Mahindra & Mahindra FIVE- G Analysis

Mahindra and Mahindra Analysis

+Market Leader in segments like Tractor, LCV and Pickup Segment, Tractors: 41%, LCV: 47%, Pickup segment: 62% in FY20.

+Overall 27.7% market share in a CV in FY20.

+Highly diversified with allocation across different sectors like Auto, IT (Tech Mahindra), Financial Services (M&M Financials Services), Hospitality (Club Mahindra), Logistics, Real Estate, etc

+The company is looking to unlock value from its subsidiaries through the right capital allocation. The company has divided capital allocation decisions into three parts, 1: Entities with a clear path to 18% ROCE, 2: Quantifiable strategic impact, 3: Unclear path to profitability in which the company aims to exit.

Automotive: Mahindra and Mahindra Ltd & Mahindra and Mahindra Finance Share Price

+More than 50% revenue in the Auto segment comes from Rural Market

+New THAR has a great response from the customers, and subsequent demand is good. It also won the ‘Autocar Car of the Year 2021’ Award.  With 55000+ orders on the book, 47% are for the automatic variants.

+Scorpio and Bolero have had 10000+ combined sales per month in Q4FY21.4

+The company aims to launch 9 new products till 2026, in which 4 of them will have an electric power train, and 2 of them will be born EVs.

+The company has also lined up 14 new products in the LCV segment, strengthening its number one position.

+The company has partnered with Amazon and Flipkart for the last-mile mobility segment, which comes under the LCVs. Last-mile mobility has a market that is ready for scale-up, and the company has TREO, ATOM and ALFA products to cater for the same.

+The management has also guided for three years CAPEX plans which will be close to Rs. 120 billion, 30 billion will go for the farm equipment segment, 90 billion for auto ( 30 billion for EVs).

-Major Pain point is Passenger vehicles with a low market share of ~7%. PV domestic growth rate was 1.3% CAGR from FY 15 - FY 20. PV exports growth rate was 1.7%

-The passenger vehicles industry declined 17.9% in FY 20, in which the PV segment of the company declined 26.5%. The decline was more than the industry.

-The market share in the UV segment declined from 41.7% in FY 14 to 20% in FY 20

-The company has built its niche in Compact SUVs and SUVs. However, this segment is facing challenges due to the new entry of global & local competitors.

-The SSANGYONG business had a loss of Rs. 3,029 crore in FY 2020 and faced bankruptcy. Mahindra and Mahindra discontinued their operations for SSANGYONG by taking an impairment loss of Rs. 1,210 crore and did not report any further losses from Q4 FY 2021.

-Total number of vehicles sold in FY21 stood at 3,48,621 units, a decline of (-26%) YoY.

Farm equipment

+The farm equipment business has shown strong recovery as it posted the highest ever quarterly sales in Q4FY21. The volume for Q4FY21 stood at 23,044 units, a growth of 58% YoY.

+Even though the tractor industry had explosive growth, the PBIT margins of the business were improving and relatively stable.

+Total number of tractors sold in FY21 stood at 3,51,431 units, a growth of 18% YoY.

-The management has guided with low to mid-single-digit growth for the industry in FY22.

Industry: Mahindra Mahindra Share & Mahindra Mahindra Ltd

Tractor

+Tractor segment is looking set for good growth due to Rural Economy. The rural Economy is looking for promising growth with good monsoon and limited Covid impact.

+India is the largest manufacturer of farm equipment and is the world’s largest tractor industry by volume. The tractor industry in India accounts for almost 1/3rd of the global market.

+In the past 15 years, tractor sales have grown by 10% CAGR due to rising farm income, crop yields, rising labour costs and improved availability of finance.

+Customers exchange their tractors every 4-6 years in mature markets.

+Increasing trend towards mechanisation

+Reason for positive demand are as follows, pent-up demand due to COVID, timely and widespread monsoon, early Kharif sowing and record Rabi crop production. Good availability of retail finance also played an important role.

+Tractor exports from India are expected to grow by CAGR 6%-8% primary market being the segment under 120HP.

-High dependence on rural economy and agricultural industry

-Top 10 states contribute to 83% of the tractor share in the industry.

Farm businesses depend on the adequacy of rainfall, interest subvention schemes, and labour cost in rural areas.

