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Buy Mahindra & Mahindra Ltd For Target Rs. 1,186

Autos take the growth baton from tractors

M&M reported better than expected PAT in Q4FY22 on higher other income and lower tax rate. EBITDA margin at standalone was 60bps lower than our estimate as Tractor margins have shrunk on lower utilization and limited inflation pass-on. Auto margins were encouraging, driven by operating leverage and improved mix. Demand outlook is positive in both the segments. Tractor sales have surprised in April’22 and May is looking better as well. Hence, management is guiding a single digit growth for the industry in FY23. Auto segment is expected to grow on healthy order book for SUVs, new Scorpio-N launch, low base effect on CVs and expected improvement in chip supply. It is well placed to benefit from shift toward SUVs with the launch of models with better urban appeal. We maintain buy with a revised TP of Rs1,186.

FES (Tractor) segment outlook positive, margins will recover gradually

April month was good, driven by sentiments from wheat exports and hence the demand was higher than expected. May is also higher than expected. Last week was a tad slow after wheat export ban. Management expects single digit growth in the industry in FY23. Farm margins were lower due to operating leverage reversal and limited pass-on of commodity costs. It gained 180bps of market share in FY22 in the domestic market. Swaraj Code, recently launched light tractors have received good response and is sitting between tillers and tractors. 40% of sales are from farmers who already own a heavy tractor. It is currently available in 3-4 states. Farm implements is a high growth area where M&M has a strong right to win. It has the potential of becoming 10x in 5 years

SUV getting stronger as new launches are getting better acceptance in urban

XUV700 open bookings are at 78k and its getting 10k bookings a month. The company is currently producing 5k per month. The current capacity is 6k. Automatic variants and petrol variants are getting good responses in Thar, XUV700, and XUV300. Even Bolero Neo is getting good response in urban region. Overall the brand acceptance in urban has improved with recent launches. Thar capacity is 4k currently and will be increased to 6k in 1-2 months’ time. Company will focus on platform sharing and commonality to expand its product portfolio. The new Scorpio-N will be more urban-centric and has a very different appeal vs XUV 700 hence management doesn’t see any overlap. Old/Classic Scorpio will be sold alongside as there is still a certain segment of customers who will want to buy it. It was thirst largest in SUVs in Q4, but in terms of revenues, it was no. 1 as per Jato analysis. It gained 160bps QoQ share in UVs

Maintain BUY

We have cut our margin for FY23/24 by 90/20bps to incorporate higher commodity costs and changing mix towards Auto segment. We value MM on SoTP. Its core business (FES+Auto) is valued at 18x FY24E EPS (16x mid FY24 earlier, on roll over effect and better outlook of both Auto and Tractor segment), which is in line with the 10 yr average. We add the value of its listed group entities at CMP after 20% holding company discount. Lastly, we add cash and current investments at book value with 30% discount

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