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Decent qtr; Robust demand for UVs, Tractor cycle key monitorable

Mahindra & Mahindra (M&M) reported 2QFY24 EBITDA margin of 12.6% (+70bps YoY, - 80bps QoQ), 120bps below JMFe. Domestic tractor industry is expected to be flattish in FY24 owing to high base of FY23. In the auto segment, supply constraints have largely eased. Gradual addition to SUV capacity (by 4QFY24), high outstanding bookings (280k+ open bookings) and healthy new bookings’ rate are likely to drive sales growth. Higher operating leverage and benign commodity costs are expected to support the margin performance going ahead. Driven by strong demand tailwind in autos, we maintain BUY with a Sept’24 target price of INR 1,725 (SOTP valuation, 16x core business). Peaking tractor cycle is the key risk to our call.

* 2QFY24 – Margin misses estimate: In 2QFY24, M&M reported net sales of INR 243bn (+16% YoY, +1%QoQ), 3% below JMFe. EBITDA margin stood at 12.6% (+70bps YoY, - 80bps QoQ), 120bps below JMFe. Auto EBIT margin (adj.) stood at 7.9% (+200bps YoY, +40bps QoQ), in-line with JMFe. Reported farm segment EBIT margin stood at 16% (- 30bps YoY, -150bps QoQ), 80bps below JMFe. This was due to adverse mix, higher new launch related expenses (90bps impact). EBITDA stood at INR 30.6bn (+23%YoY, - 5%QoQ). Adj. PAT for the quarter stood at INR 34.5bn (+49%YoY, +24% QoQ), 27% higher than JMFe due to higher other income (dividend income from investment cos.).

* FES segment - 2QFY24 update & outlook: M&M’s total tractor volume stood at c.90k units (-4% YoY, -22% QoQ). The company indicated that monsoon shortfall has impacted demand in Southern states and Maharashtra. However, it expects demand to remain healthy in the near-term owing to festive season. Its tractor market share improved by 80bps YoY to 42.2% (during 1H) led by new launches and network expansion. And, the company expects further market share gain led by ‘OJA’ platform and ‘Swaraj Target’. In respect of Farm Machinery, revenue grew by 35% YoY at Rs2.23bn (FY23 revenue Rs.6.50bn). The company targets 40% growth in FY24 given the large opportunity size (domestic industry is 60bn) and low market share of M&M. The company expects domestic tractor industry volumes to be flattish in FY24.

* Automotive segment - 2QFY24 update & outlook: M&M’s revenue market share for SUV segment increased by 90bps to 19.9% during 2Q (FY23: 19.1%). Channel inventory stands at avg. ~30 days for 2Q. Supply situation has largely normalised. M&M is currently operating at full capacity (c.42k units/month) and the company plans to ramp-up to 49k units/month by 4QFY24. Management indicated that the underlying demand remains robust esp. in the premium segment (>INR 1.3mn price point products) with total open bookings at 286k+ units. New booking run-rate of c.51k units/ month and cancellations at <8% p.m. Development of ‘Born Electric’ models is on track. Management indicated that Auto EBIT margins are gradually improving led by positive operating leverage and better efficiencies.

* Capital allocation: 1) The company also indicated that currently both Auto and Farm segments are generating healthy cash flows and are self-sufficient. If required, cashflows from farm and services segment (MMFSL & TechM) will also be available to fund EV related investments (INR100bn by FY27).

* Other highlights: 1) Management indicated that three growth gems – Susten, E3Ws and Real Estate businesses are on track to become 5x in size in 5yrs. The other three growth gems – Hospitality, Logistics and Classic Legends are WIP. 2) Management indicated that ‘Growth Gems’ are on track to achieve USD1bn+ valuation over 3-5 years. M&M remains committed to sustaining at least 18% ROE for its group operations.

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