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Mahindra & Mahindra FIVE- G Analysis

Mahindra & Mahindra FIVE- G Analysis

Published on 30 June 2021

Enterprise


+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 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 though right capital allocation. The company has divided capital allocation decisions in three parts, 1: Entities with clear path to 18% ROCE, 2: Quantifiable strategic impact, 3: Unclear path to profitability in which the company aims to exit.

 

Automotive

+More than 50% revenue in 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 automatic variant.

+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 the will have an electric power train and 2 of them will be born EVs.

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

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

+The management has also guided for three years capex plans which will be close to Rs. 120 billion, in which 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 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. 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 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 a volatile growth, the PBIT margins of the business were improving and quite 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

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

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

+In 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 in 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 expected to grow by CAGR 6%-8% main 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 are dependent upon adequacy of rainfall, interest subvention schemes and cost of labour 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 annual turnover of $100 billion and employs 32 million people.

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

+Increase preferences for personal mobility in times of pandemic. This has also caused a rise in numbers 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 months of 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 currently has affected the production of vehicles.

 

Commercial Vehicles

+The DFC (Dedicated Freight Corridor) is not expected to impact the CV industry for now, as DFC will mostly focused 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 major 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 large fleet of MHCVs on the road which is as old as 15 years or more. This would lead to replacement sales under new scrappage policy.

-Auto Sector has gone through some major challenges in 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 bus segment reduced by 82% in domestic market and 49% in export market, making it one of the worst hit sectors due to pandemic. This was due to social distancing measure and people avoiding public transport.

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

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

 

Governance:

+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 remain stable at 27.6%.


Financials

+Operating margins are stable at 14%-16% range. Similarly PAT margins are stable at 8%-4% range.
+Overall Debt Position is very comfortable. 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 past 10 year has been 7%, and for past 5 years there has been no growth in the same.

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

 

Valuation
+EV/EBITDA is 12.68, 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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