Mahindra share price rises over 2%, here is what investors should focus on | HDFC Securities report
Mahindra and Mahindra reported healthy Q2 FY21 margins of 17.8% as tractors share increased in the overall product mix (its share is at 50% of total volumes vs. 39% in FY20). While tractors continue to benefit from the above normal south-west monsoon, the outlook for SUVs remains impacted by intense competition (Kia Seltos was the key launch in Q2).
HDFC Securities reiterates ADD rating on the stock with target price of Rs 685. Mahindra and Mahindra reported healthy Q2 FY21 margins of 17.8% as tractor’s share increased in the overall product mix (its share is at 50% of total volumes vs. 39% in FY20). While tractors continue to benefit from the above normal south-west monsoon, the outlook for SUVs remains impacted by intense competition (Kia Seltos was the key launch in Q2). M&M has announced the exit from one more international business “Gipps Aero” as management is attempting to increase RoEs to 18% across business lines.
Key risks:
1) Weak response to new models on the downside
2) Faster than expected economic recovery on the upside.
Q2 FY21 Financials:
Tractor segment: Revenue grew 33% YoY, led by 30% volume growth. The segment reported record EBIT margin of 24.4%
Automotive: Revenue was down 8% YoY (though sales were 3x higher on QoQ basis). EBIT margin came in at 6.5% vs 5.8% YoY.
M&M+MVML: Revenue grew 6% YoY to Rs 115.9 bn. EBITDA margin at 17.8% came in at a multi-quarter high and expanded 370 bps, owing to a higher share of tractors in the product mix and cost cutting initiatives. The company reported an exceptional expense of Rs 11.5bn related to impairment on international subsidiaries. Adjusted PAT came in at Rs 13.1 bn (-3% YoY).
Call Takeaways:
(1) Inventory at below normal levels: Both farm equipment and auto segment currently have reduced inventories as the supply chain is gradually ramping up, amidst rising demand. M&M’s market share in the farm equipment segment has come down to 38.2% vs 39.1/41.2% QoQ/FY20, owing to the same. Tractor industry growth is now revised upwards to low double digits for FY21E.
(2) Divestments continue: After scaling down investments in SsangYong, MANA and Genze, M&M is exiting Gipps Aero, its aerospace subsidiary in Australia.
(3) Auto segment: The launch of new Thar has been well received and has secured 20k bookings.
(4) Investments: M&M has invested Rs 28 bn in subsidiaries in Q2, including Rs 17 bn in the MMFS rights issue and Rs 8 bn in other subsidiaries.
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