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M&M’s Q1 FY23 numbers came in line with our expectations as the topline was reported at ?196 bn, a growth of 67% yoy as volumes rose by 47% yoy and realizations zoomed up by about 20% yoy. Automotive division revenues came in at ?123 bn, an increase of 50.4% yoy led by success of new launches -Thar, Bolero Neo and XUV 7oo and XUV 3oo as M&M started slowly catering to the order backlog. Automotive EBIT margin rose by 10 bps qoq, (400 bps yoy) due to positive operating leverage, model mix and price hikes taken to absorb input costs. Tractor EBIT margins came in at 16% which were 30 bps up qoq but down by 430 bps down on yoy basis. This was due to inability to pass on a significant amount of high input costs due to competition. Overall EBITDA margin came in at 11.9% (-200 bps yoy,-up 50 bps qoq). This dip was due to (1) RM costs headwinds (2) subdued FES margins (3) and semi- conductor shortage. The company’s adjusted net profit of ?14.71 bn which was down by 57.5% yoy and up by 26% qoq.

New launches put M&M in top gear

M&M witnessed 80% growth in the UV segment during the quarter. The company has received an excellent response for the new Scorpio N with 100K bookings under 30 minutes. The Thar and XUV 7oo launches are still having huge order book of 5K and 10.3K per month respectively, though these models have long waiting periods. Neo Bolero was launched in July 2021 which already has received strong order bookings (8.4K monthly bookings) and has made robust inroads into Southern markets where the earlier Bolero model was not having a wide presence. Also XUV3oo has got a very strong response with 6.2K bookings per month. The total order bookings (excluding Scorpio N) is 140K now. With this, the company was able to increase their SUV market share by 60 bps to 17.1%, while staying #1 player at revenue market share level. M&M intends to launch 13 new products in Auto segment and 17 new products in CV segment over the next 5 years with a capacity expansion post 2 years.

Out of this planned portfolio, there will be a strong presence of EV products (8 new products), for which ?30 bn investment is planned. M&M has planned to increase its capex by ?19 bn mainly for the EVs. M&M has garnered 74.4% market share in the e-3W space with new launches of E-Alfa, Treo Auto and Treo Zor couple of quarters ago. M&M sold 16,862 units of E-3Ws in FY 22 and have seen a ramp-up in billings of ~12K in H2 FY22.

M&M has also launched an EV Hyper car named Batista. M&M is looking for building partnerships with various EV players globally and build products such as XUV 700 EV and XUV 620 EV. The company has tied up with British International Investment (BII) to invest up to $250 mn in new EV Co to be setup at a valuation of up to $ 9.1 bn. We expect SUVs to register 17%/14% growth in FY23E/FY24E respectively.

The company’s LCV business is also performing well with >43% market share in pick up segment (2-3.5T). The recent launch of Supro Profit Truck has strengthened offering in 0-2T 4W segment. They will be soon launching a compact Pick-up to bolster their presence in the segment. .We expect 15%/13% volume growth in CVs while 16%/12% growth in 3Ws in FY23E/24E respectively.

Management guides for a single digit growth this fiscal for the Tractor segment

M&M mentioned that the tractor segment shall grow between 3-5% in FY 23, however they shall revise their guidance during due course of the year taking a view of the second half of monsoon. We have witnessed about 18.6% growth in tractor volumes in Q1 FY23. M&M won market share by 90 bps at 42.7% in Q1 FY23. With strong monsoons except for some eastern states, we expect good tractor sales despite high base of last year. M&M highlighted that tractor segment fundamentals continue to remain strong led by (1) strong agricultural credit growth & MSPs and (2) Expectations of normal monsoon in 2022, which is already well on track 3) New launches in the form of Yuvo Tech + and a small horticulture based tractor named CODE 4) No off-seasonal rains in March and 5) Success of international Farm subsidiaries at the Consol level. Also in the farm machinery segment (35% qoq growth), M&M has been seeing a robust demand for Rice Cultivators, Rice and Vegetable Transplantors and Rotavators. We therefore expect FES segment to grow at 5%/7% in FY23E/24E respectively. However, we may see upside to these estimates in cognizance with the monsoon and at the same time risk through the recent ban on food grains, especially wheat.

Outlook and Valuation

We expect a gradual month on month upward trajectory in both SUVs and tractor sales hereon as the semi conductor issue is getting sorted out. Within the Auto sector, the robust order book of Scorpio N, Thar and XUV 7oo should assist SUV growth in coming quarters. Quick resolving of semi conductor issue shall remain the key driver for growth in the ensuing quarters as it would lead to ramp up in wholesale sales led by dispatching of the huge order book. We are cautiously optimistic about the FES segment as the food grains export ban may lead to some slowdown, while all other drivers remain in place may offset its impact. In EVs and LCVs too, with new launches, the company is in a position to expand its market leadership position. Within EVs M&M has tied-up with Volkswagen for battery management and is in a position to increase its capex with reducing debt and increasing cash flows. M&M has over time exited its loss making businesses and have turned around several businesses which would definitely gather confidence of shareholders. The company has identified several pillars of growth, which can leverage the core strength of M&M group and accelerate the growth for the company over the medium term. We maintain BUY rating on attractive valuations; SoTP-based target price stands at ?1,389 (?1,087 core business valued at 15x FY 24E earnings + subsidiary valuation of ?302) in line with our assumptions of margin improvement on increase in volumes and value of SUV, 3Ws and LCV segments, recovery in FES, impact of softening of input costs from Q3 , production increase and cost reduction measures.

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