Three-box framework for SUV-focus in EV space – M&M

Update on the Indian Equity Market:
On Monday, Nifty closed in the red at 14,930 (-0.7%), recovering from the day’s low due to a rebound in the metals and technology stocks. JSWSTEEL (+2.4%), TECHM (2.4%), and TATASTEEL (+2.3%) led the index gainers while DIVISLAB (-2.9%), BAJAJFINSV (-2.7%), and GAIL (-2.6%) led the laggards. Among the sectoral indices, METAL (+1.0%), IT (+0.6%), and PSU BANK (+0.2%) were the only gainers while MEDIA (-1.4%), PHARMA (-1.3%), and FINANCIAL SERVICES (-1.2%) led the laggards.

Mahindra & Mahindra (M&M) recently reorganized its EV (Electric Vehicle) strategy by setting up 2 new verticals, one for last-mile mobility, and the other for EV tech center. Mr. Rajesh Jejurikar, ED- Auto and Farm Sectors, M&M explained the rationale behind this strategy on CNBC TV-18 on 12^th March 2021. Here are the excerpts of the interview:

• To undertake a comprehensive look at the future, M&M has deployed a three-box framework. This framework suggests different businesses need different kind of attention and focus depending on company strategy and goals. Box 1 is the one that has the ability to scale up/Box 2 and 3 are more mid-long-term focus and need more technology and know-how.
• According to M&M, Last mile mobility is a box 1 business, which has a ready customer market today and they have to drive growth and penetration. Their box 2 business is the SUV focus IC-derived electric vehicles, and box 3 is EV which is preparing M&M’s strategy for the longer term.
• They have created a strong talent pool with good products at Mahindra Electric, which will help them in the future as well.
• They want to be SUV-focused in EV space as well. Currently, there are no plans of manufacturing EVs in shared mobility space (Sedans and hatchbacks).
• They believe the EV market penetration to be much higher by 2025-30, hence the need for a comprehensive SUV EV portfolio. They hope to have an electric variant for all price points they operate in.
• The level of readiness should be for 50-80% conversion in FY2025-30. The extent of conversion is very hard to predict at this stage so they are not setting any targets per se.
• They will launch eKUV100 and eXUV300 between CY21-CY22.
• The last-mile mobility segment is at an inflection point and the pace of sales should pick up significantly. The goods carrier segment is completely ready and a committed sales team and channel will help drive sales for this segment. The PV (Passenger Vehicle) was also ready but the slowdown due to Covid-19 has hampered the sales and M&M expects sales to pick up in 2HCY21.
• For last-mile mobility, export is a huge opportunity. M&M is already getting leads for alliances and partnerships in different markets across the world. Some of their key customers in the B2B segment are planning to take M&M products in their global ecosystem. While these deals will take some time to fructify, the initial response has been good.
• When M&M canceled their JV with Ford, the rationale was the money saved from JV will be put into the EV business. Rs 30,000 mn has been set aside for creating a strong EV portfolio.

Asset Multiplier Comments

• With the Covid-19 outbreak, the personal mobility demand has increased. Though Gen Z and millennials would prefer EVs for personal mobility, the success of EVs would largely depend on increasing penetration and availability of the infrastructure, which is currently lacking.
• M&M has been stressing on reducing investments in non-profitable subsidiaries and focusing on the core business. This three-box framework for EV vertical is a step in the right direction.

Consensus Estimate: (Source: market screener and tickr websites)

• The closing price of M&M was ₹ 846/- as of 15-March-2021. It traded at 31x/ 21x/ 18x the consensus earnings estimate of ₹ 27.4/ 41.1/ 46.8 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 959 implies a PE multiple of 20x on FY23E EPS of ₹ 46.8/-.

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