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Auto business to drive growth as tractors growth moderate

Tractor industry to grow in low single-digits; 9 SUVs launch in next 5 years

* MM’s 4QFY21 performance was driven by higher realizations in the Auto segment and cost savings. While growth in Tractors is slowing down after robust growth in FY21, the Auto segment is expected to see strong momentum in both LCVs and SUVs (led by new products and easing of supply issues).

* We cut our FY22E/FY23E EPS estimate by 5%/2% to account for sales loss due to the ongoing lockdown. We maintain our Buy rating with a TP of INR980/share (Mar’23E SoTP).

Good performance supported by mix and lower costs

* MM’s (including MVML) revenue/EBITDA/adjusted PAT increased by 48%/60%/210% YoY to INR133.4b/INR19.6b/INR10b in 4QFY21. The same for FY21 grew -1%/7.4%/13% to INR444b/INR68.2/INR40.4b.

* Net realizations grew 11% YoY (+6% QoQ) to INR659.6k/units (est. INR638.5k), driven by price hikes as well as improvements in SUV mix.

* Adjusted EBITDA margin expanded ~110bp YoY (-170bp QoQ). The sequential decline in margin is due to the impact of RM cost and negative operating leverage (volumes down ~10% QoQ).

* EBIT margin for Autos/Tractors improved 90bp/~440bp YoY (-240bp/-140bp QoQ) to 5%/22%.

* Lower other income restricted adjusted PAT to ~INR10b (est. ~INR10.2b). The company provided an impairment charge of ~INR8.4b.

Highlights from the management commentary

* The Tractor industry is expected to grow in the low single-digits in FY22, with MM focused on gaining share. After a weak Apr-May’21, it is seeing a change in sentiment in the last 4-5 days as land preparation and the sowing period nears. All the agronomic parameters are extremely strong.

* Both the Auto and Farm business commitments for CY25 are: a) 15-20% revenue/EPS CAGR, b) over 18% RoCE, c) leadership in the Core SUV segment, with a strong EV play, d) strengthen its numero uno position in LCVs less than 3.5t, and e) growth in market share in Tractors and quantum growth in the Farm Machinery business. .

* Supply chain disruption is expected to ease from Jul-Aug'21. It doesn’t expect shortages to impact launch of the XUV700 beyond Jul’21.

* Capital deployment over FY22-24: Capex of INR120b (INR90b/INR30b in Autos/Tractors v/s INR110b for the last three years) and investments of INR50b (INR15b in Auto and Tractor subsidiaries and INR35b in group companies; v/s INR65b for the last three years).

* It expects the losses in international Auto and Farm subsidiaries to reduce to INR3b in FY22E and near break-even in FY23E from INR23.6b in FY21.

Valuation and view

* MM’s valuations are still at a substantial discount to its five-year average, which captures both the pain points of deterioration in the UV market share and performance of its subsidiaries.

* Implied core P/E for MM stands at 15.5x/11.9x FY22E/FY23E EPS. This implies an over 20% discount (on an FY23E basis) to its five-year average Core P/E. We had increased our target multiple for the Auto business to 15x (in sync with multiple increases for AL/TTMT) from 12x. We maintain our Buy rating with a TP of INR980/share (Mar’23E SoTP).

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