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Mahindra & Mahindra (M&M) has corrected ~20% in the past couple of months due to fears of El Nino impacting tractor demand in FY24 along with receding waiting period of its UV portfolio. In the past 15 years, on four occasions of El Nino, tractor volume declined by an average of ~12%. Thus, we are building in 12% tractor volume decline for M&M in FY24 as against our earlier estimate of ~6% growth. For SUVs, though waiting period of XUV700 has declined, overall monthly retails in general have largely remained unchanged in the past 4-6 months, as per our dealer interactions. We believe waiting period of XUV700 is down to 2-3 months in general as compared to 6-12 months in H1FY23 due to rise in cancellation rate. For other key models like Scorpio N and Thar rear wheel drive, waiting periods are in excess of a year. With XUV400 and Thar RWD yet to get delivered, against current monthly wholesale number of ~30-32k units, we are building in ~35k units/month of SUVs in FY24. FES segment EBITM for M&M in the past has been sticky in nature, largely independent of fluctuation in volume and thus, we are building in 17.5% EBITM in FY24E. We expect M&M to receive ~Rs25bn cash in FY24-25E combined, as a result of selling stake in its EV arms, thus, helping it generate superior FCF, with budgeted capex+ investment remaining unchanged at Rs50bn p.a. We have cut our FY24E revenue/PAT estimates by 9%/14% and correspondingly cut our target price by ~8% to Rs1,386, implying 16x FY24E core EPS. We upgrade M&M to BUY from Add, as post the recent correction (~10% in six months) and factoring in the cut in tractor volume,
M&M is currently trading at ~12.5x FY25E core EPS vs long term mean multiple of ~15x.

* Domestic tractor industry declined on an average by ~12% in the past four instances of El Nino in India. Reservoir water levels are currently 5% lower than pre-summer levels of past 15 years and along with risk of disruption led by El Nino, we are factoring in tractor industry decline of ~12% in FY24, against our earlier estimate of ~6% growth. Historically, M&M has executed sticky EBITM levels in general, largely insulated from volume volatility of (+-)10% and thus, we believe stability in raw material basket would be key for M&M FES segment EBITM to move back towards ~18-19% levels from current ~16-17% levels.
* We interacted with Mahindra UV dealers across various cities such as Mumbai, Patna, Kolkata, Surat, Lucknow and Jaipur to gauge demand conditions. Feedback was largely similar across the cities as monthly retails have remained steady since November, though waiting period of XUV700 has declined. As against ~5-10% cancellation rate of XUV700 till festive season, currently it has increased to ~20% of gross booking, resulting in many models being available at a short notice. Incremental booking for XUV700/month is still at levels similar to past 4-6 months. Thar RWD and XUV400 retails are yet to start at a scale and expected to ramp up from April only. Scorpio N supply has been restricted resulting in continuation of elevated waiting periods in excess of a year. Legacy portfolio models like Scorpio Classic and Bolero are witnessing some discounts currently, as year-end month is ongoing.

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