M&M: Easing of COVID Lockdowns may Help in the Prompt Recovery of Domestic Sales

Mahindra & Mahindra Ltd. (NS:) (M&M) is one of the leading automobile manufacturers in India and the ‘King’ of SUVs. M&M is primarily engaged in manufacturing &sales of personal (PV) and commercial vehicles(CV) – current leading brands XUVs, KUV, Thar, Alturas, Marazzo, Scorpio, and Bolero. Apart from SUVs, M&M also engaged in pick-up vans, autos (passenger/goods), trucks, buses, and electric vehicles (EV-the future of the automobile industry after 2040-50 in India?). M&M is also engaged in the sale of agricultural tractors; other areas of functions-primarily financial services, sale of two-wheelers and automotive parts, IT services and real estate development.M&M SUVs are quite visible in various states as well as federal government departments mainly as a part & parcel of VVIP pool cars. M&M is also the leader in agricultural tractor sales for the domestic market.

In Q4FY21, consolidated operating revenue was at Rs.21.46B against Rs.21.63B sequentially (Q3) and Rs.20.18B a year ago (Q4FY20), just before COVID lockdown; in Q1FY21 (COVID lockdown period), revenue was at Rs.16.32B. In Q4FY21, the sequential revenue growth was negative at -0.79%, while on yearly basis, it was positive by +5.94%. But EBITDA was up by +10.47% sequentially (Q/Q) and +37.27% yearly (Y/Y) due to better management of operating costs and product mix despite higher raw material costs.

In Q4FY21, the EBITDA margin was at 17.94% against 16.11% sequentially and 11.96% yearly. Eventually, after considering interest payment, core operating profit (EBTDA=EBITDA-Interest) came at Rs.24.47B in Q4FY21 against Rs.19.68B in Q3FY21 and Rs.0.8B in Q4FY20; i.e. growth of around 24% sequentially and 66% annually. The core operating EPS was at 22.04 in Q4FY21 vs 17.74 in Q3FY21 and 7.57 in Q4FY20; COVID lockdown 1.0 low was at 1.04 in Q1FY21.

Overall, Q4FY21’s bottom line was boosted by improved demand (including pent up) for PV (passenger vehicles) and agricultural tractors. RBI monetary stimulus, as well as government fiscal stimulus (good for both rural as well as an urban economy) coupled with increasing demand for personal vehicles among the general public to avoid public transport & COVID infections. But still, in FY21, the M&M automotive segment registered a 26% decline in volumes (at 349K units), while tractor sales volumes increased 18% (at 351K units) compared to FY20. In H2FY21, elections in various states (higher demand for SUVs) and farmer’s rallies (higher demand for tractors!) may have also boosted M&M revenue.

Highlights of FY21/Q4FY21 result and company comments: M&M


Overall demand remained robust for the Company’s products in Q4FY21. However, the global shortage of semi-conductors impacted the production & sales for the quarter. That has crossed bookings of 55,000 vehicles since its launch; tested to be India’s safest off-roader with a four-star rating; It has won accolades from customers and nineteen awards. XUV300 has also seen strong demand with a 90% growth in bookings in H2FY21 over H2FY20. Bolero, Scorpio had strong sales of over 10000 sales per month during Q4FY21. The Automotive Sector continued its focus on cost optimization and reduced its fixed expenses by over Rs 900 crores over the last two years & hence keeping its margin resilience even under challenging times.

Farm Equipment:

Strong performance despite supply chain and commodity challenges; Tractor volumes up 58% and revenue up 60%; PBIT for Q4FY21 at Rs 1095 crores – a growth of 100% YoY; PBIT margin for Q4F21 increased to 22.0% from 17.6% in Q4FY20; Subsidiaries of the Farm Equipment sector registered positive PBIT for the third consecutive quarter with a turnaround in its international operations.

Our associates deserve all the credit for outstanding performance in a tough year. Our primary focus has been ‘people first’, keeping our associates and our communities safe. We have delivered our promise on capital allocation actions and have seen very positive results. We are now focused on growth—across our core businesses, growth gems, and digital platforms.

Our approach of Walk-Run-Fly has delivered strong financial returns in FY21. The strong margins and turnaround of global subsidiaries in FES along with a robust automotive demand momentum through the focused SUV strategy have set the ground for us to now accelerate to fly. New products and technologies, farm machinery opportunity, Krishe and cost management set us up for a bold, aggressive growth trajectory.

Our journey towards our goals of streamlining capital allocation and delivering superior returns has begun well. We are delighted by the robust operating cash flow in a year that saw the impact of the pandemic as well as multiple supply-side challenges.

