M&M shares surge 11% on hopes of faster recovery in business1 min read . Updated: 18 Nov 2020, 02:19 PM IST
- The company's management is evaluating loss-making businesses across the board to reduce cash burn and prioritise capital allocation to businesses that offer visibility of at least 18% ROE in near-to-medium term
MUMBAI: Shares of Mahindra & Mahindra Ltd surged over 11% on Wednesday on hope of faster recovery in its core operations following continued divestment of loss making business. Expectation of higher demand for its tractors because of improved outlook for agriculture has boosted investor sentiment.
The stock had gained 11.3% to hit a 52-week high of ₹709 on the BSE. At 1.38pm, the stock traded at ₹703 apiece, up 10.4% from previous close.
Mahindra & Mahindra, in its March quarter earnings, had said it will exit loss-making international subsidiaries and entities over the next 12 months and follow stringent capital allocation norms as it seeks to focus on its auto and farm equipment businesses.
The company plans to improve return on equity (ROE) and ensure appropriate capital allocation across businesses is on track, Anish Shah, group chief financial officer and deputy managing director, M&M, had told Mint in an interaction on 12 November.
“If you look at 2002 to August 2018, M&M was the best-performing stock on Nifty. The key driver of that was the financial performance. Earnings grew 34% annually. We had an average ROE of 22% and there was a very strong cash generation. So, we are going back to those three metrics to achieve the fiscal discipline we had then," Shah had said about the company’s strategic plan of achieving 18% ROE across all business units.
The company's management is evaluating loss-making businesses across the board to reduce cash burn and prioritise capital allocation to businesses that offer visibility of at least 18% ROE in near-to-medium term.
Its recent better than expected quarterly results were driven by strong performance in the tractor business and steady recovery in autos.
After scaling down investments in SsangYong, MANA, and Genze, Mahindra & Mahindra has made its exit from Gipps Aero, its aerospace arm in Australia.
"While MM’s core business would recover faster, focus on tightening capital allocation could act as a re-rating catalyst. Hence, we see twin levers of EPS growth and re-rating", said Motilal Oswal in a note to its investors.
The brokerage firm has upgraded FY21/FY22E EPS by 8%/6.5% to reflect volume upgrade in tractors as well as tighter cost control.