IGI Logo

Focus shifts to growth post capital allocation changes

Focus on building stronger brands in Auto; FES banks on farm machinery

Mahindra & Mahindra (MM)’s FY21 Annual Report highlights that the company has reoriented its focus on growth after tightening its capital allocation policies. Besides listing out the priority areas for the Auto and Farm Equipment Sector (FES) businesses, it explains future growth areas for farm mechanization and shared mobility/logistics. Key insights from the Annual Report are highlighted below.

* Focus shifts to generating growth after recalibrating capital allocation: Post the successful execution of the ‘Reboot’ strategy, targeting the tightening of capital allocation, MM has shifted its focus to accelerating growth with clearly laid out strategies for the Auto, Farm, Financial Services, and IT Services businesses.

* Auto business focus on building stronger brands: Its long-term strategy for the Automotive business is to build a strong, sophisticated, and authentic SUV brand, with a strong road presence and advanced, adventure-ready capabilities. It plans to launch 9 SUVs and 14 LCVs by CY26.

* EV strategy: MM’s short-term focus is on last-mile mobility, which it expects would reach an inflection point. It intends to commence its EV journey with a new portfolio of ICE-derived SUVs, transitioning to a Born EV platform. MM has set up a fresh investment of INR30b for the Born EV platform and is simplifying the structure (by merging Mahindra Electric) to provide resources and direction to realize targeted growth.

* FES strategy for faster growth: MM has deployed a comprehensive strategy for sustained growth in the FES business, with focus on a) achieving market share gains in the domestic Tractors business, b) attaining quantum growth in the Farm Machinery business, c) leveraging the K2 series of lightweight tractors, and d) growing the global Farm business.

* Targeting quantum growth in Farm Machinery: It is targeting quantum growth in Farm Machinery by building a strong product pipeline of machinery products in partnership with global associates. It is further exploring exports and inorganic acquisitions to substantially scale up in the segment. MM’s FaaS business (branded Krish-e) is a new business vertical focused on improving farmer incomes through digitally enabled services – which are progressive, affordable, and accessible to farmers – across the complete crop cycle.

* Environmental, Social, and Governance (ESG) – aspires to lead globally: MM, an early adopter of ESG in India, is now aspiring to lead ESG globally through sustained, focused programs. It aims to turn carbon-neutral by 2040, with Science Based Targets (SBT) in place. On the other hand, the group is focused on improving the revenue of its green portfolio, including EVs, automotive recycling, solar energy, waste-to-energy and biogas, green buildings, and micro-irrigation.

* Valuation and view: Implied Core P/E for MM stands at ~10.2x FY23E S/A EPS and 1.3x Core P/BV. Our Mar’23E-based SOTP Target Price is ~INR900/share (implied Core P/E at ~12.9x at TP). Maintain Buy.

Focus shifts to generating growth after recalibrating capital allocation

* As a result of a challenging two years (FY19–20), it has initiated a strategy to reboot, reinvent, and reignite value creation in FY21. At the start of FY21, the group initiated the ‘Reboot’ strategy with a focus on tightening the capital allocation process via strict control.

* As planned, ‘Reboot’ was executed within a year, with international subsidiaries identified for an exit. Consequent to this exercise, the profitability of global subsidiaries is expected to see a turnaround, resulting in lower investment requirements.

* Post the successful execution of the ‘Reboot’ strategy, MM has shifted its focus to accelerating growth, with clearly laid out strategies for the Auto, Farm, Financial Services, and IT Services businesses.

* Furthermore, it has identified nine 'Growth Gems' – businesses with proven business models and in various stages of scale-up. Each of these businesses has the ability to grow and generate significant value over the next 3–5 years with the right amount of support.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer