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Management focus pivots towards growth

Mahindra & Mahindra’s (M&M) Q4FY21 result were slightly below consensus estimates as EBITDA margin came in at 14.7% (down 227bps QoQ). Margins were dragged by the automotive segment (EBIT margin: 5%, down 243bps), while FES was resilient (EBIT margin: 22%, down 139bps). Management shared a new product plan (5-years) for SUVs (9 products) /LCVs (14 products), pure EV options (6 products) would also be developed.

Investments into electric (Rs30bn) signals clarity of strategy as M&M would be able to build a learning curve advantage visv-vis domestic peers who are investment shy on EVs. Managements aggression to gain market share in FES business is likely to sound sweet to investors and their long term growth outlook also remains bullish (15-20% CAGR over the next 3-5 years). Valuations remain attractive. Maintain BUY

* Key highlights of the quarter: Revenues in Q4FY21 grew 48% YoY to ~Rs133bn due to ~60% improvement in FES revenue, while automotive sales grew ~43%. EBITDA margin improved 107bps to 14.7% even as gross margin faced headwinds (commodity rise, regulatory costs) and dropped to 30.8% (down 487bps). Superior fixed cost reduction supported margins (other expenses down 399bps YoY). Adj. PAT jumped 211%. M&M took an impairment charge of ~Rs8.8bn.

* Key concall takeaways: Management indicated: a) Supply-side issues on semiconductor for ECUs are likely to continue improve from July onwards; b) fixed cost reduction of Rs9bn achieved since FY19 with reduction in manufacturing expenses/A&M/administrative expenses by ~40%/70%/30%, respectively; c) FES segment, farm machinery segment has grown 45% to Rs5bn in FY21 and has the potential to lead strong double-digit growth in next 3-5 years; d) capex plan for FY22-24 is pegged at (Rs 120bn) with auto at Rs90bn and balance FES (Rs30bn); e) on investments in subsidiaries the plan for FY22-24 is pegged at (Rs 50bn) with core auto subs at Rs15bn and group companies (Rs35bn), management expects to fund the group investments via dividends received from established subsidiaries; f) 23 new models have been launched including 9 new products in auto segment and 14 in LCV segment will be launched in the next 5 years; and g) Thar continues to witness very strong orderbook of 55k+ bookings; XUV300 too is witnessing 12+ weeks waiting.

* Maintain BUY: The change in management and the evolution of focused capital allocation strategy (RoE>18%) has been well appreciated by investors. The strategy now is entering growth acceleration phase; we expect H2 to witness strong pickup across PVs (led by new launches) as supply-chain woes fade away. We revise our EPS estimates by -1%/2.8% for FY22E/23E, respectively, maintain our target multiple to 8.5x FY23E EBITDA (Rs710/share) and value subsidiaries at Rs330/share to arrive at SoTP-based target price of Rs1,040/share (earlier: Rs1,045). We maintain BUY on the stock.

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