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On right track

We interacted with M&M’s MD & CEO Mr Anish Shah. He indicated: i) the group’s clear focus on right-to-win across businesses; ii) FY21 marked higher-than-expected investments in subsidiaries due to onetime costs (business shutdowns) and that investments hereon will be in growth gems, which would be largely funded by dividend and investment income; and iii) KPIs for senior management teams across businesses have been changed too with focus on EPS growth, RoE,

As indicated in Misfires and (Mis)perceptions, M&M is on the right track to address the RoIC drags, which can drive the stocks’ re-rating. Maintain ‘BUY/SO’.

Key takeaways

UVs: The new strategy (unveiled two years ago) has started paying dividends. Earlier mistakes were lack of focus on right-to-win (e.g. Marrazzo and KUV1OO). Response to Thar has been better than expected. The Thar portfolio will be expanded to keep it relevant over the next five years. Thar and XUV7OO are bringing in a new set of customers. There exists a strong following for Bolero and Scorpio, and hence launched Neo variant to expand the franchise.

Tractors: The focus is on growing agri implements revenue as the next leg of farm mechanisation (10x growth in next 5–7 years). Globally, it is 2x the size of tractors market; in India it is ~5% (largely unorganised). Key drivers: improving farm income, lack of focus (till now) on lowering costs and customisation (already WIP), educate farmers on benefits (time saving), and focus on lease/rental models.

Financing and real estate business: In financing, the focus is on stabilising NPA. Volatile NPA erodes investor confidence despite the fact delinquencies have been very low. Besides, there is keener focus on adding affluent customers compared with current focus on earn-and-pay customers. In real estate, execution was a key issue. Unable to add land bank as well as monetise some assets that have been with the company for a decade. In both businesses, there has been induction of senior leadership to drive cultural change.

Valuation and view: On course to address RoIC drags

M&M is on course to address the two RoIC drags: UVs and investment in group companies. In UVs, with a revised core SUV focus, as volumes ramp up, margins should rise significantly. In case of group companies, RoE, growth and cash flow generation are the key screens for of future investments. For instance, in case of Pininfarina, the next product (after Batista) will be developed only if there is external validation (in form of investment) and product pricing is substantially lower than current ~USD2mn per vehicle

Notably, there seems to be focus on driving a cultural change across the board. We are enthused that management is aspiring to change MMFS’s business model to 25% revenue growth, 15% RoE and stable the NPA business. Similarly, the focus on monetising assets, including growth gems, will drive the re-rating of the tractor franchise over long term. Maintain ‘BUY/SO’ with an SoTP-based TP of INR1,098.

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