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Buy Mahindra and Mahindra Ltd For Target Rs. 920

Upgrade to Buy on favorable riskreward

* Q1FY22 EBITDA stood at Rs16.3bn, below our estimate of Rs17.9bn due to lower-thanexpected realizations and higher employee expenses, which included Covid-19-related one-off items worth Rs0.4bn.

* We trim FY22-24E EPS by 7-9% due to lower margin assumptions. Following the revision, we expect revenue/earnings CAGRs of 15%/12%. Auto revenue should grow strongly at a 23% CAGR on a sales upcycle and a healthy order book, while Farm equipment revenues are likely to witness a subdued performance (3% CAGR).

* Despite the earnings cut and application of a lower core P/E of 14x (backed by DCF model), we keep the TP unchanged at Rs920 as we roll over to Sep’23E EPS and increase the value of investments to Rs435/share (Rs364/share earlier). Future stock catalysts include improvement in auto volumes and launch of new products.

* The stock price has corrected 10% since our downgrade in May’21 and underperformed the Nifty by 15%. Even in our bear case − factoring in a ~20% lower EPS and a 12x Core P/E multiple, the fair value works out to Rs767, which is near the CMP.

EBITDA misses, but PAT beats estimates:

Considering a low base in Q1FY21, results have been compared with Q1FY20 (2-year CAGR). Revenue stood at Rs117.6bn (-4% CAGR), below our estimate of Rs124.8bn, mainly due to lower-than-expected realizations in the Auto segment. Auto volumes saw a negative 19% CAGR, while realization recorded an 8% CAGR. Tractor volumes saw a 7% CAGR and realization saw a 3% CAGR.

EBITDA stood at Rs16.3bn (-5% CAGR), below our estimate of Rs17.9bn due to lower-than-expected realizations and higher employee expenses, which included Rs0.4bn Covid-19 related oneoff items. Farm segment EBIT margin expanded to 20.3% from 19.3% in Q1FY20. In comparison, Auto segment EBIT margin contracted to 1.7% from 6.5% in Q1FY20. Overall, adjusted PAT stood at Rs9.3bn (1% CAGR), above our estimate of Rs9.1bn due to higher other income and lower depreciation.

Market share to improve on new products and ramp-up in production: We expect MM to gain share in Tractors (190bps to 40.1%) and PVs (120bps to 7%) in FY22E. In PVs, the company has healthy order-bookings for Thar at 39,000+ units. Also, XUV300 has a waiting period of over 8 weeks and Bolero/Scorpio have a waiting period of 4-6 weeks. MM has a healthy pipeline of new products in PVs, CVs and Tractors (see Exhibit 7).

We upgrade MM to Buy with a TP of Rs920, based on a core P/E of 14x (backed by DCF model) and value of investments at Rs435/share. Among OEMs, our pecking order is TTMT, AL, MSIL and EIM. Key risks: delay in economic recovery; a third Covid-19 wave leading to another round of lockdowns; failure of new products; increase in competitive intensity; and adverse movement in currency/commodity prices.

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