will be a higher financial discipline that will come in.
  • M&M’s share price, as of high of August 2018, had a 31% annualized growth rate over a period of 17 years. The factors that drove this return were, – earnings-per-share growth of 34%, cash generation of Rs 23 bn per year on an annualized basis and annual return on equity of 22%. In order to get back to that kind of performance, M&M will have to get back to 20%-22% RoE and 30%-plus growth rate in cash generation.
  • M&M’s ROE in the last few years has gone down from 20% to 12%. In stage 1, by fixing loss making subsidiaries M&M should be back to 18% ROE. In the next stage, taking a look at 0-10% ROE businesses and fixing them, should mean going back to 20-22% of ROE.
  • M&M’s preference is to have a solid and conservative business over a rapidly growing risky business. M&M Finance’s business is strong and M&M is putting in capital to ensure that in any scenario, if things get much worse, there is no impact on the business. Mahindra Finance has always raised capital before it is needed, so they didn’t wait until the capital was needed. There were some analyst concerns regarding the capital issue but M&M is confident that M&M Finance should have a very high degree of subscription.
  • M&M aims to be the gateway to the largest and fastest growing themes in India and hospitality is one of them. M&M has a timeshare model and a long-term bond with the consumers. As a result, M&M expects that it’s hospitality business may not be impacted much. Post the COVID-19 crisis, M&M’s hospitality business can grow much faster.
  • As for Meru, M&M is looking at it closely to see what the real path to profitability is. M&M does not have a definitive answer to that yet.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of M&M was ₹ 563/- as of 09-July-2020. It traded at 22.1x/ 16.7x the consensus EPS estimate of ₹ 25.5/ 33.7for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 556/- implies a PE multiple of 16.5x on FY22E EPS of ₹ 33.7/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Focus on cash conservation & tightening capital allocation – M&M

Update on the Indian Equity Market:

Markets remained muted amid monthly F&O expiry as Nifty closed the day 0.2% lower at 10,289. The top gainers for Nifty 50 were ITC (+5.6%), HEROMOTOCO (+2.9%) and BAJFINANCE (+1.9%) while the losing stocks for the day ASIANPAINT (-3.1%), HINDALCO (-2.3%) and IOC (-2.1%). The gaining sectors for the day were FMCG (+2.3%), PHARMA (+0.8%) and BANK (+0.4%) whereas IT (-1.2%), REALTY (-1.0%) and METAL (-0.6%) were the losing sectors for the day.

Edited excerpts of an interview with Mr Pawan Goenka, Managing Director, Mahindra & Mahindra Ltd (M&M); dated 15th June 2020 from CNBC TV-18:

  • Mr Goenka said that the board took a decision that the Company needs to be much tighter on  capital allocation and prioritize where they want to put the money.
  • M&M is looking at all the subsidiaries right now to see whether they will be turning around profitable in the next two years. The company will take the decision in the coming few months about its subsidiaries.
  • Speaking about Peugeot Motorcycles, he said it was hit due to the pandemic. As per the plan, it could have been profitable during this year. However, due to COVID-19, the factories in China are down for quite some time. The company has lost the full peak season in Europe. The management will take the decision on the future of Peugeot motorcycles after reviewing its future.
  • Mahindra Electric turned EBITDA positive in FY20 and the company is on the way to become profit positive or cash-flow positive in the coming quarters.
  • He is confident about the strength of the balance sheet to fight the pandemic. The company holds a fairly strong cash position with more than Rs 100,000 mn cash on its balance sheet.
  • In the near term, the company’s primary objective is to find a third party investor in Korean manufacturer SsangYong as it is in need of cash for survival. 
  • The company reported a consolidated net loss of Rs 32,550 mn during the 4QFY20 due to the COVID-19. In the tough economic period, the company is looking to focus on capital allocation strategies.

Consensus Estimate: (Source: market screener, investing website)

  • The closing price of M&M Ltd was ₹507/- as of 25-June-2020. It traded at 20x/ 15x the consensus EPS estimate of ₹ 25.3/ 33.6 for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 558/- implies a PE multiple of 17x on FY22E EPS of ₹ 33.6/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Update on the Indian Equity Market:

On Tuesday night, PM Narendra Modi announced a nationwide lockdown for the next 21 days to fight against the spread of Covid-19. On Wednesday, NIFTY continued gains for the 2nd day and ended at 8,318 (+6.6%). This rally might be in the expectation that an economic package to counter economic disruptions might be announced soon.

Among the sectoral indices, Financials gained the most while no sector index ended negatively. FIN SERV (+9.7%), PVT BANK (+8.5%) and BANK (+8.4%), AUTO (+4.3%) were the top gainers. Out of the NIFTY50 stocks, RELIANCE (+13.8%), HDFCBANK (+12.4%) and KOTAKBANK (+11.9%) rallied the most. INDUSINDBK (-3.3%), IOC (-3.1%) and COALINDIA (-2.8%)  were among the few stocks that ended in red.

Business cannot take priority over the safety of people- Mr Pawan Goenka, MD, Mahindra & Mahindra

Edited excerpts of an interview with Mr Pawan Goenka, Managing Director of Mahindra & Mahindra; dated 23rd March 2020. The interview aired on CNBC-TV18.

