Is M&M a good buy ?

M&M company analysis

COMPANY ANALYSIS

RTI For Money, Lillaney

7/18/20235 min read

Let’s try to make an educated guess about what could happen to Mahindra & Mahindra (M&M) Ltd. by 2 methods.


  1. Quality investing method

  2. Growth investing method


  1. Quality investing method


The best way to think about Mahindra & Mahindra (M&M) Ltd., according to me, is the way Terry Smith thinks about investing. He is a fund manager in the UK who only invests in quality companies and has the following rules for investing in companies where he ideally intends to invest and hold forever.


Rule 1 : Invest in only quality companies which earn high returns on capital.


He often quotes the below from Charlie Munger who is Warren Buffett’s right hand:


"Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns. If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return—even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result."


Rule 2 : Don’t overpay


Although there are various studies done where it is shown that the starting price does not matter that much if you invest for the long term (think decades not years) he tries to still try and not overpay by comparing the free cash flow and dividend yields of the companies he is investing in with the following:


  1. Other companies in the same industry/sector

  2. Other companies in the same market

  3. The market itself

  4. Bond yields


Rule 3 : Do nothing


He says that after you have found a good company by following rule 1 and invested following rule 2 during downturns in the stock prices the toughest thing to do is to sit back and let the companies do their thing. This is because human beings are designed to be active all the time whether it is productive or not.


Let’s try to apply the above rules for Mahindra & Mahindra (M&M) Ltd..


Rule 1 : Invest in only quality companies which earn high returns on capital.


To understand if a company is a high quality company we need to look at the following ratios.


  1. Return on capital employed / Return on equity

  2. Profit margins

  3. Cash Conversion

  4. Debt / Equity

  5. Interest coverage


Lets see how Mahindra & Mahindra (M&M) Ltd. fares on the above ratios.


  1. Return on capital employed / Return on equity


Return on capital employed has been between 9.6 and 14.74 percent for the last 10 years.


Return on Equity has been between 0.31 and 20.55 percent for the last 10 years.


Ideally the returns on capital / equity should be higher than the 10 year bond yields and the market / index returns for the last 10 years.


India’s 10 Y bond yield is nearly 7% and the Sensex has compounded at around 11.5% over the last 10 years.


  1. Profit margins


Profit margins have been between -1.78% and 8.13% in the last 10 years.


Ideally the profit margins should be high enough to withstand downturns.


  1. Cash Conversion


Cash conversion has been between -45.22% and 236.01% with an avg. at 21.96% in the last 10 years.


Ideally this should be at more than 100%.


  1. Debt / Equity


Debt / Equity has been between 86.39% and 132.04% in the last 10 years.


Ideally the debt should be as low as possible.


  1. Interest coverage


Interest coverage has been between 1.8 and 3.69 times.


Ideally the interest coverage should be more than 2 times.


Based on the above data it seems like Mahindra & Mahindra (M&M) Ltd. has been an average company as its returns on capital / equity are average and its profit margins are average too.


The cash conversion is not so good.


The leverage ratios of debt / equity and interest coverage are average too.


Rule 2 : Don’t overpay


To determine if the stock is overpriced or not we need to look at the free cash flow yield and dividend yield of the company.


Free Cash Flow = Operating Cash - Capex


Free Cash Flow = Rs.-7,074.00 Cr - Rs. 6,305.00 Cr


Free Cash Flow = Rs.-13,379.00 Cr


Market Cap = Rs. 185,262.35 Cr


Free Cash Flow Yield = Free Cash Flow / Market Cap


Free Cash Flow Yield = Rs. -13,379.00 Cr / Rs. 185,262.35 Cr


Free Cash Flow Yield = -7.22%


Dividend Yield = 1.05%


Based on the above data of free cash flow yield and dividend yield it seems that the stock price is high.


Comparing the Free Cash Flow Yield to a bond which will give me a 7% return compounded over a 10 year period this stock seems to be a worse bet.


Comparing the Free Cash Flow Yield to Sensex which has given 11.5% return compounded over a 10 year period this stock does not seem to be a better bet.


Based on the above rules of Terry Smith it seems that Mahindra & Mahindra (M&M) Ltd. is highly priced at the moment although it is an average company as the return on capital is between 8 and 16 percent over the last 10 years.


If you would like to know more about Terry Smith and his methods you could read it in his book Investing for Growth which you can buy here -> https://amzn.to/42tZNbL


Let’s try to see it from another point of view.


  1. Growth investing method


Mahindra & Mahindra (M&M) Ltd. sales and profits have grown at least 6% compounded for the last 10 years which means its earnings could double every 12 years if it continues at the same pace.


Current earnings - say x

Earnings in 12 years - 2x

Earnings in 24 years - 4x


At the end of Mar 2023 , EPS was around Rs.92 and price was around Rs.1200 giving a P/E of 1200/92 which is equal to 13.


If the above assumptions are correct the EPS in March 2047 would be 92 * 4 = Rs.368.


Assuming a P/E of 10 the price would be 368*10 = Rs.3680 which is 3 times the price of Rs.1200 at the end of March 2023.


If we consider a price increase of 3 times in 24 years it indicates a growth of less than 5% which is a very low return.


Assuming a P/E of 20 the price would be 368*20 = Rs.3680 which is 6 times the price of Rs.1200 at the end of March 2023.


If we consider a price increase of 6 times in 24 years it indicates a growth of less than 8% which is a very low return.


If you would like to know more about growth investing, you can do so by reading the books below:


  1. Common Stocks Uncommon Profits by Phil Fisher - https://amzn.to/420BrGY

  2. Buffettology by Mary Buffett - https://amzn.to/3AU7cWw


Conclusion:


Based on the findings from both the methods above I would not recommend a buy in Mahindra & Mahindra (M&M) Ltd. if you have a short term view of a year or two. If you plan to hold it for longer the returns could be average if the company continues to perform as it has done in the last 10 years.