Mahindra & Mahindra gains 9% in 2 days on strong Q4 operational performance

An improving core business and possible course correction on capital allocation would drive stock performance as valuations are still cheap, analysts say.

Shares of Mahindra & Mahindra (M&M) gained 2 per cent to Rs 518.50 in the early morning deals on the BSE on Monday, surging 9 per cent in the past two trading days, after it reported a robust operational performance in the January-March quarter (Q4FY20).

The company reported a standalone net loss of Rs 2,500 crore, due to exceptional loss of Rs 2,800 crore on account of impairment on investments due to Covid-19 and others. It had posted net profit of Rs 849 crore in the year-ago quarter.

Standalone net sales for the quarter were at Rs 9,144 crore, down 35 per cent year on year (YoY). EBITDA (earnings before interest, taxes, depreciation and amortization) margins came at 12.4 per cent down just 100 basis points on quarter on quarter (QoQ) basis. EBIT margins in the automotive segment declined 280 bps QoQ to 2.9 per cent while the same in the tractor segment were down 180 bps QoQ at 17.6 per cent.

"While the overall services and manufacturing sectors are likely to see a slower recovery, the agriculture/farm equipment sector will be relatively less impacted, aided by several positive factors such as record Rabi production, higher Government procurement, timely announcement of higher MSPs, and outlook of a normal monsoon," the management said in a statement. 

"One can expect a quicker recovery in rural India, as is evident from tractor sales of the company in the month of May. The urban segment may take longer to come back to normalcy. Having said that, while the outlook is heavily contingent upon the intensity, duration and spread of the pandemic, a smooth normalisation and efficacy of policy measures will be the key to any recovery in FY2021," it added.

“The management commentary reiterated robust demand prospects on the rural side with M&M tractor plants currently operating at 80 per cent utilisation levels with 90 per cent plus dealers now open. It further laid emphasis on prudent capital allocation strategy for both growth as well as investments,” ICICI Securities said in a note.

“Despite M&M's recent outperformance, valuations are still at a substantial discount to its five-year average (which captures both pain points of deterioration in the UV market share and the subsidiaries' performances). An improving core business and possible course correction on capital allocation would drive stock performance as valuations are still cheap,” Motilal Oswal Financial Services said in results update.