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Valuation and View – New launches to drive outperformance in Auto

M&M (MM) 1QFY25 operating performance was better as EBITDA margins came expanded 130bp YoY (+180bp QoQ) at 14.9% (est 13.9%/ cons 13.7%). This was led by ~50bp expansion in Auto at 9.5% (led by decline in RM, full quarter impact of price hikes) while FES margins expanded 270bp QoQ at 18.5% (benign RM, cost controls and operating leverage). MM indicated negligible impact on margins due to recent price cuts in XUV7OO. It maintained guidance of, 1) SUV - mid to high teens growth in FY25E for MM led by 3XO ramping up and Thar 5 door launch (where industry outlook is muted) and 2) Tractor - maintained industry growth of ~5% for FY25E with emerging levers for better industry growth in 2HFY25. With ramp-up in supplies, order book for existing models at ~178k (vs ~220k/~226k as of May’24/Feb’24).

We raise FY25/26 EPS by 6% each to factor in for better margins in FES and tractor outlook. While we expect auto business to lead the growth over FES in the near-term, improving FES outlook would drive revenue/EBITDA/PAT CAGR to ~13.5%/21.1%/16.3% over FY24-26E. Implied core P/E for MM stands at 25.6x/22x FY25/FY26E EPS is still attractive to peers. Hence, we maintain ADD rating on the stock with SoTP based TP at Rs3,404 (unchanged) on Mar’26 EPS as we maintain core business multiple of 23x.

Result Highlights – Robust FES margins negate ASP decline in Auto/FES

* Revenues grew 12% YoY (+7.4% QoQ) at Rs270.4b (est ~Rs282.7) as volumes grew 10.6% YoY/+16.1% QoQ to 333k units while ASP grew 1.3% YoY (-7.5% QoQ) at Rs811k/unit (est ~Rs848.5k/unit). Auto ASP declined 0.5% YoY (-3.7% QoQ) at Rs895.6k/unit while Farm ASP grew 3.4% YoY (-8.1% QoQ) at Rs670.5.6k/unit. The decline in ASPs in both the segment is led by product mix.

* Gross margins expanded 130bp YoY (-50bp QoQ) at 26.5% (est 26.9%). This coupled with lower other expense at Rs19b (-18.3% YoY) led EBITDA at Rs40.4b (+22% YoY/QoQ, est ~Rs39.3b) with margins at 14.9% (+130bp YoY/+180bp QoQ, est 13.9%, cons 13.7%).

* Segmental EBIT - Auto +180bp YoY (+50bp QoQ) at 9.5% was led by led by decline in RM, full quarter impact of price hikes. FES margins expanded ~100bp YoY (+270bp QoQ) at 18.5%, led by benign RM, cost controls and operating leverage.

* Healthy operating performance partially offset by lower other income at Rs3.5b (including investment income from subs) led to Adj.PAT came in lower at Rs26.1b (-5.3% YoY/+30.6% QoQ, est ~Rs27.8b, cons ~Rs28.2).

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