Mahindra & Mahindra Ratings – Buy: Q1 performance was below expectations

In addition, the transition to international farm and auto subsidiaries will help the company meet its ROE target. Buy keep.

M&M + MVML reported Q1FY22 EBITDA of Rs 16.3 billion (-17% qoq), 7% lower than our estimate due to weaker-than-expected profitability in the automotive business. The M&M management has taken several steps to improve its capital allocation strategy by selling stake in loss-making subsidiaries and exiting certain joint ventures or deals that would have consumed capital. In addition, the transition to international farm and auto subsidiaries will help the company meet its ROE target. Buy keep.

Standalone Ebitda below 7%
Net revenue came in at Rs 117.6 billion, which was 3% lower than our expectations due to lower than expected ASPs. Net revenue declined 12% quarter over quarter due to (i) quarter-on-quarter decline and (ii) receipts declined by 5% quarter-on-quarter. The automotive division’s revenue came in at Rs 60.5 billion, led by a 23% qoq decline in (i) a 20% qoq decline in volumes and (ii) a 4% qoq decline in ASP. Tractor division revenue grew 7% qoq with (i) 6% qoq growth in volumes and (ii) marginal growth in ASP in Q1FY22. Automotive Ebit margin came in at 1.7% (-330 bps QoQ) due to RM headwind and negative operating leverage. Quad Ebit margin came in at 20.3% (-170 bps qoq).

As a result, Ebitda margin came in at 13.9% (-80 bps quarterly). Adjusted PAT came in at Rs 9.15 billion, which was 5% lower than our estimate despite a reduction in Ebitda on account of higher than expected other income. Overall, the company highlighted that commodity inflation and semiconductor supply issues remain a concern. The company suffered an extraordinary loss of Rs 785 million in respect of impairment for long term investments. Consolidated revenue declined 11% qoq in Q1FY22, while the company reported an Ebit loss of Rs 21.8 bn on account of Ebit loss of Rs 8 bn. Mahindra Finance. Global agriculture subsidiary PBIT stood at Rs 1.1 billion in Q1FY22.

Cut our FY2022-24E standalone EPS estimates by 1-6%
We have cut our FY2022-24E standalone EPS by 1-6% on lower volume and Ebitda margin estimates. We expect a recovery in automotive segment volumes once the chip situation normalises. We also expect tractor segment demand to remain strong, given a strong normal monsoon, higher reservoir levels and increased government spending. Despite the challenging external environment, losses at international agriculture and auto subsidiaries have moderated, which is encouraging. Maintain buy ratings at attractive valuations; SOTP-based FV rose to Rs 1,050 (earlier Rs 1,015), mainly due to increase in K Tech Mahindra.