Tag - Subsidiaries

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17 Nov

Not keen on diversifying at this point – M&M

Update on the Indian Equity market:
On Friday, Nifty50 ended 0.2% higher at 12,720. EICHERMOT (+7.4%), BAJAJFINSV (+3.7%), and COALINDIA (+3.1%) led the index gainers while TATAMOTORS (-3.3%), LT (-2.0%), and HDFC (-1.1%) led the laggards. Among the sectoral gainers, METAL (+1.7%), REALTY (+1.3%), and PHARMA (+1.1%) were the leaders while MEDIA (-0.9%), and FMCG (-0.1%) were the only index losers.

Excerpts of an interview of Mr. Anish Shah, MD & CEO-designate, M&M published in Business Standard on 12th November 2020:
• The stock price has more than doubled since March. The board’s decision to not invest in SsangYong was important and signaled to investors that the management is serious about capital allocation.
• The next re-rating will happen once the international subsidiaries turn around and start contributing to earnings. The second set of actions is toward driving the growth of the domestic business. Third, they have identified significant growth drivers for the future, which are termed ’10 gems’.
• They are conducting a detailed analysis of growth drivers of international subsidiaries’ performance; does it have the potential for an 18 percent return on equity? They are working to see if they can revisit their go-to-market, product, and channel strategies. The subsidiaries will have to show a profitable path.
• M&M was the best performing stock in the Nifty for 17 years. Though acquisitions were made even then, that was driven by a very high level of fiscal discipline. Now, the acquisitions will be made, just that the bar in terms of fiscal discipline will be as high as it was in the past.
• They don’t expect to diversify even when they make an acquisition. There are 10 businesses right now and they believe there is a lot of potential to grow. They are keen on scaling up the diversified footprint.
• The joint venture with Ford has been delayed because of the pandemic and government approvals.
• There is a lot of synergy from material costs in the auto and farm equipment segments. They announced the best-operating margins and that is why those segments will be together.

Consensus Estimate: (Source: market screener website)
• The closing price of M&M was ₹ 629/- as of 13-November-2020. It traded at 23x/ 17x/ 15x the consensus earnings estimate of ₹ 26.9/ 36.7/ 41.1 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 667 implies a PE multiple of 16x on FY23E EPS of ₹ 41.1/-.
Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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10 Jul

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

Update on the Indian Equity Market:

 

On Thursday, Nifty closed 1.0% higher at 10,755. Within NIFTY50, HINDALCO (+6.6%), HDFC (+4.3%), and SBIN (+4.1%) were the top gainers, while INFRATEL (-1.9%), COALINDIA (-1.5%) and TECHM (-1.2%) were the top losers. Among the sectoral indices, METAL (+1.9%), FIN SERVICE (+1.6%), and BANK(+1.4%) gained the most.  FMCG(-0.3%) was the only sector to close in red.

 

Aim to go back to 20%-22% ROE- Mahindra & Mahindra

 

Excerpts of an interview with Mr. Anish Shah, Joint MD–Mahindra & Mahindra published on ET Auto dated 7thJuly2020:

  • M&M’s loss making subsidiaries had a difficult couple of years. M&M is now looking to take direct action.
  • The loss-making subsidiaries are being evaluated and categorized into 3 groups – Category A: companies with clear path to 18% Return on Equity (ROE). Category B: companies with unclear path to profitability but can deliver quantified strategic benefit, and Category C: Calls for a possible exit through alliance or sale as it does not fit into A or B.
  • This review of subsidiaries will be carried out every 6 months to ensure businesses are on track and milestones are being achieved.
  • Over the last 4 years, profits of M&M were being eroded by the loss-making subsidiaries- 1% in FY17, 12% in FY18 because of international subsidiaries, 25% in FY19, and over 1.7% in FY20.
  • 2 years ago, M&M management started ‘challenge round’ where as Head of Group Strategy, Mr. Anish Shah was asked to challenge all proposals and recommend to the board whether to invest or not. In the process, tough calls have been taken on two-wheeler business, Baby Oye, and Mom and Me among others.
  • In 4QFY20, M&M took a call to stop further investments in SsangYong and Gen Z. Almost 60% of losses came from SsangYong and Gen Z.
  • By the end of this FY21E, the remaining loss making subsidiaries will be addressed and shut down in absence of a clear path. Entering into FY22, a lot of these problems will be history.
  • M&M aims to have a simpler structure going forward. While the focus is looking at the loss making subsidiaries and getting them back on track, M&M does not want to change the spirit of entrepreneurship.
  • Multiple reasons led to the losses in last 2 years. The environment is one reason and excess confidence in some business is the other. Essentially, there will be a higher financial discipline that will come in.
  • M&M’s share price, as of high of August 2018, had a 31% annualized growth rate over a period of 17 years. The factors that drove this return were, – earnings-per-share growth of 34%, cash generation of Rs 23 bn per year on an annualized basis and annual return on equity of 22%. In order to get back to that kind of performance, M&M will have to get back to 20%-22% RoE and 30%-plus growth rate in cash generation.
  • M&M’s ROE in the last few years has gone down from 20% to 12%. In stage 1, by fixing loss making subsidiaries M&M should be back to 18% ROE. In the next stage, taking a look at 0-10% ROE businesses and fixing them, should mean going back to 20-22% of ROE.
  • M&M’s preference is to have a solid and conservative business over a rapidly growing risky business. M&M Finance’s business is strong and M&M is putting in capital to ensure that in any scenario, if things get much worse, there is no impact on the business. Mahindra Finance has always raised capital before it is needed, so they didn’t wait until the capital was needed. There were some analyst concerns regarding the capital issue but M&M is confident that M&M Finance should have a very high degree of subscription.
  • M&M aims to be the gateway to the largest and fastest growing themes in India and hospitality is one of them. M&M has a timeshare model and a long-term bond with the consumers. As a result, M&M expects that it’s hospitality business may not be impacted much. Post the COVID-19 crisis, M&M’s hospitality business can grow much faster.
  • As for Meru, M&M is looking at it closely to see what the real path to profitability is. M&M does not have a definitive answer to that yet.

Consensus Estimate: (Source: market screener and investing.com websites)

  • The closing price of M&M was ₹ 563/- as of 09-July-2020. It traded at 22.1x/ 16.7x the consensus EPS estimate of ₹ 25.5/ 33.7for FY21E/ FY22E respectively.
  • Consensus target price of ₹ 556/- implies a PE multiple of 16.5x on FY22E EPS of ₹ 33.7/-.

 

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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