Volume revival in utility vehicles, valuations positive for Mahindra

Margin recovery in UVs, prudent capital allocation should help improve return ratios

Successful launches in the sport utility vehicle (SUV) segment, pending order book, strong launch pipeline, and reasonable valuations point to further upsides for the stock of Mahindra & Mahindra (M&M). Brokerage upgrades have led to 5 per cent gain in the last four trading sessions for the country’s largest tractor manufacturer and one of the leading utility vehicle (UV) players.

The company is one the top picks among Indian stocks for HSBC Global Research.

Yogesh Aggarwal, head of research, HSBC Securities and Capital Markets Research, highlights that the company has delivered two successful launches for its automotive (auto) business (XUV700, Thar), and the new Scorpio could be a success as well.

The order book at 160,000-plus units looks strong and the impact of the semiconductor shortage is likely to recede from the December quarter of 2021-22, adds Aggarwal.

Despite robust demand for compact SUVs and crossovers, the company had been losing market share over the past few years. Some of its launches, such as the Marazzo and the Alturas G4, did not get the volume traction the company was hoping for.

Chirag Shah, associate director, Edelweiss Research, expects business to get back on track, given the company’s strong focus on addressing product gaps, refreshes, and the launch of petrol variants across its portfolio.

To drive growth and gain market share, the company is planning to launch 13 SUVs over the next six years. Eight of these launches will be electric vehicles (EVs). The company is looking at investing Rs 3,000 crore over the next few years to develop EVs across its segments of UVs and small commercial vehicles (SCVs). What should help is its recent tie-up with Reliance BP Mobility (Jio-bp) for EV products and services that include charging solutions by Jio-bp for Mahindra vehicles, including electric three- and four-wheelers, quadricycles, and electric SCVs (sub-4 tonne category).

Edelweiss Research believes the company is on course to address the two drags — UVs and investment in group entities — on its return on invested capital.

The rise in volumes and operating leverage in UVs are expected to improve margins which have been weighing down consolidated margins. For group companies, the company’s focus on return on equity, cash flows, and growth would drive its investment decisions.

There are, however, volume worries in the most profitable segment of its portfolio — tractors. Domestic volumes in November were down 17 per cent on a high base and lower government subsidies.

Analysts at IIFL Research say despatches for the sector in November were down 21 per cent on the back of weak retail demand and inventory correction after the festival season. They expect the tractor segment to continue reporting a decline on a year-on-year basis for the coming months. While the medium- to long-term trends are strong, the Street will keep an eye on new launches and the ability of the sector leader to maintain its market share.

However, analysts at J.P. Morgan who have an overweight stance on the stock believe the turnaround in the auto segment — aided by a strong model cycle in SUVs — will offset the weakness in the tractor segment. 

The other factor working for the stock are reasonably valuations at 11x its core earnings for 2022-23. The stock had corrected 15 per cent from its November highs before the recent recovery. Given that the target prices for the stock are upwards of Rs 1,100, M&M offers upsides of 28 per cent from the current levels. Investors can take exposure to the stock with a long-term holding period, although further worsening of the tractor volume trajectory could be a key risk.