M&M analyst concall highlights:

  • Positive operating FCF for around Rs.10B in FY21 vs Rs.4.5B in FY20; out of this, Rs.3.50B is because of better capital allocations, which may be exceptional, but Rs.6.50B should be the standard (target) for every year
  • The company is quite upbeat about farm machinery and Thar vehicles along with various upcoming models
  • Upbeat prospect for EV and also the CV (last-mile mobility to avoid public transport)
  • Emphasis on digital platform and hi-tech product in PV and 2W
  • Guidance of 15-20% CAGR in core EPS along with revenue growth of over 15-20% (till 2025); 18% ROE is a standard benchmark for M&M
  • Upbeat guidance for global subsidiaries, which is set to fly
  • The emphasis from local to global; digital platform and product designing
  • Cost-saving to the tune of Rs.0.90B in the last two years on fixed expenses (automotive business) like manufacturing cost, sales & marketing and G&A
  • Average booking for PVs around 5-6K/month (except lockdown period) with a waiting period of 10-months
  • XUV300 doing extremely well along with traditional models like Scorpio and Bolero
  • The stress of SUV strategy with EV; launch of 9-new models by 2026
  • Launch of 14-new models in CV as last-mile mobility products
  • Also focusing on new tractors, trucks, buses, and various new PV models in overseas market/Europe
  • 45% growth in farm machinery for FY21; now focusing on export and inorganic expansion for this segment
  • Upbeat business prospect for tractors in North America, Mexico, Brazil, and Turkey
  • Farm machinery business contributed to EBITDA margin expansion significantly in Q4FY21; domestic automobile business also helped (price hike)
  • Advanced provisioning for South Korean failed subsidiary (Ssang Yong) will also help cleaning of M&M balance sheet
  • Guidance of capex for around Rs.17B by FY25 (Auto-Rs.6B; EV-Rs.3B; Tractors-Rs.3B; misc. investments/capex for various overseas subsidiaries/domestic group companies-Rs.5B); Rs.9B capex for FY22
  • Not too much concern over automobile chip shortages, but the company is emphasizing on right product mix, giving priority for XUV700 launch, while also trying to augment supply chains
  • Upbeat defense business; order book close to around $1B
  • May go for strategic partnership with any suitable global EV player for EV R&D for reduced stress on the balance sheet, which is already debt-heavy for various capex; total debt was around Rs.60B at Q4FY21; the company is looking for EV SUV product design R&D partnership
  • Subdued guidance for domestic tractor business amid COVID uncertainty; may be affected more than last year, but also actively monitoring the situation; expecting plateauing of COVID infections from June onwards, the start of land preparation/tractor buying season, and expected normal monsoon this year may help tractor/farm equipment business in the latter part of the year:

–our current outlook is low single digits for the industry for the year. We do want to gain some market share which something we will aspire for. As you know we have lost market share last year mainly on account of supply issues. So, when we are saying single-digit growth, I am talking about the industry. Just to add some qualitative colour to your comments on rural markets— clearly yes, they have been affected more this year than last year. In the last few days, we are seeing a change in sentiment and movement.

And as the tractor buying season, because that’s when the land preparation will start now, is starting to pick up. There is momentum building up on tractor buying which wasn’t visible for the last 3 or 4 weeks.

So, a combination of tractor buying season along with what is people are sensing as a declining or receding COVID cases in rural gives us confidence that we will see some kind of a rebound in June compared to what it has been over the last 4 to 6 weeks. From there on, of course, it will depend a lot on how the monsoon and the rest of the sentiments play out. Overall, as I am sure you have all the information as well all the parameters in rural India are extremely strong.

  • FY21 savings of Rs.0.90B on marketing expenses may not be transitory as some of the COVID-induced digital evolution will be permanent (like zoom meeting), leading to less travel/hotel expenses and so on. The company is also cutting costs by not doing any big bang product launch or doing any big-budget ad campaign; emphasizing low-cost social media for product ad like Thar; so EBITDA margin expansion may be sustainable going forward
  • Domestic farm machinery business market estimated to be around Rs.0.50B
  • Stress on improving performance and ROE for listed subsidiaries; M&M board now closely watching overall group activities and various strategies for improvement of the same
  • Projected 7-8% CAGR over next 3-5 years for the tractor market in India depending upon overall farm productivity, corp planning, machine farming, and land/soil preparation; M&M has to grow its market share significantly which was affected in FY21 for capacity constraint and supply chain issues; apart from new capacity addition through fresh CAPEX, M&M now planning manufacturing in additional shifts and also trying to resolve supply chain issues to cope with rising demand
  • Emphasis on farm machinery business like Cultivator, Rotavators, and Rice Transplanter to modernize India’s farming practices; this is a huge untapped market for organized players and so far dominated by small local players; if India can modernize farming like China, productivity will be significantly enhanced even after coping with increasing labour shortages
  • The company is watching the current subdued situation in the tractor business because of the underlying COVID tsunami, which also affected rural India this time. But the management hopes that with the onset of timely monsoon this year, farmers will eventually start to prepare the soil for cultivation. M&M and all other companies in the tractor industry, along with various finance companies are offering medical and life insurance coverage for farmers amid the COVID pandemic; tractor business may grow by low single-digit growth rather than mid, but there is always an element of surprise here as in FY21, no one expected +20% growth even after 6-weeks of complete national lockdown. There was some pick up in late May in farming activities and as the rural fundamentals are strong, the company expects a recovery in the tractor business in the coming days
  • The company is feeling some margin pressure in the tractor business due to higher raw material costs and subdued demand, which is making it difficult to pass on higher costs to customers

