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On a strong footing

Established in 1945, Mahindra and Mahindra (M&M) is the flagship company of the Mahindra Group. It is one of the leading conglomerates which operate in various segments such as Automotive (PVs, CVs, 2W and 3W), Farm Equipment, Hospitality, Information Technology, Financial Services, Real Estate, Retail and Logistics. It has a business presence in over 100 countries with 63 manufacturing facilities around the world. M&M is the market leader in the tractors and Utility Vehicles (UV) segment which is a part of its core business (Farm equipment and Auto).

Investment Rationale

* Tractor industry to drive growth:

The domestic tractor industry has witnessed a healthy growth recovery from Dec-19 (volumes were impacted due to lockdown in March and April) led by the increase in Kharif sowing area, thereby indicating a bumper harvest, good monsoons, higher government spending and favourable base effect. We believe the trend is expected to continue on the back of expected normal monsoons, a good Rabi crop season and an increase in MSP. Further, the supply side issues faced recently due to restrictions have eased considerably. The positive tractor industry growth prospect bodes well for M&M given its market leadership (41.2% market share), strong product portfolio, wide distribution network and new launches. Further, farm equipment being a major contributor to its operational profits (68.7% as of FY20), we believe it to be a key driver to M&M's earnings growth.

* M&M’s UV business to witness challenges, LCV better placed:

While we expect the UV industry to revive gradually (still underperforming the overall PV industry) on the back of cyclical recovery, the increased competitive intensity (from existing as well as new players) and product gaps would continue to remain a key challenge for M&M. On the contrary, in the LCV segment (M&M market share 42.6%), M&M is better placed due to its strong brand positioning and increased preference towards the Hub and Spoke model due to the surge in e-commerce.

Outlook & Valuation:

We continue to maintain our positive stance on M&M given its strong rural presence through Farm equipment and automotive business. The management has mentioned that the capital allocation plan is more or less complete and it has managed to reduce or turn around its loss-making businesses. Further, the management has laid out a plan to strengthen M&M’s position through new product launches, redefine its UV positioning and leverage platform synergy to optimise CAPEX. We expect revenue and PAT to grow at 12.9% and 22.5% CAGR over FY20-23E. We value the core business at 16x FY23E EPS of Rs. 51.5 and arrive at SOTP based target price of Rs. 1087.

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