Dynamic Growth In Autos And Farm Drives Profit Surge Amid Industry Transformation

Key Takeaways

• Strong growth in auto, farm, and renewable sectors, along with new product launches, is driving increased market share and profitability.
  
• Strategic investments, particularly in electric vehicles and improved asset quality in finance, position the company for sustained future growth.
  
• Challenges in international markets, diversification delays, and EV competition could impact Mahindra & Mahindra's revenue, profitability, and margin growth.

Catalysts

Provides mobility products and farm solutions in India and internationally.

• The auto and farm businesses are experiencing strong growth, with increased market share and improved margins. New product launches and successful execution in these segments are expected to drive further revenue and profit growth.
  
• Services, led by Tech Mahindra and Mahindra Finance, are significantly contributing to profit growth. Both businesses are improving their margins and growing profits, which should continue to enhance overall earnings.
  
• The renewables business is rapidly growing, surpassing its planned pace. This accelerated growth in a high-potential sector could boost future revenues and profitability for Mahindra & Mahindra.
  
• Mahindra Finance is implementing a more stable business model with improved asset quality and lower credit costs, which should support sustained growth in net margins and earnings.
  
• The company is expanding its capacity, particularly for electric vehicles, which positions it for future growth as the industry transitions. This strategic investment is expected to drive revenue growth in the coming years.

Mahindra & Mahindra Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mahindra & Mahindra's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 10.6% in 3 years time.
• Analysts expect earnings to reach ₹169.0 billion (and earnings per share of ₹130.31) by about November 2027, up from ₹118.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹211.2 billion in earnings, and the most bearish expecting ₹129.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.2x on those 2027 earnings, up from 27.7x today. This future PE is greater than the current PE for the GB Auto industry at 16.5x.
• Analysts expect the number of shares outstanding to grow by 5.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.31%, as per the Simply Wall St company report.

Mahindra & Mahindra Future Earnings Per Share Growth

Risks

• Challenges in international markets, such as a significant downturn in the U.S. tractor industry and hyperinflation in Turkey, could negatively affect revenue and profitability from those regions.
  
• The company mentioned slower-than-expected progress in diversifying Mahindra Finance's offerings, which could impact its future earnings if growth targets are not met.
  
• Temporary pressures on margins due to launch expenses and marketing costs in Q3 might affect short-term net margins for the auto segment.
  
• Increased competition in the electric vehicle market and potential cannibalization of ICE vehicle sales could lead to uncertainty in revenue and profit growth if not managed properly.
  
• Asset quality improvements in Mahindra Finance are still being worked on, and any setbacks or increased credit costs might impact earnings if the current trajectory does not continue.

Valuation

• The analysts have a consensus price target of ₹3383.41 for Mahindra & Mahindra based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3700.0, and the most bearish reporting a price target of just ₹2700.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹1596.1 billion, earnings will come to ₹169.0 billion, and it would be trading on a PE ratio of 45.2x, assuming you use a discount rate of 20.3%.
• Given the current share price of ₹2948.95, the analyst's price target of ₹3383.41 is 12.8% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.