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SUV capacity to be expanded by 70%; RM cost benefit to accrue from 3QFY23

* MM’s 2QFY23 earnings were in line, with a stable margin, despite a weaker mix. While the Auto business is firmly on the growth path, led by a refreshed product portfolio, its Tractor outlook is muted for 2HFY23. A strong order backlog in SUVs will continue to boost its performance, supported by capacity expansion and RM cost savings.

* We raise our FY23/FY24 standalone EPS estimate by 4% each to factor in strong realizations in the Auto business and higher other income. We maintain our Buy rating with a TP of INR1,470 (Sep’24 based SoTP).

Sequential improvement in margin in both businesses

* Standalone revenue/EBITDA/adjusted PAT grew 57%/50%/39% YoY to INR208.4b/INR25b/INR23.4b in 2QFY23. The same grew 61%/47%/ 45% YoY in 1HFY23.

* Volumes grew 43% YoY. Net realizations grew 9% YoY and 6% QoQ to ~INR762.7k/unit (inline), led by a growth of ~7%/5% YoY in Tractor/ Auto realizations.

* Gross margin fell 370bp YoY to 23.5% (est. 24%), largely impacted by a weaker mix (11pp YoY lower Tractor revenue). EBITDA margin was stable on a QoQ basis (down 50bp YoY) at 12% (in line).

* EBITDA grew 50% YoY to INR25b (in line). Adjusted PAT grew 39% YoY to INR23.4b (in line).

* Auto realizations improved by 5% YoY to INR819k. PBIT margin improved by 340bp YoY and 40bp QoQ to 6.1%. The full impact of the introductory pricing for XUV700 and a partial impact for Scorpio-N was seen in 2QFY23.

* Realizations in the FES business improved by 7% YoY to INR592k. PBIT margin fell 230bp YoY, but grew 40bp QoQ, to 16.4%, impacted by operating deleverage and commodity cost.

* CFO improved to INR41.8b in 1HFY23 (v/s a cash outflow of INR544m in 1HFY22), resulting in a FCFF improvement to INR16.1b (v/s an outflow of INR20.3b in 1HFY22), despite a higher capex (INR18.3b v/s INR15.1b in 1HFY22).

Highlights from the management commentary

* The momentum in SUV retails continues, with the highest ever monthly bookings at 53k units in Sep’22. Its average monthly booking rate in 2QFY23 was strong across models (~48k units v/s a production of 35k units in Sep’22).

* It has laid down SUV capacity expansion plans of ~70% across models (except Bolero), with plans to increase its monthly capacity to 39k/49k units by 1QCY23/1QCY24 from 29k units in 1QCY22.

* For its SUV business, it expects a cost increase of just INR9-15k/unit for complying with Phase II of the BS-VI emission norms (from Apr’23), which is materially lower than the expected cost increase of INR60k-100k/unit for the Diesel segment.

* Tractor retails saw a festive season growth of ~10%. Considering the high base of 4QFY22, it broadly maintained its FY23 growth outlook of over 5%.

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