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Above our estimate; strength in the Auto business drives performance

Huge order book, easing semiconductor supplies, and upcoming new Scorpio launch to dilute weakness in the Tractor business

* The beat in MM’s 2QFY22 performance was driven by better mix in the Auto business, cost-saving initiatives, and higher other income. Growth in Tractors is slowing, particularly on a high base of FY21. However, the Auto segment is expected to see strong momentum in both SUVs (led by new products and the easing of supply issues) and LCVs (cyclical recovery).

* We increase our FY22E/FY23E EPS estimate by 9%/8% to factor in stronger than expected XUV700 response as well as an improving LCV cycle. We maintain our Buy rating, with a TP of INR1,150/share (Sep’23E SoTP).

Cost savings, operating leverage, and higher other income drives beat

* MM’s standalone revenue/adjusted PAT grew 15.5%/31% YoY and 13%/81% QoQ to INR133b/INR16.9b, while EBITDA declined by 17% YoY (+2% QoQ) to INR16.6b. Revenue/EBITDA/adjusted PAT grew 46%/28%/ 97% in 1HFY22.

* Volumes grew 3% YoY and 2% QoQ. Net realization grew 12% YoY and 11% QoQ to INR698k/unit (est. INR640.6k), driven by ~13% YoY and 12% QoQ growth in Auto segment realization to ~INR779k/unit. Tractor realizations grew by ~8% YoY and 4% QoQ to INR551k/unit.

* Gross margin declined by 6pp YoY (-320bp QoQ) to 27.2% (est. 28.5%), impacted by commodity cost and adverse mix (lower Tractor sales).

* Lower than estimated staff cost (-10% QoQ due to one-off) and other expenses (on account of operating leverage) supported EBITDA margin at 12.5% (est. 12.3%), a decline of 480bp YoY and 140bp QoQ. EBITDA declined by 17% YoY and 2% QoQ to INR16.6b (est. ~INR15b).

* PBIT margin for Tractor/Auto segment fell 6pp/270bp YoY, but rose 160bp/100bp QoQ to 18.7%/2.7%.

* Higher other income (driven by dividend from subsidiaries) boosted adjusted PAT growth by ~31% YoY and 81% QoQ to ~INR16.9b (est. INR11.2b).

* Investment in subsidiaries/JVs/associates stood ~INR4.6b in 1HFY22 (v/s INR29.4b in 1HFY21).

Highlights from the management commentary

* Delayed monsoon and harvesting has resulted in a deferment of demand to post-Diwali. The management maintained its FY22 guidance of flat to singledigit growth for the Tractor industry.

* In SUV business, it has over 160k bookings (~70k for XUV700).

* Semiconductor shortage led to a loss of 32k units in 2QFY22. While the availability of semiconductors is improving, the situation is dynamic, with visibility only till Dec’21.

* XUV700 enjoyed a positive contribution margin at its launch pricing, which has improved with subsequent price increases.

* Product launch plans: In the Auto business, MM plans to launch 13 new SUVs by FY27 (including eight new e-SUVs), 17 new LCVs by FY26 (including eight eLCVs), and five innovative e-3Ws. In FES, it plans to launch four Tractor platforms and 37 new models on it by FY26. In Farm Machinery, it would be launching 15 new products by FY25.

* EVs: It is open to partnerships and external investors. It is currently consolidating its EV business by merging Mahindra Electric (100% subsidiary) with the standalone entity, bringing the entire EV business under one roof. It plans to have a sizeable share in e-3Ws, e-LCVs, and e-PVs.

* In the Farm Machinery business, it is targeting to grow its FY27 revenue by 10x to ~INR50b (including ~INR10b from exports), led by: a) strong growth in the domestic industry (to ~INR120b by FY27 from INR50b currently), and b) driving market share gains to over 30% from sub-10% currently.

Valuation and view

* We expect the Auto business to take over the growth mantle from Tractor, although deterioration in the mix would restrict EBITDA/EPS CAGR to ~17%/~23% over FY21-23E. MM's valuations are still at a substantial discount to its five-year average, reflecting a weaker Tractor cycle.

* Implied core P/E for MM stands at 12.3x/9.6x FY22E/FY23E EPS. This implies an over 30% discount (on an FY23E basis) to its five-year average core P/E. We maintain our Buy rating, with a TP of INR1,150/share (Sep'23E SoTP).

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