Mahindra & Mahindra - Initiating Coverage - Megastar on Roll: IDBI Capital

We initiate coverage on M&M and expect stock to offer 77% return over the next two years led by strong earnings growth and PE expansion supported by 1) Huge impetuous by Managements on Growth and Value creation 2) Strong recovery in Auto business 3) Blistering earnings cycle, 31% PAT CAGR over FY22-24E 4) Value unlocking in EV and other business and 5) Simplifying group structure with tight capital allocation, exiting/reorganizing loss making business. In our valuations methodology, we have valued M&M’s Auto and Farm business separately as both businesses have different dynamics. We have also captured valuations of its EV business, Growth Gems (upcoming businesses) and M&M’s investments in digital platforms.

¾ Blistering Earnings Cycle: M&M’s earnings cycle which has been stalled since FY14 is likely to enter into blistering phase with 20% Sales CAGR and 31% PAT CAGR over FY22-24E. We expect MM’s earnings growth to be primarily led by its Auto business which is likely to contribute 60% to its FY24E EBITDA compared to 36% in FY21.

n Management’s Focus on Growth and Value Creation: M&M plans to launch 63 products over the next 3-4 years as Management has clearly laid out accelerated growth path. Management focus on unlocking shareholders value through simplifying business structure, capital allocation policy and reorganizing business is highly conducive for PE rerating.

¾ BUY with 77% upside: Based on Standalone earnings, the stock is quoting at PER of 13xFY24 earnings despite 34% earnings CAGR and ~17% ROE profile. However based on its core business (Auto and Farm), net of subsidiary valuations of Rs 605/share, the stock is quoting at PER of 5.2xFY24 earnings.

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