On Wednesday, CLSA raised its rating on Mahindra & Mahindra Ltd. (MM:IN) (OTC: MAHMF) stock to outperform from hold, alongside an increase in the price target to INR3,400 from INR2,654. The upgrade reflects the firm's confidence in Mahindra's growth prospects, particularly in the sports utility vehicle (SUV) segment.
The firm's analysis suggests that Mahindra's improved scale and a superior mix of products, coupled with better pricing power in its SUV offerings, have bolstered the company's automotive margins over the past few years. Notably, the performance of models such as the XUV 3X0 and Thar Roxx, as well as the anticipation of new electric vehicle models, are expected to enhance Mahindra's SUV scale and average selling price (ASP) further.
According to the firm, these factors are likely to sustain the segmental EBIT margin at around 9% for the fiscal years 2026 to 2027, providing room for potential consensus upgrades. Additionally, after a period of flat volumes from fiscal 2023 to 2025, the domestic tractor industry is projected to rebound from fiscal 2026, driven by favorable reservoir levels.
The firm also highlighted Mahindra's robust return on equity (ROE), which has been over 20% since fiscal 2024. Despite significant capital expenditures projected at more than INR 70 billion per annum, Mahindra is trading at an approximate 3% free cash flow (FCF) yield for fiscal 2026. This is seen as an indication of the company's financial health and potential for growth.
In light of these factors, the firm has increased its earnings per share (EPS) estimates for fiscal 2025 and 2026 by 5% each and raised its discounted cash flow (DCF) based target price.
The new price target suggests a forward core price-to-earnings (P/E) ratio of approximately 26 times, compared to the mean traded levels of around 18 times from fiscal 2015 to 2022. The coverage was assumed by Basudeb Banerjee, who is responsible for the upgraded rating.
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