Analyst Corner: M&M upgraded to ‘buy’ with revised TP of Rs 721

We upgrade Mahindra & Mahindra (M&M) to ‘Buy’ and revise up FY22E core EPS 8% with TP of Rs 721 (earlier
Rs 633) led by strong Q2FY21 performance; improving auto segment outlook (lean inventory, Thar launch,
recovery in LCVs, supply chain normalisation); stable tractor demand; and jump in value of listed subsidiaries.

While we maintain our target PE (16x) and holding company discount (30%), there exists potential for re-rating as
M&M demonstrates success of its new UV strategy and capital allocation (intent of no loss funding from FY22). While we appreciate impairment recognition and business closures, H1FY21 did see cash support of INR12bn as part of restructuring towards loss-making businesses.

M&M’s Rs 116 bn revenue (up 6% YoY) surpassed our estimate by 7%. Control on other expenses (marketing, travel
and fixed cost rationalisation) translated into sharp EBITDA out performance. The company has recorded its best-ever EBITDA margin of 17.8%. Revenue of FES segment improved 33% YoY (led by volume growth of ~30%) to Rs 48bn (EBIT margin at 24.4%, its best ever). Auto business revenue contracted ~8% YoY, but EBIT margin improved 70bps YoY to 6.5%. We expect adverse margin impact due to a normalising mix (higher share of auto) to be offset by strong cost focus.

The renewed strategy (one more attempt) to revive its volumes in UVs is encouraging.With the launch of Thar,
focus is shifting from developing products for market share gain to sticking to its core positioning. LCVs are
likely to revive and can surprise on the upside. Astable tractor outlook to provide margin/cash flow cushion. M&M
continues to stay on course of its prudent capital allocation strategy and focusing on international business that can
generate 18% RoE. It took impairment charge of `11.5bn (details not disclosed) and decided to shut the aircraft business.

At current valuation, the risk-reward is favourable with potential of earnings upgrade and re-rating. We upgrade to
‘Buy/SO’ from ‘Hold/SP’ with SOTP based TP of Rs 721 (16x March 2022E core EPS of Rs 27, Rs 93 cash/share, Rs 197
for subsidiaries). It is trading at FY21/22E PER of 18.8x/16.9x (ex of listed subsidiaries).