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Healthy Qtr; Tractors reviving; Auto momentum to moderate

Mahindra & Mahindra (M&M) reported 2QFY25 EBITDA margin of 14.3% (+170bps YoY), slightly below JMFe. Festive retails (both Auto and Farm) grew in double-digits. And, the company has raised its FY25 domestic tractor industry vol. growth guidance to 6-7% (vs. 5% earlier). Rural sentiments have turned positive led by above-normal monsoon / reservoir levels. In the auto segment, gradual addition to SUV capacity and recent / new launches are expected to drive near-term sales growth momentum. Higher operating leverage and benign commodity costs are expected to support the margin performance. Driven by strong execution in autos and healthy outlook for farm segment, we maintain BUY with a Mar’26 TP of INR 3,325 (SOTP valuation, 24x core business). Success of upcoming launches (EV and ICE) remains a key monitorable

* 2QFY25 – Healthy performance: M&M reported net sales of INR 275bn (+13% YoY, +2%QoQ), in line with JMFe. EBITDA stood at INR 39.5bn (+29%YoY & -2% QoQ), 2% below JMFe. EBITDA margin stood at 14.3% (+170bps YoY, -50bps QoQ), 40bps below JMFe. Auto EBIT margin stood at 9.5% (+50bps YoY, flat QoQ), 50bps above JMFe. Reported farm segment EBIT margin stood at 17.5% (+150bps YoY, -100bps QoQ), 50bps below JMFe. Adj. PAT for the quarter stood at INR 38.4bn (+11%YoY, +47% QoQ), c.8% above JMFe due to higher than expected other income.

* FES segment - 2QFY25 update & outlook: M&M’s total tractor volume stood at c.93k units (+4% YoY, -23% QoQ). Its tractor market share improved by 90bps YoY to 42.5% during 2QFY25. The company is witnessing green shoots of revival in tractor demand led by 1) Above-normal rainfall and reservoir levels 2) Favourable terms of trade and price realisation in mandis and 3) Improved government spends on rural. Overall, the industry is expected to grow by 13-15% in 2HFY25 and the company raised full-year FY25 vol. guidance to 6-7% (vs. 5% earlier) led by continued growth momentum (strong doubledigit retail growth during festive period). With respect to international markets, US small tractor (<100HP) market continues to remain muted (11 qtrs. of decline). However, the company expects demand revival in the coming months led by lower interest rates. In respect of Farm Machinery (FM), revenue for 2Q grew by 14% YoY to INR 2.5bn. M&M is aiming for 40% CAGR growth in the medium-term in this category and expect significant improvement in its profitability over next ~24 months

* Automotive segment - 2QFY25 update & outlook: M&M’s revenue market share for SUV segment increased 190bps to 21.9% during 2Q (FY24: 20.4%). Recently launched ‘Thar Roxx’ has been received well and cos. strategy to cut price of XUV700 helped maintain growth momentum for the brand besides maintaining overall Auto margins led by favourable mix and lower commodity prices. Overall, the company expects growth momentum to continue and has guided for 15-18% vol. growth in SUVs during FY25 led by recent launches. With respect to EVs, M&M plans to unveil its born electric SUVs - BE 6e and XEV 9e in Nov’24 with deliveries starting in early-2025. The company has planned an e-SUV capacity of 100k units per annum to start with. With respect to margins, M&M aims for 10% EBIT margin for ICE SUVs in the near-to-medium term. In the near-term, margins are expected to moderate owing to higher marketing / new-launch expenses.

* Other highlights: 1) Inventory level: Auto – Stands at a comfortable level of <30 days as at Oct’24-end. Farm segment – Needs some correction though not significant. 2) E3W volumes during 2QFY25 were 21.1k units (+14% YoY) and market share stood at 43.6%. The company indicated that with rise in competition, it expects EV penetration to increase (currently at 20%). 3) LCV industry growth witnessed a positive turnaround during second-half of Oct as mandi arrivals increased by 20%. And, the company expects this demand revival to continue. 4) The company plans to file for PLI for upcoming EV launches in Nov-Dec’24 and expects to receive approval for few variants over 90 days post filling. 5) M&M remains committed to sustaining at least 18% ROE for its group operations

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