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In a sweet spot, upgrade to BUY View: Signs of recovery in tractors to aid healthy SUV momentum

Key verticals of M&M (MM) - tractors and SUVs seem all set to fire in sync. Our checks across key regions reveal vastly improved agri sentiments led by multiple factors (favorable monsoon, better cash crop realization, and improved sowing YoY), which should collectively boost tractor volumes. We expect MM to maintain large part of recent market share gains, led by new launches in lightweight segment (OJA and Swaraj). Within PVs, successful launches of Thar Roxx and XUV 3XO should drive industry outperformance; the consequent Thar portfolio contribution uptick (~18.4% by FY26E vs 12.5% in FY1HFY25E) should enhance model mix and likely margins. We stay watchful of the CAFÉ norm impact even though M&M’s EV strategy is in place. We build in a SUV volume CAGR of ~15.4% over FY24-27E with overall revenue/EBITDA/Adj PAT CAGR of 13.4%/17.5%/13.3% and upgrade the stock to BUY with a Mar’27 SOTP-based TP set at 3,707 (vs the prior Rs3,347). MM trades at implied core PE of 23.2x/21x FY26E/FY27E EPS, making it an attractive bet.

Improving agri sentiments augur well for tractor volumes - After peaking at ~940k units in FY23, the tractor industry demand weakened in FY24. It suffered a ~8% YoY decline owning to below-normal monsoon. We expect tractor volumes have an upside led by positive terms of trade, and improved subsidy announcements (though not broad based). Our extensive checks (refer exhibit 1 for detailed region wise flavor) show improved farm sentiments in key regions like West (led by MH and Guj), North (led by UP and Rajasthan), Central (MP) and South (favorable base) while East (WB and Bihar is under stress led by monsoon deficiency). This is led by favorable monsoon, improved sowing YoY, and better realization for cash crops. MM has gained ~40bp share in FY24 to 41.6% and further increased it to ~43% in 1H. We expect it will be able to maintain most market share gains, led by new product launches across HP category (OJA and Swaraj). We assume tractor industry to post 3-4% growth; MM’s tractor segment can grow ~4% in FY25E and ~6.6% CAGR over FY24-27E.

SUVs: Healthy launch reception and pipeline to drive market share gains - MM continues to enjoy a strong order backlog of ~178k units as of Jun’24 (vs ~220k units in 4QFY24) in addition to ~176k units for recently launched Thar Roxx. We think aggregate Thar portfolio volumes will increase to 8-9k units/month on steady basis (vs Thar 3 door average TTM volumes of ~5.5k units). We consider >50% cannibalization with Thar 3 door. MM will continue to have a healthy launch pipeline as it targets to launch 9 ICE SUVs (includes 6 new launches and 3 mid-cycle upgrades), 7 BEVs and 7 LCVs by 2030. Strong order backlog and new launches should help MM to continue industry outperformance even in FY25/26 with 15.4% volume CAGR in passenger UVs over FY24-27E. MM’s strategy of offering premium features to mass/affordable segment has credibly manifested in recent launches in the form of better infotainment, premium touch, and safety features.

EV transition strategy in place, CAFÉ impact critical - MM has articulated a clear roadmap for EV transition. Under the VW partnership, VW will supply components of MEB platform to MM’s INGLO platform, on which MM will launch five all-electric SUVs in India beginning Dec’24. MM has lined up investments of Rs120b in EVs over the next three years. It expects EVs to contribute 20-30% of its mix in five years. The exact CAFÉ impact however would need to be studied. Valuations attractive - We estimate MM to post revenue/EBITDA/PAT a CAGR of ~13.4%/17.5%/13.3% over FY24-27E. The implied core P/E for MM stands at 25.9x/23.4x FY26E/FY27E EPS. We upgrade the stock to BUY (vs ADD) with revised TP of Rs3,707 (vs Rs3,347 earlier) based on Mar-27E SOTP.

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