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Valuation and View – Healthy performance to continues

M&M (MM) 2QFY25 operating performance was better as EBITDA margins expanded 150bp YoY (-50bp QoQ) at 14.3% (est 14.1%/ cons 13.8%). This was led by ~30bp expansion in Auto at 9.5% (despite price correction and Thar Roxx laucn) while FES margins expanded 150bp QoQ at 17.5% (benign RM, cost controls). MM indicated no impact on margins due to price cuts in XUV7OO. It maintained guidance of, 1) SUV - mid to high teens growth in FY25E for MM led by ramp-up of new launches (vs industry outlook is low single digit growth) and 2) Tractor – upward revised industry growth of mid-single digits (vs 4-5% indicated earlier) with healthy double-digit growth expected in 2HFY25, led by positive farm sentiments due to confluence of factors. The management indicated ICE capacity can be ramped up to 55-56k units though as full fungibility within Thar portfolio yet to be achieved.

We keep FY25/26/27EPS largely unchanged as we were building in sharp tractor volumes recovery from 2HFY25. 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 ~13.4%/17.5%/13.5% over FY24-27E. Implied core P/E for MM stands at 23x/20.7x FY26/FY27E EPS is attractive to peers. Hence, we maintain BUY rating on the stock with SoTP based TP at Rs3,632 (vs Rs3,707) on Mar’27 EPS led by decline in subsidiary value post recent stock price correction. Key near term margins risk are new BEV launch expenses in 3QFY25 and weak FES exports.

Result Highlights – Auto margins healthy despite price cuts/new launch

* Revenues grew 12.9% YoY (+1.9% QoQ) at Rs275.5b (est ~Rs275.3) as volumes grew 7.4% YoY/-2.6% QoQ to 324.4k units while ASP grew 5.2% YoY (+4.6% QoQ) at Rs849.3k/unit (est ~Rs848.5k/unit). Auto ASP grew 4.7% YoY (+2% QoQ) at Rs913.7k/unit while Farm ASP grew 5.8% YoY (+3.8% QoQ) at Rs695.7k/unit.

* Gross margins expanded 110bp YoY (-50bp QoQ) at 25.8% (est 25.7%). EBITDA at Rs39.5b grew +26.4% YoY/-1.8% QoQ (est Rs38.7b) with margins at 14.3% (+150bp YoY/-50bp QoQ, est 14.1%).

* Segmental EBIT - Auto +30bp YoY (flat QoQ despite new launch impact and price cuts for XUV7OO) at 9.5%. FES margins expanded ~150bp YoY (-100bp QoQ) at 17.5%, led by benign RM, cost controls and operating leverage.

* Higher other income at ~Rs19.98b (-3% YoY/ 4.5x QoQ, est Rs15.5b), led to Adj.PAT came in at Rs38.4b (+13.2% YoY/+47% QoQ, est ~Rs34.9b).

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