M&M - Growth or value bet?

Mahindra & Mahindra Ltd is one of the most diversified automobile company in India with presence across 2-wheelers, 3-wheelers, PVs, CVs, tractors & earthmovers.

It also has presence across financial services, auto components, hospitality, infrastructure, retail, logistics, steel trading and processing, IT businesses, agri, aerospace, consulting services, defense, energy and industrial equipment through its subsidiaries and group companies.

Details

Global Presence
The group has a presence across 22 industries, 100+ countries and operates 150+ entities on a consolidated basis.

Automotive Division (~55% of revenues)

The company is presence across various segments in the automotive industry and is the 4th largest Passenger Vehicle, 2nd largest Commercial Vehicle and Largest small commercial vehicle (LCV) player in the domestic market of India.

The company plans to launch 9 new SUVs and 13 new LCVs by 2027. 6 of these vehicles will be Born EVs.
The company managed to significantly reduce its fixed costs from ~2,100 crores in FY19 to ~1,200 crores in FY21 of this division.
The company's market share in Utility Vehicles (UV) segment decreased from 18.9% in FY20 to 14.6% in FY21 primarily due to aging product profile and weak presence in fast-growing compact UV market.

Farm Equipment Division (~41% of revenues)

The company is the dominant player in the local tractor Industry in India. Its brands include Mahindra, Swaraj and Trakstar.
It has a market share of 40%+ in domestic tractor industry. It has maintained its leadership position for the last 40 years in the tractor industry in India.
The company has a sizeable global farm business and is present in in 4 of the 5 largest markets in the world i.e. USA, Brazil, Mexico and Turkey.
It plans to launch ~37 different models of technologically advanced tractors under its K2 series which will be made in collaboration with Mitsubishi Mahindra Agricultural Machinery, Japan and company's own Mahindra Research Valley in India over the next 4 years.

Domestic market implements space-  Farm machines and tractors, (including harvesters and all of the products), makes up 5000 crores. They are at about 10% share of this, it is in the region of about 500 crores. (just to clarify the 5000 crore is organized. There is a huge unorganized, on top of that).

Other / Allied Businesses (~4% of revenues)
The company's other standalone businesses include:-
1. Mahindra Powerol - It is a leading power backup solutions provider to the telecom industry.
2. Construction Equipment - Under this business, the company sells earthmoving, road construction and other equipment.
3. 2-Wheeler Business - The company also has minor presence in the 2-wheeler business and also owns iconic brands like 'Jawa Motorcycles' founded a century ago.

Sales Volumes FY21
1. Total Automotive Vehicles Sold - 3,49,000
a) Passenger Vehicles - 1,57,000
b) Commercial Vehicles - 1,56,000
c) Three-Wheelers - 17,000
d) Automotive Exports - 18,000
2. Total Tractors Sold - 3,55,000

Manufacturing Capabilities
Presently, the company has a total of 68 manufacturing facilities for production of Automotive, Tractors & farm machinery, two-wheelers and others. Out of these, 41 facilities are located in India and other 27 are located in various countries across the world like USA, Turkey, UAE, Algeria, etc.
It also has R&D facilities in USA, China, Japan, India, Turkey, Finland, Italy, France and UK.

Key Subsidiaries
The company has presence in various other businesses through its subsidiaries and group companies :-

1. Tech Mahindra Ltd (~29% stake) -  It is one of the largest IT companies in India with presence in a wide presence across the world.

Mcap 9/11/2021 1.51Lcr *29%=44000Cr

2. M&M Financial Services Ltd (~52% stake) - It is a NBFC focused in rural and semi-urban sector. Its key business areas are financing purchasing of pre-owned and utility vehicles, tractors, cars, commercial vehicles, construction equipment and SME financing.

Mcap 25000Cr-12500 Cr Stake worth

3. Mahindra Lifespace Developers Ltd (~51% stake) - It is engaged in the business of real estate and infrastructure.4500Cr *51% 2250Cr

4. Mahindra Holiday & Resorts India Ltd (~67% stake) - It is a part of leisure and hospitality sector and offers family holidays primarily through vacation ownership memberships.

2500Cr worth of stake 

5. Mahindra Logistics Ltd (~58% stake) - It is mainly engaged in transportation, warehousing, supply chain management and people logistics services.

2500Cr worth of stake

Capital Allocation Strategy
During FY20-21, the company implemented tight capital allocation norms with clearly defined criteria.
It decided to support those entities, which has clear path to 18% ROE and those that have a delayed or unclear path to profitability but a quantifiable strategic impact. It also plans to exit those entities with unclear path to profitability.
During FY21, the company stopped investing and decided to exit its businesses like SsangYong, GippsAero, Genze and Mahindra First Choice Services (MFCS).

SsangYong Bankruptcy - During FY21, the members of the company approved the proposal of transfer/ dilution of stake in Ssangyong and/or cessation of control of the company over Ssangyong.
Ssangyong filed for bankruptcy in Dec 2020 and the company has made provisions for its investments of ~1,650 crores in Ssangyong Motors Co.

CAPEX Plans
The company and its wholly owned subsidiary (Mahindra Vehicle Manufacturers Ltd) incurred a capex of ~3,300 crores in FY21. It has also provided capex guidance of ~12,000 crores for FY22-24 and guidance for investments in subsidiaries and group companies of ~5,000 crores for FY22-2

Moving Forward

Automotive-6000Cr revenue with 100Cr profit. All their brands are in momentum - have open booking of 39000 for the Thar, which has a waiting period of 10 months, open booking for 10,000+ on (XUV)300 and  did 6000 billing which is highest ever for XUV300 in July 2021. 4000+ opening booking Bolero and 6000+ open bookings for Scorpio and a very strong demand momentum on pickups as well plus XUV700 launch is around the corner, they will reveal it this quarter, and hopes to start delivery in quarter three of the year.

Farm equipment side, seen a revenue of 5300 crores in quarter one, strong growth on last year, last year quarter one on FES side was not so depressed so it’s a strong growth and a strong growth in PBIT as well-margin of 20.3% and increase in market share

Semiconductor Issue-least a couple of quarters we believe and we are gearing up towards that

M&M Finance -  It has a wide distribution in rural and semi urban areas with a strong local connect and trust, 1400 branches, local talent pool and a brand that really epitomizes trust. It is a leader today in rural asset-based lending, but it has gone beyond rural as well. Rural today is 42% of the asset base, semi urban 35%, 23% is urban.

Target- "Hospitality and Real Estate stayed negative. What we are seeing all of them do is to track the positive territory this year and by FY26 we see good position for all our businesses to be able to get us to 18% ROE with the growth rate that we are looking for. So, at this point, the basic message there is, we have a clear track for ROE for every entity. And that track meets what we are looking from an overall portfolio perspective."

POINT BY POINT ANALYSIS  :

1) Asset turns -2-2.5x Sales peak Auto 28000Cr /Q

2) Valuations-P/S=1.33 13.5x EVEBITDA making it a bargain.

3) 75000 Advanced booking of XUV700 and 85000 for Thar + 13 EVs lined in (58% Rev from Autos)

4) DCF terminal value 2.5%-2%

5) Holdings worth-63750Cr discounted @ 50% =31875Cr

6) Auto Sales 2025 1Lcr and P/S=2x (Maruti 2.7x)  (2Lcr +Holdings)  2-2.5x by 2025 2.5Lcr approx.

What makes this company a special investment bet is mix of top quality management and excellent product lineup with fair valuation.

Disclaimer - It is just for leaning purpose. Please do your own research before investing.