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Decent quarter with best ever FES revenue

M&M reported its best-ever FES revenue (Rs53.2bn), but a miss on EBITDA margin mainly on higher than expected employee cost, which was driven by a new Covidrelated scheme to support employees. EBIT margin for the Automotive segment was 1.7%, down 330bp QoQ. FES margin declined 170bp QoQ to 20.3%. PAT was Rs9.3bn, adjusting for exceptional expense of Rs785mn on impairment provisions. It declined 7% QoQ and was lower than our estimate of Rs9.8bn.

Management guided a low to mid-single digit growth for the Tractor segment because of high base last year and good inventory stocking across the industry this time around. Demand is strong for the Automotive segment, with orders piling up for UVs; however, semiconductor shortage remains a concern. We have not changed our estimates, as we expect employee cost to increase in the coming quarters. We maintain BUY with a TP of Rs953.

Q1FY22 margin miss on higher employee expense

This is the first quarter after merging MVML with the standalone business (earlier, it was a wholly-owned subsidiary). M&M reported Q1FY22 earnings of Rs9.3bn, adjusting for exceptional expense of Rs785mn on impairment provisions. It degrew by 7% QoQ and was lower than our estimate of Rs9.8bn. Revenue was Rs117.6bn vs our estimate of Rs119bn on the back of lower than expected ASP at Auto segment while ASP at FES segment was better.

Auto ASP was up 1.3% YoY and Tractor ASP was up 4.6% YoY. Staff cost increased 11% QoQ on new Covid-related scheme to support employees. EBITDA margin came at 13.9%, down 120bp QoQ. Margins in both segments were lower than expected. EBIT margin at Automotive segment came at 1.7%, down 330bp QoQ. FES margin came at 20.3%, down 170bp QoQ.

Demand scenario improving for both Auto and Tractor segment

The company indicated strong demand for Auto brands with July being strong and tractor demand picking up in June. Most tractor markets are doing well now, as rainfall has caught up. Management guided a conservative low to mid-single digit growth for the Tractor segment because of high base last year and good inventory stocking across the industry this time around. It is building up inventory and is now at 30 days of inventory in Tractors to prepare for the festival season. Also, discounts in the Tractor segment are unlikely to be as high as in FY20 despite of all the players stocking their inventory well.

Semiconductor shortage could play spoilsport

With Malaysia under Covid lockdowns, the supply of semiconductors will continue to be strained. However, M&M is confident of managing it, and hence, has not delayed its launch of XUV7OO, which will be launched in Q2 and sold from Q3.

No change in estimates, as cost increases already factored in

We have not changed our estimates, as we expect employee cost to increase in the coming quarters. We continue to value it at SoTP, with core business at 16x FY23E earnings. We maintain BUY, with a TP of Rs953. It is currently trading at 14.3x FY23 EPS (Standalone)

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