Some feel M&M’s large capex will drive growth while others point out falling tractor sales would emerge a large negative in the coming months.
M&M’s March quarter earnings were disappointing. Standalone net sales stood at Rs 13,512 crore down 4.9 per cent QoQ. A year-on-year comparison is avoided as last year’s quarter was affected by Covid lockdown. Standalone Ebitda margin stood at 13.2 per cent, down 280 bps QoQ, amid a 110 bps sequential decline in gross margins.
Post-earnings, the stock declined nearly 5 per cent on Monday to trade around Rs 800 level. It has moved in a half-a-per cent range over the past two days.
Q4 Earnings
The company’s revenue fell due to lower volumes in the auto and farm segments. Ebitda declined because of higher raw material prices and adverse mix, analysts tracking the company said.
The company said it generated Rs 10,000 crore of operating cash flow and Rs 6,700 crore of free cash flow for FY21. Auto segment fixed costs lowered by Rs 900 crore in two years–most of it is systemic and will be sustainable, it believes. In the medium term, the management expects to grow EPS at 15-20 per cent and deliver 18 per cent ROE. Auto and FES will target a 15-20 per cent revenue CAGR.
Capex plans
The company seeks to play on its core strengths by regaining SUV leadership and consolidating its hold over the
Capital deployment for next three years to be Rs 9,000 crore in auto (including Rs 3,000 crore in EVs), Rs 3,000 crore in farm; Rs 1,500 crore investment in international subsidiaries and Rs 3,500 crore investment in group companies.
The company aims to create value by identifying and investing in growth companies and target a market of $1 billion in the next 3-5 years for each of them. Some analysts lauded the capex plan outlined by the management.
“A definitive roadmap for EV launches across PV, 3-W and CV ranges is encouraging and demonstrative of ambitions in the sunrise space,” said Shashank Kanodia of ICICI Securities. He said product excitement underpins the company’s growth ambitions.
Risk factors
Among the key risk factors are the supply constraints related to semiconductor shortages and localised lockdowns amid the ongoing second Covid-19 wave, which are likely to impact near-term volumes across automotive and tractor divisions.
Another concern is the decline in tractor sales. Tractor upcycle, which has been a major profit driver for the company in FY21, is in its last legs.
“We expect the tractor industry to register a decline in FY22 on the back of high base, greater rural impact (vs last year) of Covid, high channel inventory. Additionally, margins would come under pressure from adverse HP mix (vs last year), higher commodity prices and incentives,” said Saksham Kaushal, Research Analyst at PhillipCapital.
Analysts said they are particularly concerned with the capital deployment plan. “In our opinion, this is a step back from the Rs 12,000 figure floated earlier and would significantly impair the cash flow generation for the company. Also, in our opinion, the quest for a partner to collaborate on EVs could be difficult,” said Kaushal.
Commodity costs are another issue the company has to deal with. Metals, which is a key commodity the auto industry consumes, have been on a rise in recent one year, destabilising the economics for OEMs.
“Rising commodity costs are likely to erode gross margins where we pencil in a 180bps decline over FY21-FY23. Also, supply chain issues and erratic lockdowns due to Covid-19 could impact demand and must be monitored. A rising mix of low-margin auto segment sales is also likely to hamper profitability,” said Mayur Milak of BOB Capital.
Analyst calls
Overall, analysts are divided on the stock. Some see up to 30 per cent potential upside in the next 12 months and recommend buying, others believe selling will be the prudent step at this point.
“We lower our target EV/Ebitda for MM+MVML to 9 times expected FY23 (from 10x) due to lower growth for tractors and higher investments. Current valuation at 6x FY23F EV/Ebitda (adjusted for subsidiaries) with 7 per cent free cash flow yield for M&M+MVML is very attractive for 16 per cent Ebitda CAGR over FY21-23. Execution on value creation from investments could give further upside,” said Kapil Singh of Nomura India, who has a ‘buy’ rating with a price target of Rs 1,085.
Analysts at ICICI Securities and LKP Securities also recommend buying with potential 12-month targets at Rs 1,000 and Rs 957, respectively.
On the other side, analysts at PhillipCapital downgraded the counter to ‘sell’ and slashed target price to Rs 760. They also lowered their FY2 and /FY23 estimates for revenue, Ebitda and net profit by up to 32 per cent.
BOB Capital continues to value the automaker’s core business at 14x FY23E EPS (at par with the long-term average) and maintain its price target at Rs 630 with a ‘sell’ rating.
