Mahindra shares touch a two-year high on strong Q3 show on two key fronts

Concerns remain on the company's weakening position in the UV segment

Almost seven months after Mahindra and Mahindra announced a plan to embark on a stringent capital allocation exercise, it is almost at the fag end of the first phase of the strategy. The company’s earnings for the December quarter shows it has scored well on both fronts—paring losses from the international subsidiaries and to some extent, bringing focus back on its core businesses.

However, an increasing competition in its core UV space, where it has ceded significant ground to rivals, remains an area of concern for investors. “Valuations for Mahindra and Mahindra are still at a substantial discount to its five-year average (which captures both the pain points of deterioration in UV market share and subsidiaries' performances),” wrote analysts Jinesh Gandhi from Vipul Agrawal from Motilal Oswal in a post earnings report.

“M&M needs be a lot more aggressive in the auto and tractor market. They have lost market share across all segments. They have been facing intense competition from rivals,” says Mahantesh Sabarad, head- retail research at SBI Cap Securities. The pace of upgrades, refreshes and completely new products has been slower than rivals and they really need to catch up fast, says he.

 

M&M’s market share in the UV segment shrunk to 15.21 per cent in the first nine months of the current fiscal from 20.14 per cent in the same period a year ago, according to Society of Indian Automobile Manufacturers (Siam). It has been displaced by Tata Motors as the third largest passenger vehicle maker. Even in tractors it has been facing competitive pressure from Escorts and others. Its market share in tractors has come down to 38 per cent in the third quarter of FY21 from 411.2 per cent at the end of fiscal 2019-2020.

To recoup its share, over the next 18-24 months, Mahindra plans to launch several new products and refreshes including e-KUV100, new Thar, new XUV500, new Scorpio, and  e-XUV300 but that is not assuaging investor concerns. “While Mahindra s trying to catch up to the competition on the products side, we have limited visibility on the company making a comeback. We have not built in benefits from any imminent launches. We estimate Passenger UVs volumes to grow 7 per cent over FY20–23E,” wrote Gandhi and Agrawal.

But investors have rewarded the company handsomely for its sharp focus on return on equity and capital allocation. Most of the brokerages have upgraded earnings sharply which in turn have bumped up the stocks by 63.2 per cent in the last one year. On Monday it closed at Rs 928.2 apiece, up 7.2 per cent, the highest since September 2018. This was on a day when the BSE Sensex Index rose 1.2 per cent and BSE auto Index rose 3.1 per cent.

 

Even Motilal Oswal analysts have their holding-company discount from 40 per cent to 20 percent factoring in an improvement in capital allocation and expected reduction in subsidiary loss. They have a “Buy” rating on the stock with a Sum of the parts (SOTP) based target price of Rs1040 (Mar’23E).

Some of the headline numbers shared by the company’s management on Friday explains investors’ exuberance. Losses from Mahindra’s international subsidiaries have shrunk to Rs 3000 crore from Rs 3500 crore a year before. The company has guided for a further 90 per cent reduction in losses to Rs300 crore by end of fiscal 2021-22. This will be largely due to company’s Korean subsidiary, SsangYong Motor Company filing for bankruptcy.

 Even the domestic farm and auto business showed a sharp uptick in earnings--- the average selling price (ASP) for the automotive and farm equipment segments advanced 21.2 per cent year-on-year (YoY) and 2.5 per cent YoY, respectively. Net revenue for the segments rose 12 per cent and 24 per cent YoY respectively.

Other brokerages too have increased their earnings estimates. “We raise FY21-23E EPS by 17-26 per cent, driven by a change in volume and margin assumptions,” wrote analyst Raghunandan NL, analyst from Emkay Research.