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Strong SUV portfolio aiding revenue growth: M&M Q4FY23 performance was in line with our expectations as its revenue came in at Rs 22,571 Cr, growing by 31.8% YoY/4.2% QoQ. The company continued to witness strong demand across its SUV portfolio while tractor segment posted mixed performance. Amongst segments, Auto division revenue came in at Rs 16,400 Cr, up by 35.9% YoY and 11.8% QoQ while Farm Equipment Services (FES) revenue was at Rs 5,584 Cr with a growth of 29% YoY while it declined by 11% sequentially.

Continued growth momentum in volumes: M&M continues to witness strong demand across segments and categories as its overall volumes grew by 21.9% YoY to 278,958 units. Amongst segments, Auto Division volumes grew by 21.4% YoY/7.5% QoQ to 189,227 units while its tractors volumes grew by 23.1% YoY, however, it declined by 15.2% sequentially due to off season. Going ahead, we expect the Auto Industry to grow by ~7-10%, which will be dominated by higher demand for SUVs and given its strong foothold in the SUV space we expect M&M’s growth momentum to continue in FY24.

Premium mix of portfolio aiding realizations: Blended realizations for the quarter came in at Rs 809,131/unit registering a growth of 8.1% YoY while it grew by 5.3% sequentially. Amongst segments, Auto Division realizations were at Rs 866,691/unit, up by 11.9% YoY and 3.1% QoQ while FES realizations came in at Rs 622,340/unit increasing by 4.8% YoY and 4.9% QoQ. The blended realizations have grown at a CAGR of 5.2% over last 12 quarter aided by premiumization and wide range of offerings across portfolio. We expect the realizations will continue to grow driven by industry tailwinds, operating leverage as a result of strong volumes and strategic pricing actions.

Better operating leverage aiding margin expansion: Its gross profit was reported at Rs 5,649 Cr, up by 39.5% YoY and 8.5% QoQ with a gross margin of 25% with an expansion of 139 bps YoY and 98bps QoQ, commodities remained flat however improvement was driven by operating leverage. Subsequently, EBITDA came in at Rs 2,797 Cr growing by 43.8% YoY while it remained flat sequentially with a margin of 12.4%, marginally lower than our estimates as other operating expenses increased by 40.3% YoY and 30.5% QoQ.

Outlook & Valuations: M&M is one of the leading players in SUV category with a revenue market share of ~19.6%. We expect M&M’s Auto Division to drive the growth led by robust demand across its SUV portfolio while its foray into Electric Vehicles is garnering strong response, is expected to aid in revenue growth and margins expansion gradually. Besides, its strong foothold in FES segment with new products launches in pipeline will further aid in revenue and market share growth. We maintain our positive view on the company and expect its Revenue/EBITDA/PAT to grow at a CAGR of 15.5%/21%/31.6% over FY23-25E. We recommend Buy rating with a revised target price of Rs 1,556.

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