  • As a contribution to tackling the Covid-19 crisis, the Mahindra Group has taken certain steps. The Group has started work on how their manufacturing facilities can be used to make ventilators. They have put their projects team on standby to assist the government or the army in erecting temporary care facilities. In addition, Mahindra Holidays will offer their resorts as temporary care facilities.
  • The foremost consideration is given to the well-being of the group’s employees. Plants in Nagpur, Kandivali and Chakan have already shut down. Over the next few days, most plants will be shut down.
  • No one is in a mood to buy cars right now. Dealerships are also shutting down due to lockdowns. The automotive business is slowing down. Tractor business is also slowing down, although not to the same extent.
  • Mahindra Group is playing it by the day as things are very dynamic. It is difficult to predict how long the shutdown will last. If lockdown lasts only until 31st March, the business that has slowed down will come back in the next 2-3 months. If lockdown lasts longer than 31st March, the comeback will take much longer.
  • Need for tractors in agriculture cannot disappear. The tractor buying peaks in May-June period. If Mahindra does not miss out this season, then the tractor business will be fine. However, to tap that season, production will have to take place in April. But in the current scenario, the business will not take priority over the safety of the Group’s people and communities.
  • For the auto and tractor business point of view, the foremost responsibility of the company is to make payments to its suppliers and low wage earners-especially the contract workers and daily wage workers.
  • Mahindra Finance is closely watching the concern of liquidity in the market. There is a concern of EMI payments not happening but that will not happen immediately. The farmers have probably already received revenue from the previous cycle and so there might not be an issue.
  • The big unknown from the perspective of Mahindra Financial is what will happen to the financial cycle, i.e money coming into the NBFC from both borrowings and EMI payments. It is very important to get that cycle going. But right now, the sales pull will also be less hence the demand for financing will be less.
  • The group has an advantage in terms of business diversification.
  • Mr Goenka is of the opinion that although the Government is also under pressure and we should not expect too much, the government has to step in at this point. Mr Goenka has mentioned three things that he expects from the government at this point:
  1. For the auto industry, the immediate issue is the 31st March deadline to liquidate BS-IV inventory. It is not in the hands of the Government as it’s a supreme court matter. Mr Goenka is hoping that the court extends the deadline and gives extra time to liquidate the BS-IV vehicles. As no OEM is manufacturing BS-IV vehicles any longer, there is no problem of excessive dumping of those vehicles.
  2. The second area where Government intervention is needed is to help in the liquidity situation. If a moratorium of say 3 months is imposed on recognition of EMI non-payment as NPAs, NBFCs will be able to have a bit of a breathing room. The government needs to ensure that the financial cycle does not break down because it will take a long time to repair if broken.
  3. Thirdly, the Government must not delay any payments due to the industry as right now the industry needs funds.

Consensus Estimate: (Source: market screener, investing.com websites)

  • The closing price of M&M was ₹ 274/- as of 25-March-2020. It traded at 7.2x/ 7.7x/ 6.7x the consensus EPS estimate of ₹ 38.3/ 35.4/ 40.6 for FY20E/ FY21E/ FY22E respectively.
  • The consensus target price of ₹ 651/- implies a PE multiple of 16.0x on FY22E EPS of ₹ 40.6/-

Mahindra & Mahindra Ltd- 1QFY20- Slowdown hurting the profitability

Dated: 8th August 2019

Quarterly Performance:

Key Highlights:

  1. Net sales were at Rs 128,050 mn, a decline of 4% YoY. The domestic auto sales volume for the quarter was 5% down YoY whereas the exports were down 20% YoY. The export sales were impacted due to the South Asia region which declined 61% YoY. The domestic tractor volumes were down 15% YoY whereas exports have shown a muted growth of 1% YoY.
  2. EBITDA stood at Rs 17,940 mn, a decline of 15% YoY. The operating performance was impacted due to subdued sales and also due to increased advertising & marking expenses.
  3. The operating margins were at 14% vs 15.8% in 1QFY19.
  4. Net profit before the exceptional income was at Rs 9,180 mn for the quarter, a decline of 26% YoY.
  5. The Company reported an exceptional income of Rs 13,600 mn for the quarter which increased the PAT by 80% YoY at Rs 22,600 mn. This was on account of gain on sale of shares by M&M benefit trust and gain on buy-back by an associate/transfer of certain long-term investments.

Management Commentary:

  • Management expects some revival in the tractor industry post-August-19. They have guided for flattish sales for FY20E. They expect a 6-8% sales volume growth for the tractor industry in the coming few months. Good monsoons, an uptick in sowing and low base effect in the 2nd half of the year could provide further upside.
  • Dealer inventory is under control. Company is only at around 2,000-3,000 tractors higher than the desired level of inventory.
  • The management has refrained from providing any industry guidance. Auto industry might see some upsides on account of decent monsoons, favourable commodity prices and pre-buying in the latter part of the year. The rate cut transmission by banks, stimulus in the form of GST rate cut and supportive govt. policies would further help the industry according to M&M management.
  • Post-BS-VI, the small engine vehicle (1.2-litre engines) would 100% be petrol variant. They expect the diesel & petrol mix to be 50:50 post-BS-VI launch.
  •  M&M took a marginal price increase in both auto and FES (Farm Equipment Segment) segments this quarter.

Consensus Estimate (Source: market screener website)

  • The closing price of M&M Ltd is Rs 522/- on 08-Aug-19. It traded at 12.6x / 12.3x the consensus EPS for FY 20E / FY21E EPS of Rs 41.56 / 42.28 respectively.