Revisiting capital allocation
Current crisis a catalyst to reboot, reinvent and reignite value creation
Mahindra and Mahindra’s (M&M) FY20 Annual Report highlights the company’s recalibration of capital allocation to reduce losses and increase accountability of its various businesses. Besides listing out priority areas for the auto and FES businesses, it also explains future growth areas for farm mechanization and shared mobility/logistics. Key insights from the Annual Report highlighted below:
* M&M is focused on using the current crisis (in the form of substantial losses in global businesses) to reboot (streamline capital allocation policy and bring accountability), reinvent (realize the potential of few unlisted businesses) and reignite value creation for all its stakeholders.
* Positive sentiment in the rural economy should drive faster recovery for tractors/Auto sector. Besides potential demand-side challenges (lower incomes, job uncertainties, financing issues), supply-side bottlenecks (labor availability, limited working hours, social distancing norms) are also expected.
* It has identified priority areas for its core businesses such as strengthening of the core business, aggressive cost optimization, reorientation of capex and turnaround in global subsidiaries.
* M&M is taking appropriate steps to strengthen its UV portfolio through new product launches, introduction of petrol engines and leveraging the Ford JV.
* The tractor business saw green-shoots during Dec’19 to Feb’20 with ~9.7% volume growth, before the Covid-19 related lockdown hurt demand. Consistent growth in horticulture is also driving growth for tractors.
* M&M is continuing its focus on farm mechanization to address concerns of farm productivity and labor shortage. It has an active presence in the farm mechanization space and offers efficient and affordable mechanization solutions across the spectrum of farming operations.
* It has launched a unique delivery model – Farming-as-a-Service (FaaS) under the brand name Krish-e – to support farmers across the crop cycle. Krish-e aims to provide an integrated agronomy advisory, mechanized services and high-tech digital solutions to small farmers to reduce their cost of cultivation, enhance productivity and improve farming outcomes.
* M&M is also focusing on the shared logistics segment for both personal mobility as well as cargo logistics. It further expanded its presence in this segment by acquiring stake in Meru (shared personal mobility). This is in addition to its stake in Zoomcar, which it had acquired in FY19 (~16.1% stake).
* Mahindra Electric (subidiary focused on EVs) achieved EBITDA break-even in FY20. e-3Ws offer good growth potential due to better operating economics and easy deployment for first/last mile connectivity (incl. at metro stations).
* Valuation and view: Implied Core P/E for M&M is ~12.8x FY22E S/A EPS and 1.3x Core P/BV. Our Jun’22E-based SOTP TP is ~INR695/share – an upside of ~17%. At our TP, implied Core P/E is ~15.2x (v/s 5-year average core P/E of ~15.9x and 10-year average of ~14.3x). Maintain Buy.
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