With record crop production & stellar Q4 should you bet on India’s best proxy play to the rural economy?

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Shares of Mahindra & Mahindra slipped 4.76% to Rs 806 apiece on Monday after the company reported March quarter numbers.

On a standalone basis, its revenue for Q4FY2021 stood at Rs 13,512 crore, up 50.1% year-on-year (y-o-y), driven by a richer product mix, 58% growth in tractor volumes, and 17% growth in automobile volumes. The margin improvement was driven by price hikes and product mix. Standalone EBITDA margin stood at 13.4% in Q4, showing a decline of 40 bps (basis points) y-o-y and 370 bps q-o-q, largely due to rising in commodity prices. Adjusted PAT witnessed 189.8% y-o-y growth to Rs 935 crore. Whereas on a consolidated basis consolidated adjusted PAT stood at Rs 1,513 crore in Q4FY2021 as against loss of Rs 464 crore.

Management commentary

The Tractor industry is expected to grow in the low single-digits in FY22, with MM focused on gaining share. After a weak Apr-May’21, it is seeing a change in sentiment in the last 4-5 days as land preparation and the sowing period nears. All the agronomic parameters are extremely strong.

Both the Auto and Farm business commitments for CY25 are: a) 15-20% revenue/EPS CAGR, b) over 18% RoCE, c) leadership in the Core SUV segment, with a strong EV play, d) strengthen its numero uno position in LCVs (light commercial vehicles) less than 3.5t, and e) growth in market share in Tractors and quantum growth in the Farm Machinery business.

Capital deployment over FY22-24: Capex of Rs 12,000 crore (Rs 9,000 crore/Rs 3,000 crore in) Autos/Tractors v/s Rs 11,000 crore for the last three years) and investments of Rs 5,000 crore (Rs 1,500 crore in Auto and Tractor subsidiaries and Rs 3,500 crore in group companies; v/s Rs 6,500 crore for the last three years).

Losses in international Auto and Farm subsidiaries to reduce to Rs 300 crore in FY22E and near break-even in FY23E from Rs 2,360 crore in FY21.

Record foodgrain production

India’s foodgrain production is estimated to rise 2.66 per cent to a new record of 305.43 million tonnes in the current crop year 2020-21, on the better output of rice, wheat and pulses amid good monsoon rains last year, according to the agriculture ministry.

That apart the India Meteorological Department (IMD) announced that this year’s monsoon is likely to be “normal” at around 98% of the long period average (LPA). A normal monsoon in 2021 will be a boost to the rural economy that is facing the brunt of a raging second wave.

Mahindra & Mahindra being among one of the best proxy play to the Indian rural economy here is what the brokerages have to say about the stock.

Sharekhan | Target price: Rs 1,000 | Upside: 24%

M&M to benefit from its leadership status in the tractor segment, strengthening its position in the light commercial vehicle segment, and defending its market share in the highly competitive utility vehicle segment. Going ahead, M&M’s strategy revolves around tighter capital allocation, turning around loss-making subsidiaries, and focusing on core automobile and farm businesses through new launches and become future ready for the emerging EV business. The company is expected to benefit from the turnaround of its loss-making subsidiaries and generate strong cash flows going forward and attain its target of 18% ROE and 15%-20% EPS growth.

Antique | Target price: Rs 1,020 | Upside: 26.5%

The demand for utility vehicles and pick-up trucks to grow strongly over FY21-24E, on the back of revival in economic growth, strong rural demand, improving consumer sentiment, etc. M&M will benefit from a strong model cycle, with the launch of nine new UV models and 14 new LCV models by 2026. The company has taken significant steps towards improving its capital allocation by announcing to shut-down loss making international businesses, which has resulted in 170% YoY growth consolidated PAT. M&M’s core business is trading at an attractive valuation of 13x FY23E price to equity ratio. As return ratios improve, we believe there is significant room for valuation re-rating.

Motilal Oswal | Target price: 980 | Upside: 21.6%

M&M’s valuations are still at a substantial discount to its five-year average, which captures both the pain points of deterioration in the utility vehicle market share and the performance of its subsidiaries. Implied core price to equity (P/E) for M&M stands at 15.5x/11.9x FY22E/FY23E EPS. This implies an over 20% discount (on an FY23E basis) to its five-year average core P/E.

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)