M&M hits new high; rallies 12% in three days on healthy demand prospects

While the outlook for tractors has improved, analysts expect the auto business to be the key growth driver over the next couple of years.

Shares of Mahindra & Mahindra (M&M) hit a fresh record high of Rs 1,035.90, up 4 per cent on the BSE in Tuesday’s intra-day trade, after it surged 12 per cent in three days, on strong demand outlook.

Most of the brokerages retain ‘buy’ rating on M&M with target price in the range of Rs 1,150 to Rs 1,200 per share, amid healthy demand prospects across the company’s product profile and its focus towards capital efficiency and electric vehicle (EV) proactiveness.

M&M became the number one player in the SUV revenue market share in Q4 and H2FY22, whereas, farm equipment sector (FES) gained 180 basis points market share in FY22. With 170k+ bookings, the demand for the automotive product portfolio remains strong for the company. Meanwhile, FES delivered second highest full year PBIT despite market slowdown and steep commodity inflation.

Given the recent fiscal and monetary measures by the government and Reserve Bank of India (RBI), the management foresees the cost pressures in the economy to cool off.

Besides that, the company reported a 17 per cent year-on-year (YoY) rise in standalone profit (before exceptional items) at Rs 1,167 crore for the March quarter (Q4FY22) from Rs 998 crore, a year ago. After accounting for exceptional items, profit rose too, by 427 per cent to Rs 1,292 crore from Rs 245 crore, a year ago.

Analysts at ICICI Securities believe that M&M’s renewed pivot towards efficient capital allocation (vision for >18 per cent RoCE at consolidated level) and aggressive EV launch pipeline are structural positives. However, analysts see that the company's standalone return ratios look optically muted compared to peers due to high quantum of investments in subsidiaries (listed and unlisted).

With operating leverage benefits at play, mix normalisation (high growth in relatively low margin automotive business) and focus on optimising cost; the brokerage firm expects 12.6 per cent  growth in EBITDA margins and ~13 per cent standalone RoCE by FY24. ICICI Securities retains a ‘buy’ rating on M&M with 12 month target price of Rs 1,200 per share.

That said, analysts at Emkay Global Financial Services believe that the company's aggressive price hikes will augur revenue growth.

"In Q1FY23, the company has been more aggressive than peers in price hikes, and input costs are expected to see a downtrend from Q2FY23 considering recent corrections in commodity prices. Auto revenue should see a strong 24 per cent CAGR, and farm revenues are likely to witness a 6 per cent CAGR," the brokerage firm added, with a 'buy' rating on the counter, and target price of Rs 1,150 per share.