M&M is a “Lethal Combination of Growth and Value Creation” & a “compelling buy”: IDBI Capital

Summary

M&M’s Q4FY22 results were ahead of Consensus estimates on all account. In the Analyst meet, Management shared its intentions of aggressive business growth and value creation for shareholders. The Company reiterated its plans of attaining ~15-20% Sales and EPS CAGR over FY22-25E. To meet growing demand (especially for XUV700 and Thar), the Company has increased its capex plan for its Auto division from Rs90bn to Rs119bn. Management anticipates strong demand for its UV business with launch of Scorpio-N in June 2022. We retain our estimates for FY23 and FY24. M&M’s Sales and PAT is expected to grow at 19% and 25% CAGR respectively over FY22-24E. The stock is quoting at PER of 14.8xFY24 earnings (25% earnings CAGR/ ~17% ROE profile). We find current valuations extremely attractive and retain BUY rating and target price of Rs 1,565.

Key Highlights and Investment Rationale

► Q4FY22 Results Highlights: During Q4FY22, M&M’s sales grew by 28% YoY to Rs171bn primarily driven by its Auto division. EBITDA margins during the quarter declined by 328bps YoY to 11.4% on account of lower gross margins. Adjusted PAT increased by 17% to Rs11.6bn.

► Management’s view: The Company reiterated its plans of attaining ~15-20% Sales and EPS CAGR over FY22-25E and highlighted its priorities for aggressive business growth and value creation in the medium term.

► Retain Estimates: We retain our estimates for FY23 and FY24. M&M’s earnings cycle which has been stalled since FY14 is likely to enter into a blistering phase with 19% Sales CAGR and 25% PAT CAGR over FY22-24E. We expect M&M’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.

► Compelling Valuations: BUY with 57% upside: Based on Standalone earnings, the stock is quoting at PER of 14.8xFY24 earnings despite 25% earnings CAGR and ~17% ROE profile. However, based on its core business (Auto and Farm), net of subsidiary valuations of Rs 574/share, the stock is quoting at PER of 7.1xFY24 earnings. We find current valuations extremely attractive and retain BUY rating and target price of Rs 1,565 implying 57% upside