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Capital calls taken under broader 18% RoE framework

We attended the virtual analyst meet hosted by M&M wherein the company provided a business update on notably three domains: (i) Update on potential investor coming on board of SsangYong Motors and potential financial implication for M&M (equity & debt exposure) (ii) amicable calling off of JV with Ford Motors (announced in October 2019) and (iii) supply side constraints (semi-conductor chips) impacting volumes in the near term.

SsangYong Motors: potential investor likely to materialise

M&M shared that it is in advanced discussions with a potential investor coming on board in its ailing South Korean automobile arm SsangYong Motors, thereby owning majority stake in the company. Consequent to the transaction, M&M expects its stake to reduce to ~30% with the deal expected to close in about two month. As far as financial implications for M&M is concerned, M&M’s equity investment as on date in SsangYong Motors is at ~| 980 crore with direct debt advances at ~| 250 crore and ~| 680 crore as guarantor for debt raised by SsangYong Motors. Hence, in total, equity exposure in SsangYong is pegged at ~| 980 crore while total debt exposure is at ~| 950 crore. Actual amount of write downs i.e. equity or debt will depend upon the deal contours as and when they materialise. As far as cash implication is concerned, total fresh cash outflow in worst case is limited to ~| 680 crore i.e. debt guaranteed by M&M. Given that SsangYong Motors’ labour union is on board the restructuring exercise, the M&M management is confident that the write-down or cash outflow will be limited in nature. Going forward, from FY22E onwards, since M&M intends to be a minority shareholder in SsangYong, it will not have to consolidate SsangYong numbers leading a positive rub off in its own consolidated PAT. SsangYong clocked sales of ~| 20,000 crore in FY20 with corresponding (PAT) loss at ~| 3,000 crore with loss attributable to M&M at ~| 2,300 crore

Increase in capital outflow- chief reason for JV call off with Ford

M&M announced a JV with Ford in October 2019 and we were quite enthused by M&M’s access to Ford’s automobile capacity in India. M&M, however, has notified that it is amicably calling off the JV with ford amid increase in capital requirement for the proposed JV (initially envisaged at ~| 1,400 crore). M&M has not made any meaningful investments on this front nor has it deployed any major resources for the proposed JV.

Valuation & Outlook

M&M is a conglomerate with varied business interest. However, the company has now commenced its path on RoE accretion as it realises that healthy capital efficiency is paramount for long term self-sustenance of its business model as well as to create wealth for its shareholders. In the recent past, M&M has taken the hard calls and we remain constructive on it. We continue to maintain BUY rating on M&M with an unchanged target price of | 870 valuing it using SOTP valuation methodology (Exhibit 1)

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