I’ve been in the new age world long enough to know deal valuations are driven by several factors, not just “value” as public markets would define them. And Mahindra & Mahindra’s deal with British International Investments, which pegs the four-wheeler EV business valuation at between Rs 40,441 crore and Rs 70,070 crore for an initial investment of Rs 1,200 crore (remember Rs 725 crore comes in only later), seems no different from the valuation of other private market deals—Zomato, PolicyBazaar, Paytm, etc., pre-listing.
What were the other considerations that British International Investments weighed? We may never know. But why do we say the EV valuation seems like a number out of a hat. Here’s the elementary math.
The puzzling EV valuation
Electric vehicles may be the future, with some forecasting they could make up 60-70 percent of cars on the road by 2050. That’s a huge replacement market. That said, every major automaker is making moves towards a more electric or hybrid world.
So, assuming lower competitive intensity may not be wise. Given that, any expectation of supernormal profits is likely to be belied. If that’s so, growth now boils down to vehicle numbers.
What Mahindra has said is that it will sell about 200,000 4-wheeler SUVs in the fiscal year 2027 (FY27), or nearly 17,000 units a month by end-FY27. Let’s take that as a given. How many SUVs does Mahindra sell today? In FY22, the tally was 223,682 units. So, what the company is saying is that it will sell nearly as many e-SUVs as the SUVs it sells today. Whether it can is a debate we’ll leave for another day.
Now let’s look at Mahindra’s valuation. The company has a market capitalisation of about Rs 140,000 crore, after the recent run-up. If we adjust this for the value of its holdings in subsidiaries (discounted by 20 percent) and associates, the residual value of the auto and farm equipment business works out to Rs 96,600 crore.
If we then split the valuation of the auto and farm businesses by their contribution to the profit before interest and tax (PBIT) in FY22, the auto business (including SUVs) has an indicative equity valuation of Rs 23,500 crore. If we add to this the entire liabilities of the auto division of Rs 14,274 crore at end-FY22, we end up with an enterprise value of about Rs 38,000 crore.
That works out to a discount of 46 percent to Rs 70,070 crore but a more reasonable 6.5 percent to the Rs 40,441 crore valuation. But remember, this is for over 400,000 auto unit sales today vs 200,000 EV unit sales five years from now.
Mahindra: Value in listed arms | |||
| Subsidiaries | Share (%) | Mcap (Rs cr) | Value (Rs cr) |
| MMFSL | 52.16 | 24414 | 12734.3 |
| Mahindra EPC | 54.4 | 276.65 | 150.5 |
| Mahindra Holidays | 67.22 | 4356.43 | 2928.4 |
| Mahindra Lifespace | 51.33 | 6550.68 | 3362.5 |
| Mahindra Logistics | 58.18 | 3631.31 | 2112.7 |
| Total | 21288.4 | ||
| Associates | Share (%) | Mcap (Rs cr) | Value (Rs cr) |
| Swaraj Engines | 34.72 | 1808.49 | 627.9 |
| Tech Mahindra | 25.52 | 99809.12 | 25471.3 |
| Mahindra CIE | 11.43 | 9262.24 | 1058.7 |
| Total | 27157.9 | ||
Mahindra: Auto vs EV value | |
| Particulars | Amount (Rs cr) |
| M&M Mcap | 140810 |
| Net of Holdings (20% disc for Holdco) | 96621 |
| Auto + Farm PBIT | 5144 |
| Mcap/A+F EBIT | 18.8 |
| Auto Share of Mcap | 23556 |
| Auto Share of Liabilities | 14274 |
| Auto Sales (units) | 423143 |
| EV SUV sales in FY27 (units) | 200000 |
| EV Valuation | 70000 |
| Auto Enterprise Value / Unit | 0.09 |
| EV Mcap / unit | 0.35 |
The other point to bear in mind is that part of the value captured in the EV business will flow through to the parent, as it “will significantly leverage the broader manufacturing capabilities, product development, design organizations along with the ecosystem of suppliers, dealers, and financiers of M&M,” the company has said.
This is extremely important from the perspective of M&M shareholders, as with the market moving towards EVs, their share of the EV SUV arm will continue to decline. The immediate resource need indicated by the company is Rs 8000 crore, which could imply a minority interest of 8.7 percent to 15 percent depending on the valuation you choose, assuming Mahindra doesn’t match further infusions. And how much will be diluted in the future is anyone’s guess.
Value beyond EV
The other important statement by Mahindra was that EV SUVs would account for 20-30 percent of total SUV sales by FY27. What this implies is that total SUV sales should be between 667,000 and 1000,000 units in the year. That spells a 24 percent to 35 percent CAGR in total SUV sales over the next five years, and more interestingly a 16 percent to 29 percent CAGR in ICE SUV sales. Put simply total SUV sales could be 3x to 4.5x in five years, that’s a very strong growth outlook.
Also, if we look at the valuations of Mahindra’s auto and farm businesses (using standalone operating cash flows for FY2022), we end up with an operating cash flow yield of 7.34 percent. That’s a very attractive yield for a high-growth business.
In a nutshell, therefore, while buying into the Mahindra story on a correction based on the growth prospects and current valuations may be worth considering, you should take the EV arm valuation number with a pinch of salt.
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