M&M looks set to take off, and how! | Economic Times

ET Intelligence Group: Mahindra and Mahindra’s (M&M) decision to exit from loss-making businesses and commitment to tighter capital allocation policy should help in narrowing its valuation discount to peers in the automobile sector. Its current price-earnings (P/E) multiple for the core auto earnings is among the cheapest in the sector.The recent bankruptcy filing by the Korean subsidiary SsangYong will put an end to M&M’s future investment in the loss making venture. In the past three fiscal years, SsangYong incurred a cumulative loss of around Rs 3,000 crore and M&M took an impairment of around Rs 2,450 crore. Since analysts no more ascribe any value to this business, M&M’s loss will be limited to Rs 680 crore pertaining to the debt guarantees given to SsangYong, which is less than 1% of the parent’s total market capitalization.The equity value of the SsangYong on the books of M&M is about Rs 980 crore compared with the current market cap of Rs 1200 crore at the Korean stock exchange. Any positive resolution such as potential suitors will be positive for the stock.80106967In another development, M&M has exited from a potential JV with Ford due to an increase in the potential capital commitment amid the pandemic. M&M was supposed to invest Rs 657 crore to achieve 51% stake and it had a scope to invest upto Rs 1,400 crore, which would provide an incremental installed base of 4.4 lakh units annually. The savings incurred due to cancellation of the JV plan will be utilized in other capex needs. In addition, though lack of a JV would affect the new car launches in the B segment, M&M believes that it is capable of developing two new platforms in the segment with a scope for a collaboration with Ford.M&M plans to invest Rs 9,000 crore over the next three years. It is on course to kickstart SUV launches with the new generation XUV 500 and Scorpio in the next fiscal year. The company received encouraging response for the recently launched Thar SUV with 32,000 bookings so far. Nearly 50% bookings are for automatic variants suggesting that its efforts to upgrade technology is clicking with SUV customers.Lower loss from subsidiaries, improving capital allocation and benign tractor cycle have prompted analysts to accord a higher P/E of 15-16 to M&M’s core auto business compared with 12-13 earlier. Nearly one-third of the company’s fair value is derived from its stakes in Tech Mahindra, Mahindra Holidays, Mahindra Financial services, and Mahindra Logistics. On a consolidated basis, M&M trades at 20 times its one-year forward earnings, which is a 28% discount to the peer average. The stock ended 2.2% higher on the BSE at Rs 748.9 on Monday.