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Adjusted for one-offs margins are healthy

Valuation and View

M&M (MM) 2QFY24 results, adjusted for new product launch expenses in FES (~90bp impact), EBITDA margins came in-line at 13.5%. This was further helped by higher other income at Rs21.5b (est Rs8b, +1.2x QoQ) lead to Adj.PAT beat at Rs34.5b (est ~Rs27b, +24% QoQ). The key highlight of the quarter was continued increase in auto segment margins (EBIT) at 7.9% (+40bp QoQ/ +200bp YoY) and farm margins at 16% (-150bp QoQ). We reckon, margins to remain at an elevated level led by 1) moderating RM inflation, 2) operating leverage and 3) cost controls. The second highlight of the quarter was auto order book which remained healthy at 286k units as of Nov’23 (v/s 281k units as of Aug’23 and 292k as of May’23) where MSIL order book declined QoQ further to 288k as of 2QFY24 (v/s ~355k units in 1QFY24 and 412k in 4QFY23). The management indicated healthy demand for premium products.

We upgrade our FY24/25 EPS by 12%/2.6% each to factor in for higher other income. While we expect auto business to lead the growth over FES, deterioration in the mix would restrict Revenue/EBITDA/PAT CAGR to ~13%/16.7%/25% over FY23-25E. Implied core P/E for MM stands at 11.6x/10.7x FY24/FY25E EPS is attractive. Hence, we maintain ADD rating on the stock with revised SoTP based TP at Rs1,753 (v/s Rs1,721 earlier) on Mar’25 EPS.

Result Highlights – Adjusted for launch expenses, margins were in-line

* Revenues grew 15.7% YoY (+1.1% QoQ) at Rs243.1b (est Rs255.5) as volumes grew 10.6% YoY/ +1.2% QoQ to 302.1k units while ASP grew 4.6% YoY (flat QoQ) at Rs804.5k unit (est ~Rs845.7k/unit). Auto ASP grew 3.3% YoY (-4.1% QoQ) at Rs867.8k/unit while Farm ASP grew 3.4% YoY (+1.4% QoQ) at Rs657.3k/unit.Gross margins expanded 130bp YoY (-30bp QoQ) at 24.7% (est 25%). 

* Gross margins expanded 90bp YoY (-30bp QoQ) at 24.4% (est 24.9%). EBITDA came in at Rs30.7b (+25.7% YoY/ -5.2% QoQ, est Rs34b) with margins at 12.6% (+100bp YoY/ -80bp QoQ, est 13.6%). However, adjusted for one-offs impact of ~90bp due to new product launches in FES, margin were in-line.

* Segmental EBIT - Auto +150bp QoQ (+310bp YoY) at 9%, FES at 16% (+70bp YoY/ -150bp QoQ). 

* Led by higher other income at Rs21.5b (including investment income from subs, est Rs8b) due to one-off gains of Rs2.1b pertaining to transfer of MLMML, Adj.PAT came in better at Rs34.5b (+53% YoY/ +24.4% QoQ, est ~Rs27b).

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