Despite various COVID-related difficulties, M&M, which is also India’s biggest tractor maker, reported a quarterly profit in Q4FY21, compared with a loss last year when the first wave of the COVID pandemic struck.Supply line constraints, such as chip shortages affect the entire automobile industry globally, were also an issue for M&M, but Q4FY21 was also helped by strong demand in its auto and farm equipment sectors and restructuring at some of its loss-making international subsidiaries. In Q4FY20, M&M logged a loss of $345M when it took a charge related to its South Korean unit SsangYong Motor. In Q4FY21, too, it booked a one-time loss of $67M on discontinuing SsangYong’s operations.

On 1st June, M&M published its tractor sales figures for May:

Mahindra & Mahindra Ltd.’s Farm Equipment Sector (FES), a part of the $19.4B Mahindra Group, announced its tractor sales numbers for May 2021, which indicates a clear growth path in the upcoming season.

Domestic sales in May 2021 were at 22,843 units, as against 24,017 units during May 2020 (-5%); Total tractor sales (domestic + exports) during May 2021 were at 24,184 units, as against 24,341 units for the same period last year (-1%); The company’s total tractor sales have contracted 12.1% sequentially in May’21 (from 27523 units sold in Apr’21); Exports for May’21 stood at 1341 units (+314% from May’20)

M&M said:

We have sold 22,843 tractors in the domestic market during May 2021. In May, COVID spread in rural markets led to stringent lockdowns, leading to deferment of tractor purchase and limited operations at dealerships. While state-specific lockdowns and localized restrictions continue, it is heartening to see the COVID cases reducing sharply. This is leading to a sharp improvement in farmer sentiments, and green shoots of recovery are visible, especially since the last week, as farmers start preparing their land for the upcoming Kharif crop season. A bumper Rabi harvest, record procurement, food prices holding up, gradual opening up of mandis, and expectations of a normal monsoon will pave the way for growth in the upcoming season. In the export market, we have sold 1,341 tractors with a growth of 314 percent over last year.

On 1st June, M&M published its PV sales figures for May:

Overall auto sales (PV+CV+exports) for May 2021 stood at 17,447 vehicles. Sequentially, the company’s total auto sales declined 52.1% in May 2021 from 36,437 units sold in April 2021. The passenger vehicles (PV) segment (which includes UVs, cars and vans) sold 8,004 vehicles in May 2021, up 107% YoY. Total exports for May 2021 zoomed 300% to 1,935 units from 484 units in May 2020.

M&M said:

We are seeing a strong growth momentum for our entire product portfolio. The Thar is clocking robust bookings, despite extended waiting periods.XUV300 has been a tremendous success and continues to see strong demand. Our power brands (Scorpio and Bolero) continue to do well. With the cases coming down and the gradual opening up of markets, we foresee a strong demand rebound. We are working closely with our supplier partners to manage supply chain issues and meet the market demand.

M&M tumbled more than -7% from a pre-result high around 853 to 790 after report cards on subdued guidance (both tractor and PV sales). In early May, M&M said it expects auto sales; revenue and profit for Q1FY22 to be 15%-20% lower on a sequential basis (q/q) due to COVID disruptions and chip shortage, but it expected a demand rebound as India emerges from COVID lockdowns, while automotive sales may remain under pressure from a global chip shortage.

M&M said:

We are ramping up production and we believe there will be a strong demand rebound as we get out of lockdowns between June-July—-

We wish to inform you that with the rampant spread of the Second Wave of COVID-19 and Lockdowns enforced in various States / Parts of the Country coupled with disruption in the supply of oxygen for industrial use, demand, and supply for Vehicles and Tractors is expected to be impacted temporarily.

In addition, on the supply side, the global shortage of micro-processors (semi-conductors) used in Electronic Control Unit (ECUs) fitted in different components/aggregates for Vehicles continues to pose challenges to the smooth Production Schedules.

