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Healthy performance, firing on all cylinders…

About the stock: Mahindra & Mahindra (M&M) is a conglomerate with a presence in auto, IT, financial services, logistics, hospitality, real estate among others. At the standalone level, it is India’s largest tractor manufacturer (38.2% FY21 market share) & second largest CV, fourth largest PV maker (27.5%, 5.8% FY21 market share).

* FY21 standalone revenue mix – ~56% automotive, ~41% tractors

* Best-of-class 20%+ tractor EBIT margins

Q1FY22 Results: The company posted healthy Q1FY22 results.

* Standalone net sales declined 12.9% QoQ to | 11,763 crore

* EBITDA margins at 13.9% were higher by 63 bps sequentially

* Consequent standalone PAT for the quarter came in at | 856 crore

What should investors do?

The stock price performance has been largely flattish over the past five years, in step with the wider Nifty Auto index.

* We retain BUY rating on pivot towards capital efficiency, EV proactiveness

Target Price and Valuation: We retain SOTP-based target of | 1,000 for M&M (10x EV/EBITDA to standalone business; 35% holding company discount to investments).

Key triggers for future price performance:

* Leadership in tractor space, post Covid rebound in the automotive domain amid continued LCV momentum to aid topline growth, going forward. We build 12.7%, 14.8% total volume, sales CAGR, respectively, in FY21-23E

* New launches, differentiated products to aid UV market share gains

* Operating leverage benefits to result in healthy margins (13.5% in FY23E)

* Focus on prudent capital allocation (18% RoE vision), EV thrust (six fully electric PV, LCV launches by 2026) remain structural positives.

Alternate Stock Idea: Apart from M&M, in our OEM coverage we like Tata Motors.

* Long term value drivers (EV transition, deleveraging & FCF focus) intact

* BUY with a target price of | 375

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