Mahindra and Mahindra’s (M&M) Q3 FY21 results were broadly in-line with our estimates. M & M reported another quarter of strong operating performance. M&M + MVML reported a revenue of Rs 14057 cr, up 16% yoy in Q3 FY21 driven by richer product mix, 20% growth in tractors, partially offset by a decline of 7% in automotive volumes. The farm equipment revenue grew by strong 23.5% yoy at Rs 5281 cr, while the automotive business grew by 12% yoy at Rs 8311 cr. EBITDA margin improved 221 bps yoy and declined 78 bps qoq to 17%. The yoy Mahindra and Mahindra EBITDA margin was driven by richer product mix (higher share of tractor), cost control measure and operating leverage benefits. The EBITDA margin for the quarter was slightly lower than our expectations.

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However, the strong improvement in EBITDA margin of Mahindra and Mahindra led to 33.4% yoy EBITDA growth in Q3 FY21 at Rs 2386 cr. The company’s adjusted net profit was up 77.9% yoy and 33.1% qoq at Rs 1745 cr. M&M continues to focus on expanding its utility vehicle (UV) business, leverage brand recall and improve returns on capital investment. Mahindra and Mahindra reinforced its capex plans of Rs 9000 cr in the next three years, as announced earlier. In terms of its UV business, M&M’s next-gen XUV500 is slated to hit the roads by March 2021, while the next-gen Scorpio is likely to be launched in the second quarter of 2021 with both petrol and diesel engine options.

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Mahindra and Mahindra is planning to accelerate investments in electric vehicles as well and create a global brand in this space. Structural growth drivers remain intact. Sharekhan expects Mahindra and Mahindra to benefit from its leadership status in the tractor space (40% share), strengthening position in the LCV segment and a steady market share in the UV segment. For tractors, the farm sector is expected to remain buoyant, driven by good monsoon and higher crop output. The tractor business has high ROCEs that will help Mahindra and Mahindra improve overall return ratios.

Mahindra and Mahindra also leads in the LCV space with an over 45% market share and a greater than 65% share in the 2-3.5T LCV category. Sharekhan expects M&M to further consolidate market share in the overall LCV segment. Demand for LCVs is likely to be driven by higher demand for short distance movement of goods. In the UV market, we expect Mahindra and Mahindra’s growth to be driven by new launches in highly competitive markets. Concrete steps to achieve an 18% RoE by exiting loss-making subsidiaries and focusing on core businesses will improve overall performance.

Sharekhan expects Mahindra and Mahindra+MVML earnings to grow by 35.8% yoy in FY22E and 15.1% yoy in FY23E, driven by 16.7% CAGR during FY2021-FY2023E in revenues and 120 bps increase in operating profit margin. Sharekhan remains positive on Mahindra and Mahindra’s fundamental growth prospects and hence, maintains a Buy rating on the stock.

Mahindra and Mahindra Key Risks:

Mahindra and Mahindra is facing supply issues due to a supply shortage of micro-processors (semiconductors) used in Electronic Control Unit (ECUs). If the situation persists, longer it can impact the automotive business. Also, the company can be impacted by the second wave of COVID.