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Strong operational performance

* Q3 OPM of M&M, including MVML, improved 220bps to 17%. Excluding one-time investment promotion benefit of Rs900mn, margin stood at 16.4%, topping est. of 15.7% on better performance in the Tractor segment, due to lower sales spends and cost savings.

* We expect FY21-23 revenue CAGR of 19%, driven by robust growth in the Auto segment (29% CAGR) and single-digit growth in the Farm segment (5% CAGR). The Auto segment’s performance should be driven by the cyclical upturn as well as new products.

* Major capital allocation exercises are mostly completed. With the exit from Ssangyong, management expects losses from international subsidiaries to reduce to Rs3bn in FY22 from Rs30bn in FY21 and turn to profit in FY23. It also expects investments in subsidiaries to be lower than that of prior years.

* We raise FY21-23E EPS by 17-26%, driven by a change in volume and margin assumptions. Reaffirm Buy with an SOTP based TP of Rs1,020 (Rs824 earlier), based on 16x core P/E and value of investments at Rs348/share.

* EBITDA margin above estimates: Revenue grew 16% yoy to Rs140.6bn (est.: Rs140.3bn), in line with estimates. Automotive revenues grew 12% to Rs83.1bn on 21% growth in realization despite an 8% decline in volumes. Farm equipment revenues grew 23% to Rs52.8bn, driven by 20% volume growth and 3% realization growth. EBITDA margin expanded 220bps yoy to 17%. Excluding one-time investment promotion benefit of Rs900mn, margins stood at 16.4%, above forecast of 15.7%, on better performance in the Tractor segment. Farm equipment (Tractor) EBIT margin expanded 400bps to 23.4%, while Automotive EBIT margins (adjusted for one-off) contracted 100bps to 6.4%. Overall, adjusted PAT, ex. one-offs and dividends, grew 33% to Rs13 bn (est.: Rs11bn), above estimates due to higher operating profit. Reported financials included an Rs12bn exceptional item for the impairment of Ssangyong’s debt/equity investments. Ssangyong has filed an application with a Korean bankruptcy court and is working for selling/liquidating its assets and has now ceased to be a unit of MM.

* Maintain Buy: We expect robust revenues/earnings CAGRs of 19%/22% for FY20-23E, with average post-tax ROIC of 24% and FCF of Rs27bn/year. We remain positive on expectations of healthy demand prospects and stringent capital allocation efforts. Reiterate Buy with an SOTP-based TP of Rs1,020 (Rs824 earlier), based on 16x core P/E (17x core P/E earlier) and value of investments at Rs348/share (Rs249 earlier). We slightly reduce the valuation multiple as the sales cycle is nearing a peak in the Tractors segment. Key risks: 1) further delay in economic recovery; 2) weak monsoon in 2021; 3) failure of new products; 4) increase in competitive intensity; and 5) further increase in input prices.

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