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Operating leverage cushioning profitability

Mahindra & Mahindra’s (M&M) Q2FY23 EBITDA margin at 12% (flat QoQ) was in line with consensus estimates. Gross margin was flat QoQ led by promotional pricing of new SUV launches mitigating benefit of RM price decline. M&M has planned capacity expansion to 39k/49k units per month by Q4FY23/Q4FY24, respectively, as order backlog continues to be elevated at >260k with brand Scorpio adding 130k bookings. Successful model launches, production ramp up with easing chip-supply situation to drive market share gains further in core SUV segment. EV portfolio roll-out to start Jan’23 onwards with XUV400, and a pipeline of 17 new products (FY24 onwards) including LCVs/3Ws other than SUVs. Capex and investment outlook remains unchanged at Rs65bn on an average in FY23-24 with frequent asset monetisation programmes driving cash inflow. We value M&M on a revised SoTP-based target price of Rs1,339 (earlier: Rs1,245), implying 18x FY24E core EPS. Maintain HOLD.

Key highlights of the quarter:

* M&M is planning to ramp-up production capacity to ~39k units per month by Q4FY23 and 49k/month by Q4FY24, with 10k/month increase in capacity led by XUV700/Scorpio-N. This increase in capacity is driven by monthly trend of order addition for these key models other than potential demand from target export markets. For Thar, company is not increasing capacity as of now from 6k/month, but will envisage doing that closer to the launch of 5-door Thar in CY24. Scorpio Classic along with Scorpio-N are presently garnering 17k/month bookings as against Scorpio-N capacity of 6k units a month.

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