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Tractor industry to grow at low single digit, M&M targeting share gains

* MM’s 4QFY23 operating performance was in line, though PAT exceeded expectations thanks to higher other income and lower tax. SUV business order backlog continues to increase (~292k units vs 266k in 3Q) driven by new launches, despite increase in production. In tractors, it aims to gain market share through product launches in lightweight tractors, though industry is expected to have low growth in FY24.

* We maintain our EPS estimates for FY24/FY25. Retain BUY with a TP of INR1,500/share (Mar’25E based SOTP).

Better gross margin offset by higher other expenses

* 4QFY23 result was operationally in line with our estimates, with revenue/ EBITDA/adj. PAT growing 31%/45%/67% YoY to INR225.7b/INR27.9b/ INR19.8b. FY23 revenues/EBITDA/adj. PAT grew 47%/49%/52%.

* Volumes grew ~22% YoY, while ASPs rose 7% YoY to INR809.1k/unit (est. INR796.9k/unit).

* Gross margin expanded 130bp YoY/100bp QoQ to 25% (est. 23.9%), offset by higher other expenses. Hence, EBITDA margin came in at 12.4% (+120bp YoY/-60bp QoQ, in line).

* Adj. PAT grew 67% YoY to INR19.8b (est. INR15.7b), driven by higher other income at INR3.3b (est. INR2.1b) and lower tax.

* It had exceptional loss of INR5.1b in 4QFY23 due to impairment provisions for certain long-term investments and gains on the sale of certain investments.

* The board has recommended a dividend of INR16.25/share (v/s INR11.5/share in FY22).

* Auto: Revenue grew 35% YoY to INR164b. Volume/ASP grew 21%/11% YoY. PBIT margin were in-line at 7.3% (+190bp YoY/60bp QoQ).

* FES: Revenue grew 29% YoY to INR55.8b. Volume/ASP rose 23% /5% YoY. PBIT margin stood at 16.7% (+100bp YoY/10bp QoQ, v/s est 16.4%)

Highlights from the management commentary

* M&M expects the tractor industry to grow in low single digits in FY24E, led by healthy reservoir levels, growth in government spending in rural regions and favorable terms of trade for farm. It is focusing on gaining market share by launching products in lightweight tractors. It plans to launch a new Swaraj platform (for 25HP and 29HP lightweight tractors) in Jun’23 and a global launch of Mahindra Oja in Aug’23.

* Open bookings for SUV as of 1st May’23 stand at ~292k units (vs 266k as of 1 st Feb), with ~57k fresh bookings per month. Cancellations are less than 8%. It lost ~10k volumes due to semiconductor issues in 4Q.

* Capex: M&M incurred a capex of INR34.4b in FY23. It has increased capex (ex investments) guidance by ~INR27.2b over FY22-24E (incl. EVs) to INR161b. Increase in capex has been for the auto division (up by INR16b) for capacity expansion (including pickups) and regulatory changes, and EVs (up by INR11.2b).

Valuation and view

* While the outlook for tractors remains stable, we expect the Auto business to be the key growth driver for the next couple of years. Despite deterioration in the mix, we estimate revenue/EBITDA/PAT CAGRs of ~14%/19%/16% over FY23-25E. The implied core P/E for MM stands at 14.2x/12.5x FY24E/FY25E EPS.

* While the valuation is still cheap compared to peers, it has seen a substantial rerating in FY23 as the stock is now trading in line with its five-year average core PE (against discount of 30% earlier) driven by a strong performance in the SUV segment, market share gain in tractors and new launch pipeline in EVs. We maintain our BUY rating with a TP of INR1,500/share (Mar’25E based on SOTP)

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