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Mahindra & Mahindra (M&M) reported 3QFY24 EBITDA margin of 12.8% (-20bps YoY, +20bps QoQ), 40bps above JMFe. Domestic tractor industry is expected to decline by 10% / 5% during 4Q / FY24 owing to muted demand and inventory correction. Normal monsoon remains a key enabler for FY25. In the auto segment, supply constraints have largely eased. Gradual addition to SUV capacity (by 4QFY24), high outstanding bookings (226k+ units) 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 Mar’25 target price of INR 1,850 (SOTP valuation, 16x core business). Revival in tractor demand remains a key monitorable.

* 3QFY24 – Margin beats estimate: In 3QFY24, M&M reported net sales of INR 253bn (+17% YoY, +4%QoQ), broadly in-line with JMFe. EBITDA margin stood at 12.8% (- 20bps YoY, +20bps QoQ), 40bps above JMFe. Auto EBIT margin (adj.) stood at 8.3% (+170bps YoY, -70bps QoQ), 80bps above JMFe. Reported farm segment EBIT margin stood at 15.5% (-70bps YoY, -50bps QoQ), 100bps below JMFe. This was due to higher marketing expenses (70bps impact). EBITDA stood at INR 32.4bn (+15%YoY, +6%QoQ), 4% above JMFe. Adj. PAT for the quarter stood at INR 24.5bn (+14%YoY, -29% QoQ), 2% above JMFe.

* FES segment - 3QFY24 update & outlook: M&M’s total tractor volume stood at c.101.7k units (-4% YoY, +13% QoQ). Its tractor market share improved by 80bps YoY to 41.8% (during 9MFY24) led by new launches and network expansion. The company indicated that monsoon shortfall has impacted demand in Southern states and Maharashtra. While retails have been higher than wholesales, current inventory is slightly higher than normal level (30 days) and it expects to correct the same over next 2 months. Overall, the industry is expected to decline by c.10% / c.5% during 4Q / FY24. Positive enablers for FY25 are 1) normal monsoons, 2) positive terms of trade and 3) favourable festive base. In respect of Farm Machinery, revenue grew by 35% YoY at INR 2.2bn (+28% YoY). M&M is aiming for 40% CAGR growth in the medium-term (30%+ in FY24) and expect significant improvement in profitability over next 18-24 months

* Automotive segment - 3QFY24 update & outlook: M&M’s revenue market share for SUV segment increased by 40bps to 21% during 3Q (FY23: 19.1%). The company remains on track to ramp-up SUV vols. to c.49k units/month by 4QFY24. Supply situation has normalised. Led by the ramp-up in capacity, the company has brought down its order book to 226k+ units from 286k+ units QoQ. Management indicated that the underlying demand remains robust esp. in the premium segment (>INR 1.3mn price point products) and new booking run-rate stands at c.50k units/month. While cancellations increased during 3Q to c.10% p.m. (owing to seasonality), it has normalised in Jan’24 to c.8%. Management has guided for mid-to-high teen growth in SUV sales during FY25 (vs. industry SUV growth of 10-12%). Development of ‘Born Electric’ EV 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 indicated that 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) and ‘Growth Gems’ for value creation.

* Other highlights: 1) Management indicated that Susten (one of its Growth Gems) is on track to create >5x value in 5yrs. The other ‘Growth Gems’ – E3Ws, Hospitality, Real Estate, Logistics and Classic Legends are also on track to create significant value over medium-to-long term. 2) E3W volumes during 3Q were 11.6k units (+118% YoY) and market share stood at 48.5%. However, it stood at c.61% during Jan’24. Currently, E3W industry penetration stands at 11.6%. The company indicated that with rise in competition, it expects EV penetration to increase and M&M market share to moderate going forward. 3) PLI scheme - E3Ws are eligible for PLI and the company expects to receive incentives soon. With respect to electric passenger vehicles M&M will apply for PLI certification by 2QFY25. 4) M&M remains committed to sustaining at least 18% ROE for its group operations.

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SEBI Registration Number is INM000010361