Mahindra and Mahindra outperforms Nifty with 40% returns in past three months

Mahindra & Mahindra Limited (M&M) is a Mumbai-based multinational Indian automotive manufacturing company. It was founded in 1945 under the name Mahindra & Muhammad and changed to Mahindra & Mahindra subsequently. M&M, a member of the Mahindra Group, is one of India’s top car producers by production and the largest manufacturer of tractors in the world. 

Even today, June 27th, 2022, Mahindra launched its new Mahindra Scorpio-N SUV. Currently, the Mahindra Scorpio is priced between Rs 13.65 lakh – Rs 18.88 lakh, ex-showroom. One can expect the new Scorpio-N to charge a slight premium over these rivals the likes of the Tata Safari, MG Hector, Mahindra XUV700, etc. This launch is expected to get an overwhelming response.

Mahindra wasn’t originally an Automotive Company

Mahindra was not always an automobile firm. It was first established as a steel trading company in 1945. Currently, it is an automobile company, producing SUVs, sedans, trucks, light commercial vehicles, heavy commercial vehicles, two-wheeled motorbikes, and tractors under the “Mahindra” name, with an annual revenue of over Rs 90,000 crores.

Over the past month, despite the Nifty 50’s decline of 2.6%, M&M has increased by more than 13.22%. Moreover, Nifty 50 has declined almost 8.8% over the previous three months, whereas M&M has delivered returns of more than 40%. This demonstrates how optimistic investors are about this stock. We will examine M&M’s performance in Q4FY22 as well as for the entire financial year FY22 in order to evaluate the reason for the same today.

Double digit YoY growth in both Top & Bottom line in Q4FY22

Mahindra and Mahindra (M&M) reported numbers for the Q4FY22. Both the top and bottom lines of the company registered double-digit growth during the quarter.

M&M’s consolidated PAT after exceptional items grew 109.07% from Rs 1,070.16 crore in March 2021 to Rs 2,237 crore in Q4FY22. Similarly, its consolidated revenue stood at Rs 25,934 crore in March quarter, up 21% year-on-year.

In the consolidated financials, there was an exceptional item of Rs 293.7 crore for Q4 FY22 pertaining to impairment of non-current assets.

Evaluating the performance in the past 5 years, it can be said that the company has surpassed FY20 sales levels (Pre-Covid). FY22 Consolidated PAT after Exceptional Item at Rs 6,577 crores, up 97% YoY, whereas sales grew 21% YoY from Rs 74,278 crore in FY21 to Rs 90,171 in FY22. While the number is still below sales of Rs 103,015 crore in FY19 & Rs 91,942 crore in FY18. 

Automotive: Expanding Market Share across all segments

With a total of over 1,70,000 bookings pending in Q4FY22, the company launched 4 SUVs (Sports Utility Vehicles). The majority of bookings, around 78,000, were for the XUV700. The company increased its market share by 2.8% in Q4FY22, putting it at 16.5% and placing it among the top 3 SUV players.

With a market share of 73.4% in FY22, the firm maintained its position as the industry leader in electric 3W. In the second half of FY22, and in March 2022, they had their greatest monthly volume of 2,345 units.

In FY22, this segment’s export volume increased by 77%to 32,427 units. In South Africa, the XUV300 was introduced. Future development drivers for this market category include maintaining brand value, developing platform and EV strategies, transforming consumer experiences, de-risking supply chains, and reducing costs.

Ratio Analysis:

Mr. Manoj Bhat, Group Chief Financial Officer, M&M Ltd. in the conference call with analysts, said, “Our focus on capital allocation and improved financial metrics continues to deliver results.” We continue on our journey towards a 18% RoE. ” 

While the current ROE and EBITDA margin percentage of the company are at 13.95% & 17.31% respectively, which can be considered healthy given the industry.

Business Highlights of Other Segments

Due to the large base from the previous year, the domestic agricultural equipment section saw its PAT (before exceptional items) decline both during the quarter and for FY22. They increased their market share in the Farm Equipment Sector (FES) from 38.2 to 40% in FY22. They started Vuvo Tech Phase II, which improved their primary domestic presence. In FY22, this segment’s export volume increased by 66% to 17,515 units.

Robust growth expectations in the future

Mr. Rajesh Jejurikar, Executive Director, M&M Ltd., said, “We recorded our highest revenue for Auto and Farm segment in FY22. M&M became No.1 in SUV Revenue Market Share in Q4 and H2FY22, while FES gained 180 basis points in market share in FY’22. With 170k+ bookings, the demand for the automotive product portfolio remains strong. FES delivered second highest full-year PBIT despite market slowdown and steep commodity inflation. Given the recent fiscal and monetary measures by the Government of India and RBI, we foresee the cost pressures in the economy to ease out.”

Additionally, the business announced plans to introduce the fully electric XUV 300 SUV in the first quarter of FY23. The corporation also said that its “Born Electric Vision” EV idea and commercial plan for electric vehicles will be unveiled in August of this year.

Volkswagen and M&M recently formed a partnership to investigate the potential of the former’s modular electric drive matrix (MEB) components in M&M’s electric vehicles. The MEB electric platform and its components enable automakers to swiftly and affordably expand their line-up of electrified vehicles.

By 2027, the company intends to release 13 SUVs, eight of which will be electric. Despite a waiting period of 18 to 24 months, Jejurikar said that the recently debuted XUV 700 had only seen 10 to 12% cancellations. However, he asserted that as the company increases capacity and as semiconductor supplies are anticipated to continue to improve, the waiting period will shorten.

Capex of Rs 17,000 crore under its three-year plan, FY22-24

In the Auto segment, the company has planned capacity creation towards XUV 700, others & electric vehicles and hence has increased its capex outlay from the budgeted Rs 9,000 crore last year to Rs 11,900 crore. Towards Farm segment they increased their base capex of Rs 3,000 crore, by Rs 400 crore on the back of setting up of a new factory & capacity addition.

In Auto & Farm Investments (International operations of Auto and Farm excluding Ssangyong), the company would proceed with the base investment of Rs 1,500 crore. For group company investments they had budgeted a spending of Rs 3,500 crore, however they would be reducing that by Rs 800 crore and retaining the spending at Rs 2,700 crore, on the back of the group companies advancing with self-funded growth. Rs 2,500 crore is projected to be spent towards monetization & partnerships (value creation) pertaining to unlisted investments & listed investments. Of this investment, around Rs 500 crore has already been spent.

Technical Analysis: Recently formed a breakout candle with volumes greater than last 5 days average

M&M is currently trading at its all-time high of 1072 with 50 EMA well above 100 & 200 EMA. It does not show any signs of trend reversal and is in an uptrend in the long run. Even in the last few months, where Nifty 50 has gone down by a significant percentage, M&M has given robust returns to the investors. 

Moreover, the automobile sector is on a track to recovery currently, which is also a positive for the company. So, investors can continue to have a bullish view on the stock as long as the DMA is above 100 & 200 DMA.

Our View:

By FY25, the company forecasts sales growth by CAGR of 15 to 20% by focusing on core business expansion and value creation and leveraging their EV leadership in 3W and 4W. They also aim for an EPS growth of 15 to 20 percent by FY25.

The only real cause for concern is the recent dramatic rise in commodity inflation. Because of this, the company’s ability to pass on price increases was hampered by the rising trend in material costs, which put pressure on profits. On the vehicle side, operating leverage helped the margins recover. Disruptions in the supply chain also continued to have an impact on corporate operations, but these are predicted to become less frequent in the future.

As semiconductor supplies improved in Q4, resulting in the highest ever quarterly UV volumes, the same is projected for the future as well.