What M&M’s new EV arm with Rs 70,000-cr valuation mean for Indian auto sector? Mitul Shah explains

“In the case of EV, the entire investment of all the players – around 70-80% is going into the R&D and so definitely cash burn would be high initially but it will help them to get an edge over global R&D capabilities and get better platforms and better products in future,” says Mitul Shah, Head of Research, Institutional Equity, Reliance Securities.


M&M is unlocking the EV business. What do you make of this investment by British International Investment (BII) in the M&M four-wheeler EV business?
It is really a very remarkable decision by the company and one of the biggest announcements from the Mahindra & Mahindra because this valuation of Rs 70,000 crore is really mind boggling. These people are valuing business and that too again only passenger vehicle EV business. I am clarifying this does not include the company’s other EV business like three-wheelers on EV platform.

So it is purely the passenger vehicle business like what a few months ago, Tata Motors did and valuation to the level of 70,000 crore is certainly very high because if we just compare Mahindra versus Tata, Tata is already close to 75-80% market share in Indian EV space and, passenger vehicle segment with one of the most successful Nexon EV products.

That is not the case with Mahindra & Mahindra. Mahindra’s EV is still at a much nascent stage with very negligible volumes right now. But since the last 10-12 years they have been on EV platforms. In fact, they were the pioneers in the Indian market in EV space and there would be various technology related aspects to the deal. The future launches and future market penetration must be considered in a strategic investment by BII. So it is definitely a very big positive.

But the stock is already floating at an all-time high, from Rs 1,100 plus. How much more premium or headroom would you assign after this news?
This valuation of Rs 70,000 crore is on the higher side but even if we take on the lower side because there are number of terms and condition and milestone for future investment by all these partners and based on certain achievement on the EV side, on the lower side, it can be around Rs 40,000 crore a valuation.

So generally we take a 30% holding company discount. We should consider some erosion in the IC engine PV business. All those parameters probably can easily give Rs 100 to Rs 300 incremental value coming from this deal. The market will slowly try to give those types of valuations. We believe the stock may stabilise Rs 100-150 above the current level.

In terms of EV, there are now two players – Tata Motors and M&M with strong cash flow for EV investment. What does that mean for the sector?
These types of investments are giving hefty cash for the future investment and this is the segment wherein a lot of expenses are going to R&D rather than the new product launches as compared to conventional OEM manufacturing of IC engine where the R&D expenses are very small. It happens only when there is a change of emission norm, etc, but product development costs are high. Here in the case of EV, the entire investment of all the players – around 70-80% is going into the R&D and so definitely cash burn would be high initially but it will help them to get an edge over global R&D capabilities and get better platforms and better products in future.