Why M&M Share Price Is Rising?

Anand Mahindra, the chairman of Mahindra Group, tweeted on 30 May 2022, expressing his happiness over the rallying share price of Mahindra & Mahindra (M&M).

He mentioned that when Mahindra and Mahindra's (M&M) share price started falling in 2019, he was reminded of the advice given to him by APJ Abdul Kalam.

During the inauguration of Mahindra research valley, the late President had advised him to take the hill i.e., dare to dream.

Hence, when the share price started falling in 2019 after reaching its all-time high, he asked the team to take the hill up.

The new team did indeed take the hill up and M&M hit the target of all-time high price on 31 May 2022. It crossed the Rs 1,000 mark for the first time and reached a price of Rs 1,048.8.

M&M's closing share price on 31 May 2022 was Rs 1,033.9. This is 8% higher than its closing price on 27 May 2022.

In fact, 30 May 2022 was the first time that M&M reached the mark of Rs 1,000!

But what caused the sudden rise? How did M&M manage to surpass its previous high?

Read on to find out…

#1 Improved financial performance

On 28 May 2022, M&M approved and reported its financial results for the quarter ended March 2022 and full year 2022. Good Q4 results and full year numbers are the prime reasons for the rising share price.

The financial statements showed a rise in profits by almost fourfold on a YoY basis. The profit for fiscal 2022 stood at Rs 4,940 crore as compared to Rs 980 crore in 2021. However, these are the figures for profit after exceptional and abnormal items.

But, even if we consider profit before exceptional or abnormal items, there has been a rise of 19% in profit on a YoY basis.

The revenue for fiscal 2022 stood at Rs 59,520 crore. This is 30% higher compared to its previous fiscal.

The company also announced a dividend of Rs 11.5 per share.

In the quarter under review, the company's auto business delivered the highest ever quarterly utility vehicle (UV) sales volumes. In Q4, M&M sold 152,204 vehicles, 43% higher than the same quarter last year.

M&M had a stellar 2021-22. Hence its share prices are rallying.

#2 Huge Capex Plans

M&M announced huge capital expenditure plans over 2022-2024. M&M plans to incur an expense of Rs 15,300 crore on auto, farm equipment, and electric vehicles (EV).

Out of this, Rs 3,200 crore is already spent in fiscal 2022. The remaining will be spent over the remaining two years.

Before the pandemic period, M&M was spending Rs 3,000 to 4,000 crore per annum on capex. But with the pandemic running its course, M&M had to cut off its capex.

However, it seems it is going back to its normal levels of capex now that the pandemic is over.

M&M intends to improvise its core strength through capex. It is trying to work on maintaining a strong brand value, improving the supply chain, focusing on the development of EVs, and cost optimisation to achieve its goals.

M&M intends to gain the pole position in SUVs – the position they had three years ago.

When a company announces huge capex plans, it indicates it has big plans for the future and it has the capabilities to achieve the same.

These plans send a positive sentiment in the market. Hence investors believe the company will generate huge returns for them. Hence, the share price is rallying.

#3 Divestment

Divestment from a subsidiary hardly seems like a positive sign for share prices. But divestment may cause the share price to rise in cases like M&M.

So, did that happen?

Undoubtedly, the figures show that the financial performance of M&M had improved. But if you take a look at the financial ratios of M&M, they have stayed muted.

The profitability ratios like net profit margin, return on net worth, etc rose significantly. But ratios like Enterprise value, Enterprise value/EBITDA have either fallen or stayed the same.

The reason for this is heavy investment in its subsidiaries. However, M&M has started taking steps to correct this too.

On 30 May 2022, M&M announced it is divesting its 2.76% stake in TVS Automated Solution Private (TASL). After this, the company will have no stake in TASL. The stake was sold for Rs 450 m.

Hence, when a company sells its stake in a subsidiary that was not adding value to it, the share price will rise.

Investment Takeaway

M&M is one of the most reputed brands in India for automobiles. Its tractors are unbeatable. It is planning to make the most of the opportunity offered by the development of electric vehicles (EVs).

It intends to launch EVs for SUVs. Hence, it seems that operationally M&M won't disappoint.

Its financial figures paint a pretty picture too.

However, an investor must keep in mind that no matter how strong and functional a company is, it has to bow to the changes in the market.

Hence, one should invest carefully.

For more details about the company, you can have a look at Mahindra & Mahindra's factsheet.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)