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All eyes on growth recovery

Mahindra & Mahindra’s (M&M) Q1FY22 result was above consensus estimates as EBITDA margin came in at 13.9% (down only 83bps QoQ). Margins drop was led by automotive segment (EBIT margin: 1.7%, down 327bps), while FES held ground (EBIT margin: 20.3%, down 168bps). Management’s focus towards improving global subsidiary’s performance is bearing fruit with four consecutive quarters of positive EBIT (highest ever in FES subs at ~Rs1bn).

Management remains focused on both tractor business (volume and market share gains) and domestic farm implements business (M&M has ~10% market share/TAM: ~Rs 50bn). Valuations remain attractive. On the automotive side, XUV700 launch coupled with existing products (e.g. Thar) is likely to aid market share gains in H2FY22/FY23. Valuations remain inexpensive. Maintain BUY.

* Key highlights of the quarter: Revenue in Q1FY21 declined 12% QoQ to ~Rs118bn due to ~23% fall in automotive revenue, while FES sales grew ~7%. EBITDA margin contracted 83bps to 13.9% even as gross margin fell marginal 48bps QoQ (commodity rise, regulatory costs) and dropped to 30.4% (down 481bps YoY). Superior fixed cost reduction supported margins (other exp. down 121bps QoQ). Adj. PAT was down ~7%. M&M took impairment charge of ~Rs785mn.

* Key concall takeaways: Management indicated: a) Supply-side issues on semiconductor for ECUs are likely to improve Q3 onwards; b) tractor implements and farm machinery segment has a market size of Rs50bn (organized) where MM has 10% market share; c) FES revenues grew 7% QoQ and reached market share of 41.8% (highest in 8 quarters); d) FES global subsidiaries too reported positive PBIT at ~Rs1.1bn; e) capex plan for FY22-24 is pegged at Rs120bn with auto at Rs90bn and balance FES at Rs30bn; e) profitability impacted due to higher provisions (~Rs25.2bn) in MMFSL impacted by higher GNPA (15.5%); f) demand for EV-3W in commercial segment is strong with good traction from e-commerce industry (i.e. Amazon); and g) XUV700 will be launched in Aug’21 and deliveries will begin Q3 onwards; Thar and XUV300 continue to witness strong orderbook of 39k+ and 10k+ bookings, respectively; Bolero Neo bookings stand at 5k in 3 weeks.

* Maintain BUY: Focused capital allocation strategy (RoE>18%) and continued success in core-SUV segment (via new launches- XUV700, Thar) are key focus points for investors. Enhanced focus towards electrification of commercial segments is also likely to improve M&M competitive position in the LCV segment. We expect H2 to witness pickup across PVs/tractors as supply-chain woes moderate while demand remains firm. We revise our EPS estimates by 2.1%/-0.5% for FY22E/23E, respectively, maintain our target multiple to 8.5x FY23E EBITDA (Rs710/share) and value subsidiaries at Rs339/share to arrive at SoTP-based target price of Rs1,049/share (earlier: Rs1,040). We maintain our BUY rating on the stock.

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