Shares of Mahindra & Mahindra (M&M) climbed 3 per cent in an otherwise weak session on Wednesday, thanks to a beat on profit that surged 785 per cent in the September quarter, on a low base.
This stock is trading at a substantial discount to its five-year average, partly reflecting a weaker tractor cycle. Going by analyst estimates, the stock has the potential to deliver up to 28 per cent returns.
Analysts are largely optimistic about the turnaround of M&M’s subsidiaries, its continued success in the core-SUV segment and enhanced focus towards electrification of commercial and personal mobility. They say while the tractor segment’s growth and margins may moderate from recent highs, it will still be industry leading.
For the September quarter, M&M saw a rise in domestic tractor market share by 190 bps YoY to 40.1 per cent. The management expects tractor industry sales to be flat or grow in the low single digits in FY22E, which implies a YoY decline in tractor sales in the second half of the financial year.
The company continues to maintain a strong booking pipeline in the auto business. Its XUV7OO has received over 70,000 bookings since launch, even as global shortages of semiconductors have hit the production of 32,000 units in the September quarter. Overall, the company has over 1,60,000 pending bookings in the automotive division.
Kotak Institutional Equities says, “With successful launches in the UV (utility vehicle) segment, we expect strong recovery in automotive segment volumes once the chip shortage situation resolves. Also, the company has been successful in turning around international farm and auto subsidiaries in challenging times, which is impressive.”
The brokerage has a target of Rs 1,180 on the stock.
Edelweiss says M&M continues to walk the talk on two key RoIC (return on invested capital) drags: utility vehicles and subsidiary losses. The brokerage has lowered its FY23 EPS forecast by 11 per cent, recognising the costs and competitive pressures. It still has a buy call on the stock with a target of Rs 1,098.
On Wednesday, the stock rose 3 per cent to hit a high of Rs 919.80.
Motilal Oswal says the stock trades at over 30 per cent discount (on an FY23E basis) to its five-year average core P/E, and maintains a buy on the stock with a target of Rs 1,150/share.
M&M’s core business is trading at an attractive valuation of 10 times FY24 PE, says Antique Stock Broking, adding that there is a significant room for valuation re-rating for the stock as the return ratios improve. This brokerage has a target of Rs 1,100 for the stock.
ICICI Securities sees the stock at Rs 1,141 while Nirmal Bang Institutional Equities finds the stock worth Rs 1,042. “We value M&M on SoTP basis with core business valued at 14 times (discount to long-term average of 16 times) September 2023 core EPS while other listed entities are valued at current market value to arrive at a target price of Rs 1,042 (increased from Rs 972). The stock is currently trading at 12 times FY23 core EPS and 10 times core FY24 EPS, which we view as undemanding,” Nirmal Bang adds.
The automaker on Tuesday reported a 785 per cent year-on-year growth in net profit at Rs 1,431.7 crore, on a 14.7 per cent rise in revenue at Rs 13,305.4 crore.
Also Read:
“As volumes improve on the auto side, M&M can easily surpass the current margins and come close to about 13.5 to 14% margins over the next one year.”