Given this, the Company is carefully reviewing the demand & supply situation and re-calibrating its operations accordingly while protecting the interest of its customers, dealers and suppliers. The endeavour is to ensure an optimal level of inventory at plants & dealerships to be prepared for a rebound in demand once the situation returns to normalcy.


India’s PV sales slip to 2.7M units in FY21 from 3.4M in FY20 on COVID recession, the lowest in last six years. Indian PV market was already under stress for the last few years even before COVID due to general economic slowdown (demonetization effect on high-value consumer goods), high GST on cars, higher cost of owning a car (high road tax, insurance/fuel cost etc) and various other factors.

M&M has been reviewing its business to retain only the most profitable subsidiaries, helping the company reduce the full-year loss from international units to $325M in FY21 from $473M in FY20. M&M expects that international loss to fall to $41Mby FY22 and breakeven from FY23.

M&M management sees a subdued trend of PV sales on COVID/economic uncertainty (scarring effect) despite demand for personal mobility (to avoid public transport/COVID infections). Unless most people are properly vaccinated, there will be always a COVID scarring effect, which will prevent consumers to spend lavishly on discretionary items like cars. M&M CEO Shah expects India’s PV sales to recover to pre-COVID levels only by FY23 because of the very tepid pace of COVID vaccinations (two doses).
Car market share

The Indian PV market is traditionally dominated by Maruti (NS:) (almost 49%), followed by Korean giant Hyundai, Tata Motors (NS:), M&M, Kia Motors (sister concern of Hyundai) and Renault (PA:). M&M has lost its market share mainly to Kia Motors which sells only two model-Seltos (SUV) and Carnival (NYSE:) (MPV). M&M was also affected by automotive chip and other raw material (arts & components) shortages from its China supply line amid COVID disruption and transition to BS-VI emission norms (transitory factor). Also, due to surging prices of diesel and reduced spread with petrol, the erstwhile fuel economy appeal of diesel vehicle compared to petrol version has been significantly reduced if overall maintenance cost is considered; this was negative for diesel heavy M&M vehicles.

But M&M is also taking a quite aggressive road map for its automotive business by launching nine new SUVs and fourteen LCV vehicles by 2026; a total of 37-models; 4-platform and 4-geographies (North America, Southern (NYSE:) Europe, South Africa, and South Asia/APC). Apart from the farm equipment business, M&M is also quite active in its Aerospace & Defence business. Recently its subsidiary Mahindra Telephonics Integrated Systems secured a contract for over Rs.3.23B from Indian Defense Ministry (11 airport surveillance radars).

Looking ahead, M&M is confident to overcome chip/raw material shortage issues, and in any way, it’s an industry issue, not just M&M. India’s rapid progress of COVID vaccinations (at least single dose) and visible plateauing of 2nd parabolic wave of COVID may an indication that the worst of lockdown 2.0 may be over; we may see a gradual easing of COVID restrictions in the days ahead. But public transport and some other restrictions may continue till at least Dec’21 or until authorities feel confident enough to ease the same (even after adequate single dose vaccinations).

Thus, the demand for personal mobility may be higher to avoid public transport and COVID infections. This coupled with easy and affordable car financing options, the Indian PV market may recover swiftly in the coming days. On the other side, WFH is going to be a permanent feature in most jobs even after COVID, considering better productivity and lower cost. This along with India’s elevated cost of vehicle ownership may also affect the demand for PVs.

In any way, M&M’s SUV models have good demand in rural, semi-urban India, while the popularity of its MPV model is also increasing in urban/city areas. M&M vehicles are also quite visible in various utility (electricity), logistic companies, government departments including VVIP vehicle/pool cars and election vehicles (party road rally show, election campaigning etc). Forthcoming elections in 5-states including UP in early 2022 may be a big boost for M&M SUV models. Overall, M&M enjoys a nationalist (Made in India) appeal locally at government levels along with affordable SUV appeal for households and businesses.

Fair Valuation of M&M: Rs.1015-1168 (by FY22-23)

In FY21, M&M posted a core operating EPS around 66.77; considering all the pros & cons, management guidance, commentaries, reality on the ground (progress of COVID vaccinations), the company may report an average of 15% CAGR in core operating EPS. Assuming an average PE of 10, the fair valuation of M&M should be around 668 for FY21, 768 for FY22, 883 for FY23, 1015 for FY24 and 1168 for FY25. As the market is now discounting FY24 earnings, M&M should scale around 1015 by Mar’22 and 1168 by Mar’23.

Fair Value

Technical outlook: M&M

Technically, whatever may be the narrative, M&M now has to sustain over 816-825 levels towards 952-975 zones and above; otherwise expect some correction towards 780-730 levels, which should offer a good opportunity for short to long term investment.
Technical View


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