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M&M’s Q2 results were marked by sequential margin weakness (down by 138bps to 12.1%), on increase in costs across line items, though PAT beat our estimates due to higher other income. For M&M, valuations remain supportive (~14x core FY26E PER) amid reasonably-healthy automotive demand prospects (we build-in ~10% volume CAGR over FY23-26E), though Farm segment demand is expected to be relatively muted (we factor-in ~4% volume CAGR), given the high base. We upgrade FY24E EPS by ~9%, largely to reflect higher than expected other income in H1; FY25E/FY26E EPS is revised upwards marginally by ~1% each. We maintain BUY on M&M, given the undemanding valuations with revised SOTP-based TP of Rs1,690/share (Rs1,590 earlier; including ~Rs460/share for subsidiaries/investments; rolled over to FY26E).

Mahindra & Mahindra: Financial Snapshot (Standalone)

Subdued margin performance sequentially

Revenue rose ~16% YoY to Rs243bn (below estimates), amid ~11% YoY volume growth and ~1% QoQ growth in realizations. EBITDA increased 20% YoY to Rs29.3bn, with EBITDA margin down by 138bps QoQ to 12.1% (Consensus/Emkay est.: 12.9%/13.3%); the miss was owing to higher than expected costs across line items. Gross margins dipped by ~30bps QoQ. Auto segment revenue grew 22% YoY to Rs184bn, while Farm segment revenue was flattish YoY at Rs59bn. EBIT margin for the Auto segment rose by 150bps QoQ, at 9% (underlying Auto margins, however, were up by ~40bps, at 7.9%), while Farm segment EBIT margin declined by 149bps QoQ, to 16%. Adjusted PAT grew 49% YoY to Rs34.5bn (above estimates), driven by higher than expected other income.

Earnings call KTAs

1) In Automotive, demand for the above-Rs1.3-1.4mn/unit segment remains strong, while that for the sub-Rs1-1.2mn/unit segment remains weak; M&M’s automotive orderbook saw marginal growth to 286K units (vs. 281K units in Q1/290K units in Apr-23); channel inventory as of Q2 is at ~30 days, in line with the industry; cancellation rates remain below 8%. 2) Tractor industry volumes expected to be flattish in FY24, with Mar24 volumes seen declining due to an adverse base effect (Navratras-induced strong Mar23). 3) The Automotive segment has reported healthy double-digit growth in the first 20 days of the festive period; Tractors saw some growth during the first few days of Navratras, along expected lines. 4) Remains on track to reach 49K/month automotive capacity run-rate by Mar-24; capacity beyond this would be augmented for upcoming Thar 5-door and the born electric portfolio; would continue investing in ICE, though the lesser age of most of the current portfolio would enable some savings in outlay for a pipeline refresh over the next few years; most manufacturing facilities for ICE and EVs to be fungible. 5) Company has ~60% market share in L5 category E-3Ws and sees robust growth prospects (amid ~10% penetration); margins for the category need to be similar to those of ICE in the longer run, to be able to compete. 6) Retains 18% RoE target (achieved ~20% in H1).

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