Mahindra & Mahindra share price has seen only a 2% correction since beginning of May’18.
So in terms of price fall, it is not attracting attention.
But its business fundamentals looks very decent.
Mahindra and Mahindra lies among the Top 30 stocks in term of its market capitalisation.
Such huge stocks does not generally trade at such attractive price levels.
Though Mahindra and Mahindra’s (M&M’s) shares are still not undervalued but its worth a very close watch.
M&M was once a leader of its segment in SUV manufacturing.
It had products like Xylo, Scorpio, XUV500 etc. The only rival of M&M was Tata Motors.
But today, the SUV segment is packed with premium products like:
- Ford Ecosport.
- Honda W-RV
- Renault Duster.
- Hyundai Creta.
- Nissan Terrano.
- Jeep Compass.
- Hyundai Tuscon etc.
As a result of this competition, the EPS growth rate of M&M has been lagging.
But apart from EPS, Net Worth, Income, PAT & FCF growth has been reasonable.
The point that attracted me to analyse Mahindra & Mahindra’s share price was its upcoming launch in 2018.
This new vehicle will be a MPV called as U321. It will compete with Toyota’s Innova and Maruti’s Ertiga.
The launch of U321, and the recent XUV500 upgrade, is likely to improve current valuations of the company.
#1. Business Fundamentals of Mahindra & Mahindra
In order to analyse business fundamentals of Mahindra & Mahindra, lets check the following:
- Growth rates.
- Financial ratios.
- Miscellaneous data.
- Price movement of last 10 years.
- Quarterly Trends.
- Intrinsic Value
#1.1 Growth Rates
Consistent growth rates automatically attracts attention.
Double digit growth rates makes stocks more interesting.
The financial parameters those are more relevant-growth-indicator in stocks are as below:
- Free Cash Flow Growth
- Reserves Growth
- Income Growth
- Profit Growth
- Dividend Growth &
- EPS growth (my favourite)
I use my stock analysis worksheet to quantify all these values.
Mahindra and Mahindra’s growth rates has been very decent.
- FCF growth > 15%
- Reserves growth >24%
- Income growth > 12%
#1.2. Financial Ratios
Financial ratios helps investors to comprehend the numbers better.
It gives a first impression about the stock.
The ratios that my worksheet highlights prominently are as below:
- Price Valuation
- P/E – Price to Earning Ratio.
- P/B – Price to Book Value Ratio.
- P/S – Price to Sales Ratio.
- P/FCF – Price to Free Cash Flow.
- Return on Equity (ROE)
- Return on Capital Employed (RoCE)
- Cash Returned on Invested Capital (CROIC)
I use my stock analysis worksheet to quantify all these values.
Mahindra and Mahindra’s Financial ratios has been as below:
- P/E = 14.30.
- EV/EBITDA = 14.76.
- P/S = 0.02.
- ROE = 15.6%.
- ROCE = 23.2%.
- ROA = 14.1%
#1.3. Miscellaneous Data
How to get a rough idea about the current position of the stock’s price?
I prefer to look at the below indicators?
- Current price compared to its 52W high and Low price.
- How much the price changed in last 30 days and 12 months.
- What is the market cap.
- Compared to the Industry P/E, what is the P/E of stock.
- What is the price growth in last 3Y, 5Y and 10Year.
- What is the average dividend yield in last 3Y, 5Y and 10Year.
I use my stock analysis worksheet to get quick answers to these questions.
Few Miscellaneous data of Mahindra and Mahindra are as below:
- Price: 52W High-873, 52W Low-592, 1 Year Change-16.6%.
- Price Growth: 3Y-9.5%, 5Y-11.3%, 10Y-21.1%.
- Dividend Yield: 3Y-1.3%, 5Y-1.8%, 10Y-3.0%.
#1.4. Price Chart of Last 10 Years
The price chart of Mahindra & Mahindra is like a dream come true for its investors.
In last 10 years, the market price of M&M has jumped from Rs.150 to Rs.825.
This is a CAGR of 21.1% per annum.
But, frankly speaking price charts tell very less about a stock (unless you are a technical analyst).
But I still like to give it a glance. Why?
It gives an idea of how the current price is placed compared to last 10 years trend.
There can be few scenarios here:
- If price is only bullish – current price can be overvalued.
- If Price is remaining modest – poses a question why price is not growing fast enough?
- When price is falling – current price can be undervalued or business fundamentals may be weakening.
I use my stock analysis worksheet to generate the 10 Year price chart and analyse it accordingly.
#1.5. Quarterly Trends
Why to look at quarterly results?
For investors (not traders), long term trends are more valuable.
But it is also essential that the investor should not miss to note the short term trends.
If in short term, the income, earnings are falling, its a risk factor that must be taken into consideration.
Investor must get the answers for the Why’s before proceeding.
The quarterly trends that I refer are as below:
- Total Income – TTM data verses last FY data (if rising or falling).
- Net Profit – TTM data verses last FY data (if rising or falling).
- Earning Per Share (EPS) – TTM data verses last FY data (if rising or falling).
I use my stock analysis worksheet to get pictorial chart for the above important informations.
Quarterly trends of Mahindra and Mahindra are as below:
- Total Income-TTM: Up (from Rs.45,600 to Rs.46,400 crores).
- Net Profit-TTM: Up (from Rs.3,900 to Rs.4,000 crores).
- EPS-TTM: Up (from Rs.37 to Rs.57).
#1.6. What is the Intrinsic Value of this stock?
The estimated intrinsic value of Mahindra & Mahindra is very close to its market price.
Though it is still not undervalued, but a stock of this calibre may still be considered as fair.
This worksheet analyses stocks fairly honestly. But this is also true that it is not Warren Buffett. It can make mistakes.
But, I believe that, even if it is a rough estimation of intrinsic value, it is still worth doing it.
Because investing in a stock without comparing its intrinsic value with its current price is a big mistake.
There are several ways to estimate intrinsic value of a stock. But I rely more on the following methods.
I have incorporated all of my favourite methods in my worksheet to estimate intrinsic value of stocks.
An intelligent formula then generates the net intrinsic value of the stock derived from all these individual methods:
- DCF method
- NCAPS method
- Absolute PE method
- Reproduction cost method
- Benjamin Graham’s Formula
- Earning Power Value (EPV)
I use my stock analysis worksheet to estimate intrinsic value of stock.
What is the final conclusion?
This worksheet considers all aspect of stock to arrive at a final conclusion.
What is the ultimate question in stock investing?
- The stock is good or bad?
How to arrive at this conclusion?
My stock analysis worksheet does this very nicely for me.
Based on the following parameters, it generates an overall grade for its stock.
If the generated grade is above 85%, the stock is considered good.
For Mahindra & Mahindra, the over gradings are as below:
- Low price: slightly overvalued.
- Future growth: excellent.
- Management’s efficiency: excellent.
- Profitability: low.
- Financial health: below average.
- Bankruptcy thread: Nil.
It must be noted that, investors must give importance to the price valuation of stock.
A stock which is priced right (undervalued), and has a score of 85%+ is ideal.