M&M shares surge 10% in 5 days. Here's what's fuelling the rally

Shares of Mahindra & Mahindra, a passenger car and utility vehicle maker, hit a fresh 52-week high of ₹1,057 on the NSE in Thursday’s trade. The stock has risen 13.5 per cent in the last week. At 2:00 p.m. M&M's stock was trading at ₹1,046 per share, down 0.08%, versus a 0.73 per cent gain in the benchmark S&P BSE Sensex.

A combined 3.1 million shares have changed hands on the counters on the NSE and BSE till the time of writing of this report.

Furthermore, the stock gained more than 30% in the last three months, compared to the Nifty 0.5 per cent gain during the same period.

Here are some key factors behind the rally:

Strong Financials

On May 28, M&M reported a 427 per cent increase in its standalone profit after tax to ₹1,292 crore for the quarter ended March 31, 2022. The company had posted a profit of ₹245 crore for the year-ago period.

The revenue for the quarter stood at ₹17,124 crore, a 28 per cent jump over the corresponding quarter last year. The company reported revenue of ₹13,356 crore in Q4FY21.

EBITDA stood at Rs. 1,946 crore for the January-March quarter of FY22 as against Rs. 1,955 crore in Q4 FY21.

Net profit for the year increased by 401 per cent to ₹4,935 crore from ₹984 crore the previous fiscal year. Revenue increased by 29% to ₹57,446 crore from ₹44,630 crore the previous year.

In Q4 of FY22, the company sold 1,552,204 vehicles, a 43 per cent increase over the same quarter the previous fiscal year. Tractor sales during Q4FY21 were recorded at 72,058, declining by 23 per cent from the same quarter last fiscal.

Further, Auto exports increased by 77% year on year in the previous fiscal year, while farm export volume increased by 66% year on year to 17,500 tractors in FY22.

The firm noted that it recorded the highest ever standalone revenue for the auto and farm segments at over ₹55,300 cr for FY22, up 29 per cent. M&M also ranked first in SUV Revenue Market Share in the second quarter of FY22.

The Board has recommended a dividend of ₹11.55 per ordinary (equity) share with a face value of ₹5 each.

Capex Boost

Mahindra and Mahindra (M&M) has announced a ₹15,300 crore capital expenditure in the auto, farm equipment, and electric vehicle (EV) businesses between 2022 and 2024. which it has already pumped in ₹3,200 crore in FY22, while the remaining ₹12,100 crore will be done during FY23 and FY24. This is significantly higher than the Capex done by the company in the recent past.

Prior to FY21, it was pumping in ₹3,000-4,000 crore annually. The pandemic, coupled with a chip shortage, made the company defer the expenditure. The company's Capex plans are in line with the trend at its peers, Tata Motors and Maruti Suzuki India.

M&M’s aim is to fortify its position in the SUV and tractor segments and enter the electric passenger vehicle business with the "born EV" platform from 2025, the company’s top officials said at an annual press conference on Monday.

Mahindra has set aside ₹11,900 crore for its automotive sector, which includes electric vehicles, and ₹1,900 crore to increase production capacity for the XUV7OO and other models.

Strong order book

The XUV700 is seeing strong bookings of over 9.5k units per month, despite a high waiting period. It has open bookings of 78k units and an overall order book of 170k. 

The XUV700, the firm’s flagship model that was launched in August 2021, has a wait time of 18–24 months.

Cancellation rates stood at 10–15%. It doesn't expect the waiting period to fall materially as bookings are at 2x its production rate.

In the SUV business, where the company claims to be the market leader revenue-wise with a 17.9 per cent share, Furthermore, M&M plans to launch the new Scorpio, codenamed Z101, on June 27.

According to the company, the all-new Scorpio-N will redefine the D-segment SUV category and is designed for tech-savvy customers looking for a full-size SUV with plenty of features. The new Scorpio will come with premium interiors and a host of modern features and the latest technology.

Brokerage Views

Motilal Oswal has given a 'BUY' rating, with a target price of ₹1,150/share, implying an upside of 9% from the current market price. It raises M&M's stand-alone EPS estimate for FY23E/FY24E by 12%/7% to account for an improving tractor outlook.

"We expect the auto business to be a major driver of growth over the next couple of years, led by strong momentum in both SUVs—driven by new products and the easing of supply issues—and LCVs—a cyclical recovery," said Motilal Oswal.

Meanwhile, HDFC Securities said that M&M will regain some of its lost market share in the coming years.

The brokerage house raised its target price for M&M from ₹1,065/share to ₹1,164/share, implying an upside of 11% from the current CMP.

CLSA said easing commodity cost pressure will drive Mahindra & Mahindra margins. The capacity addition at M&M will meet demand, finding M&M’s growth commentary positive, said the global brokerage firm, which has a target of ₹1,257 on the stock.

An average of 42 analysts polled by MintGenie have a 'buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.