-Demand or tractors remain vulnerable to monsoons; a bad monsoon can result in volatility in demand for tractors.

Passenger Vehicles

+India is the 4th largest automobile industry with an annual turnover of $100 billion and 32 million people.

+Improved affordability and scope for the sector growth as there are less than 30 cars per 1000 population.

+Increase preferences for personal mobility in times of pandemic. This has also caused a rise in the number of first-time buyers.

-Slowdown in the automobile market, FY 2015- FY 2020 ~1.3 CAGR growth in volumes.

-Reasons being weaker economic growth and cautious financing from financial institutions.

-Regulatory impact due to BS-VI provisions.

-Auto sector was one of the major hit sectors due to COVID-19 lockdowns, with many businesses reporting 0 sales during April and May. 

-Shift to electrical vehicles causes one more hurdle for the growth in the sector. Competition from international players and start-ups would increase.

-Rise in commodity prices has increased raw material costs for the companies, impacting their profit margins.

-Shortage of semiconductor chips supply as they are moved to more priority industries has affected the production of vehicles.

Commercial Vehicles: Mahindra And Mahindra Growth Rate & Mahindra Mahindra Annual Report

+The DFC (Dedicated Freight Corridor) is not expected to impact the CV industry for now, as DFC will primarily focus on long hauls. The CV model is based on door to door delivery, where is DFC is transhipment.

+LCVs are the fastest to recover in the industry. A primary reason being an increase in e-commerce activity as consumers stayed home.

+Crisil forecasts CV volumes of 7.5 lakhs – 8.5 lakhs in FY22.

+The scrappage vehicle policy could improve the sales in MHCVs as there is a large fleet of MHCVs on the road, which is as old as 15 years or more. This would lead to replacement sales under the new scrappage policy.

-Auto Sector has gone through some significant challenges in the recent past: BS-IV to BS-VI conversion and COVID 19 Impact

-As the CV industry has a close linkage to the economic activity, industrial growth, infrastructure investments and regulatory changes such as emission norms and scrappage policy, the current pandemic has had a huge impact on the CV industry.

-FY21 volumes in MHCV stood at 1,53,366 units, and LCV volumes stood at 4 lakh units.

-As the volumes of the CV industry are expected to grow by 30%-50%, it will be still well below the peak of over 1 million units in FY19.

-The volumes in the bus segment reduced by 82% in the domestic market and 49% in the export market, making it one of the worst-hit sectors due to pandemics. This was due to social distancing measures and people avoiding public transport.

-The industry declined 29% in FY20 and 21% in FY21, taking its number to half a million units.

-Higher interest rates and subdued fright rates amid economic slowdown & dampened economic activities during the lockdown.

Governance: Mahindra and Mahindra Results & Mahindra and Mahindra Research Report

+Strong parentage of Mahindra Group

+The promoter group owns 19.39% of the company.

+FIIs have improved stake and is currently at 38.9%. DIIs stake remains stable at 27.6%.

Financials: Mahindra and Mahindra Finance & Mahindra & Mahindra Finance Results

+Operating margins are stable at the 14%-16% range. Similarly, PAT margins are stable at the 8%-4% range.

+Overall Debt Position is very comfortable. The standalone D/E Ratio is at 0.09

+ROCE stands at 13.9%, while 5 year avg ROCE is 16%.

+Current ratio is healthy at 1.34

-ROE currently is 2.41%, while 5 year avg ROE is 9.85%.

-Debt to equity ratio stands at 1.43 (consolidated) while standalone D/E is at (0.21)

-Negative operating cash flows for consolidated business in past 2 years.

-Sales CAGR for the past 10 years has been 7%, and for the past 5 years, there has been no growth in the same.

-Profit growth has been negative in the past 10 years due to low profits in the past 2 years.

Valuation: Mahindra and Mahindra Ratio Analysis, Mahindra & Mahindra Swot Analysis & Mahindra & Mahindra Stock Analysis

+EV/EBITDA is 12.68, the lowest among its peers.

+S.O.T.P. (Sum Of The Parts) Valuation is looking good.

+All subsidiaries are looking fairly valued (Specially TechM provides good upside potential)

+Current PB is at 2.35 and 10-year median PB: 3.38.

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