What should investors do with M&M post Q1: buy, sell or hold?

Mahindra & Mahindra (M&M) share price gained in early trade on August 10 despite company reported a weak set of numbers for the quarter ended in June 2020.

The company has registered a massive 97 percent year-on-year decline in profit for June quarter 2020 as lockdown hit volumes. Profit including Mahindra Vehicle Manufacturers, a 100 percent subsidiary of the company, stood at Rs 67.8 crore for the quarter ended June 2020, against Rs 2,259.74 crore in the same period last year.

M&M said profit before the exceptional gain of Rs 29 crore declined 96 percent YoY to Rs 39 crore for the quarter.

Revenue from operations fell 56.4 percent YoY to Rs 5,589.43 crore in Q1 FY21 as vehicles sales declined 78 percent to 27,565 units during the quarter.

Prabhudas Lilladher | Rating: Upgrade to buy | Target: Raise to Rs 702 from Rs 531

With improved rural outlook, broking house increase consolidated EPS by 4%/8% as it expect the contribution of high margin FES segment to remain elevated. This has resulted in 50bp/70bp upgrade in FY22/23 margins.

It value core auto business at 14x (v/s 13x to factor in for superior mix and outlook) plus the subsidiary value of Rs 158 at 40 percent holding company discount (v/s 50 percent earlier).

ICICIdirect | Rating: Buy | Target: Rs 700

ICICIdirect expects sales, EBITDA to grow at 5 percent, 11.6 percent CAGR, respectively, in FY20-22E. Broking house continues to like M&M for its strong rural presence and sharpened capital allocation focus, although the pace of recovery on the automotive side remains a key monitorable.

Motilal Oswal | Rating: Buy | Target: Rs 720

Despite the company's recent outperformance, valuations are still at a substantial discount to its 5-year average.

The implied core P/E for the company is 16.1x/12.9x FY21/FY22E EPS and 1.5x/1.3x Core P/BV; this implies 19% discount to the 5-year average P/E and 29% discount to the 5-year average P/B.

Dolat Capital | Rating: Accumulate | Target: Rs 692

In tractors, M&M has lost market share, stood at 39.1 percent in Q1 FY21 versus 41.2 percent Q4 FY20 led by supply constraints. Even as utilisation levels ramped up to 90 percent, it was unable to fully meet the demand. Consequently, inventories have fallen to unusually low levels.

Dolat Capital expects the company to regain its lost market share once supply issues are resolved. Industry outlook is positive, given the record output of the Rabi crop and a good monsoon. In addition, re-stocking will also aid volume growth in the forthcoming months.

Sharkhan | Rating: Buy | Target: Rs 750

M&M’s tractor division is witnessing strong demand-pull, while automotive volumes are picking up, driven by strong rural sentiments. At the CMP, the stock is trading at 12x its FY2022 core earnings, which is lower than its long-term historical average of 15x.

With a good outlook for core business along with prudent capital allocation policy, M&M multiples are likely to get re-rated considering companies with lower market share such as Escorts are trading at higher multiples than M&M and M&M remains our preferred pick in the space.

Kotak Institutional Equities | Rating: Buy | Target: Rs 725

Q1 EBITDA was below our estimates due to steep volume decline in the automotive division, said Kotak Institutional Equities.

It expects near-term to remain challenging for auto business on uncertainties related to COVID and expect tractor demand to recover as the rural economy remains strong. The focus on tightening capital allocation norms could lead to re-rating of the stock, reported CNBC-TV18.

Jefferies | Rating: Underperform | Target: Rs 435

Q1 EBITDA fell 68 percent YoY (a 7 percent miss) while recurring net profit declined 96 percent YoY. The demand commentary was positive and production seems a key challenge for now.

Jefferies believe rally already factors in good tractor outlook & capital allocation change, reported CNBC-TV18.