Why M&M Shares Are Rallying In Today’s Trade

Shares of Mahindra & Mahindra Ltd. extended their gains into the fourth day, the longest winning streak in two months, after Morgan Stanley listed the automaker as its top pick among peers.

The research firm, according to its note, maintained its ‘overweight' rating, and raised price target to Rs 1,112 apiece from Rs 865—implying a potential upside of 34% from Wednesday's closing.

“Weak passenger vehicle industry demand, loss of market share and a sharp fall in group RoE has derated M&M. [But] we see a change on all fronts and rate it as our top pick,” Morgan Stanley said in the note.

Mahindra's new Thar, the financial services provider said, is gaining significant traction, and if January sales were to be annualised, that would imply a 65% growth for overall utility vehicle sales for the company.

M&M reported a 4% year-on-year rise in overall sales at 20,634 units in January. Its utility vehicle sales increased 5% over the year earlier to 20,498 units. Exports were up 30% to 2,286 units. Tractor sales in January jumped 50% year-on-year to 23,116 units.

“We think the outlook for the agriculture sector remains positive on the back of strong kharif output and a healthy outlook for the rabi crop,” Morgan Stanley said. “As we see tractors forming about 55% of FY21 EBIT, the turnaround in the business has helped earnings.”

Morgan Stanley, however, awaits more clarity on the company's RoE-focussed approach and estimates it to be at 13% in FY23 for its base case. “We think RoE expansion to 18% could help price-to-book rise from the current 2.5x to closer to 3.5-4x.”

Adding electric vehicles business to its estimates, Morgan Stanley has arrived at a bull case price target of Rs 1,820 apiece, implying a potential upside of 118% from current levels.

This comes at a time M&M is grappling with a prolonged supply chain issue. The company, in December, said the global shortage of semiconductors supplied by Bosch Ltd. is expected to lower its production and sales in the last quarter of the ongoing financial year. Its tractor operation and three-wheeler production, however, will remain unaffected with the disruption.

Other Highlights From The Report:

• Base case price target assumes 15x FY23 P/E on core earnings and 20% holding company discount for listed subsidiaries.
• Expects automotive volumes to rise 45% in FY22 and 15% in FY23.
• Improvement in RoE should help lower the holding company discount.
• Increases FY22 and FY23 EPS estimates by 12% and 24%, respectively.
• Raises base case utility vehicle volumes by 22% in FY22 and FY23. Tractor volumes remain unchanged.
• Key Risks: Slower economic recovery, increased competition in the farm segment leading to a loss of market share and pressure on margins, continued pressure on auto margins, failure of new utility vehicle launches.

Shares of M&M gained as much as 5.5% in early trade on Thursday to Rs 879 apiece — the highest since September 2018. The stock has gained more than 17% in the last four trading sessions.

Of the 42 analysts tracking the company, 37 have a ‘buy' rating, two suggest a ‘hold' and three recommend a ‘sell'. The stock crossed its Bloomberg consensus 12-month price target of Rs 827.3 on Thursday.