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Marginal miss in Q1 EBITDA due to FES; Auto segment to drive growth ahead

* Mahindra and Mahindra’s (M&M) Q1FY23 revenue grew 15% qoq (3-year CAGR at 15%) to Rs196bn, mainly below estimates, due to lower-than-expected realization in the farm equipment segment (FES). EBITDA grew 20% (3-year CAGR at 9%) to Rs23.4bn, 5% below our estimates, on account of lower-than-expected margin at FES. Management expects favorable commodity prices to reflect in Q3.

* We have reduced our FY23-24E EPS forecast by 2-3% owing to lower margin assumptions. Following the revision, we have built in revenue/earnings CAGRs of 22%/25% over FY22-24E. Auto revenue should see a strong 29% CAGR and farm revenue is likely to witness a 10% CAGR.

* The PV order book is strong at 273,000+ units, driven by robust demand for the ScorpioN, XUV700, and Thar models. EVs remain a focus area with expected unveiling of Electric XUV400 in Q2FY23. By CY27, management expects to launch 8 electric models for PVs.

* We maintain Buy with a TP of Rs1,390 (unchanged), based on 11x standalone Sep’24E EPS (DCF-based) and the value of subsidiaries/investments at Rs646/share.

Marginal EBITDA miss: M&M’s Q1FY23 revenue grew by 15% qoq (3-year CAGR at 15%) to Rs196bn, 2% below our estimate, due to lower-than-expected realization in FES. Auto volume declined by 4%, while realization grew by 6%. Tractor (FES) volume grew by 61%, while realization declined by 4%. EBITDA grew by 20% to Rs23.4bn (3-year CAGR at 9%), 5% below our estimate, due to lower-than-expected margin at FES. The auto segment’s EBIT margin expanded by 10bps to 5.7%. Further, FES EBIT margin expanded by 40bps to 16%, but it was below our estimate owing to adverse mix and delay in passthrough of commodity inflation. Other income was flat at Rs2.4bn, above our estimate as it included Rs759mn of dividend income. Overall, adjusted PAT grew by 26% to Rs14.7bn (estimate: Rs14bn), above our estimates due to higher other income and lower tax rate. Auto subsidiaries’ EBIT loss stood at Rs331mn in Q1FY23 vs. loss of Rs670mn in Q4FY22. In comparison, EBIT profit of farm subsidiaries stood at Rs710mn in Q1FY23 vs. Rs648mn in Q4FY22.

* Maintain Buy: We remain positive due to expectations of a sales cycle recovery in both auto and farm segments. We reaffirm our Buy rating with a Sep’23E TP of Rs1,390. Key downside risks: Lower-than-expected growth in key segments; Failure of new products; Increased competitive intensity; and Adverse movement in currency/commodity prices.

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