Add Mahindra and Mahindra Ltd For Target Rs.1,501 - Yes Securities
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Volume constraints in SUVs till new capacity is up
Valuation and View
M&M (MM) 2QFY23 results were broadly in?line on operating front, higher other income due to dividends from subs at Rs13.3b (est Rs2.1b), lead to beat at Adj.PAT at Rs23.4b (est Rs15.6b). The key highlight of the quarter was continued increase in auto segment margins (EBIT) at 6.1% (+350bp YoY/ +40bp QoQ). This in a way exceeding the management target of ~300bp gains in Auto segment margins laid out in 3QFY22 (as ~240bp achieved). We reckon further increase led by 1) price hikes and end of introductory pricing for XUV7OO and Thar, 2) RM inflation (partly offset by currency depreciation in imported content) and 3) cost controls. The second highlight of the quarter was ~40bp expansion in FES margins by 40bp at 16.4% (this is at time when ESCORTS’s EBIT contracted 220bp QoQ at 8.4%). MM don’t expect significant cost hike due to RDE (Rs9?15k/unit) is positive. Capacity addition for SUV portfolio is again positive, but we would have liked it to be early come through.
We raise FY23/24 EPS led by price hikes, higher other income. While we expect auto business to lead the growth over FES, deterioration in the mix would restrict Revenue/EBITDA/PAT CAGR to ~9.4%/18%/20.5% each over FY22?25E. Implied core P/E for MM stands at 13.7x/10.7x FY23/FY24E EPS is attractive . Hence, we maintain ADD rating on the stock with revised SoTP based TP of Rs1,501 (v/s Rs1,395 earlier) as we roll forward out TP to Sep’22 (v/s Mar’22).
Result Highlights? Operationally in?line; Higher other income led PAT beat
* Revenues grew 6.3% QoQ at Rs208.4b (in?line) as led by ~6% QoQ growth in ASP/unit at Rs763k while volumes were flattish QoQ.
* Gross margins remained flat QoQ (?400bp YoY) at 23.5% (in?line).
* Led by cost control, EBITDA came in at Rs25 (in?line) with margins remaining flat QoQ (?50bp YoY) at 12%.
* Segmental EBIT – Auto margins expanded 40bp QoQ (+350bp YoY) at 6.1%, FES margins expanded 40bp QoQ to 16.4% (?230bp QoQ)
* Co reported exceptional charge of Rs2.5b due to impairment provision for long term investments.
* Higher other income at Rs 13.25b (4.5X QoQ, est at Rs4.5b) led Adj. PAT grew at Rs23.3b (+59% QoQ, est at Rs15.5b).
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