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Shares of Mahindra & Mahindra Ltd (M&M) have risen by 24% so far in calendar year 2022 outperforming the sectoral index, Nifty Auto, which gained by only 4% in the same span.

The turnaround in M&M’s automotive segment has boosted investor sentiments. Also, the outlook is firm as the demand for its products such as XUV700 continues to grow.

At the Nomura Investment Forum, M&M’s management noted that it receives about 9,500 average orders per month (after accounting for cancellations) for XUV700. It plans to invest in capacity expansion to meet the increasing demand for its passenger vehicles.

But a factor limiting the company’s ability to manufacture vehicles is the semiconductor shortage which currently affects 10% of production when compared with optimum levels. However, it has a decent inventory of electronic control units. M&M produces about 5000-6000 units of XUV700 per month at present.

“We expect M&M to be a key beneficiary of the strong model cycle in utility vehicles. As production picks up and the orderbook with price protection for XUV700 runs out, we estimate there is potential to more than double auto sector Ebit over FY22-24F," said analysts at Nomura Financial Advisory and Securities (India) in a report on 9 June. Ebit is earnings before interest and tax.

On the electric vehicle (EV) front, M&M’s Born EV platform is likely to be unveiled in August. The company expects this platform to contribute about 20% to passenger vehicle volumes by FY27. It has no plans to launch CNG (compressed natural gas) products in the passenger vehicle segment.

In the farm equipment segment, M&M notes that there is increased competition from unlisted entities. Also, there is higher stickiness from farmers to change tractor brands. As such, the company focuses on gaining market share. In FY22, it held a market share of 40% in tractors. The Ebit margin in this segment has been on a decline due to elevated commodity costs. M&M expects input prices to normalize in about one and a half years.

“Despite flattish tractor volumes over FY22-24F, we expect about 27% earnings per share CAGR on a strong auto launch cycle. Current valuation at about 7 times FY24 enterprise value-Ebitda (adjusted for subsidiaries) looks attractive (peers trading at 10-13 times enterprise value/Ebitda)," added the Nomura report. Ebitda is earnings before interest, tax, depreciation and amortization.

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