Buy Mahindra & Mahindra Ltd For Target Rs.3,850 by Motilal Oswal Financial Services Ltd
Auto margins recover; growth remains strong Tractor industry guidance for FY27E cut from mid-single digit to flat
* Mahindra & Mahindra’s (MM) 2QFY27 PAT at INR51b was ahead of our estimates, led by higher-than-expected other income and beat on both segmental margins.
* On account of better-than-expected segmental margins and higher other income, we increase our earnings estimate for FY27/FY28 by 7.5% each. On the back of its healthy launch pipeline and positive consumer sentiment, management provided a strong outlook for FY27E across segments: MM UV at mid-to-high teens, and the LCV industry at double digits. While MM did cut tractor guidance from mid-single digits to flat for FY27, we were already factoring the same into our nos. We estimate MM to post a CAGR of ~20%/ 13%/14% in revenue/EBITDA/PAT over FY26-28. Reiterate BUY with a TP of INR3,850 (based on FY28E SoTP).
PAT beat, fueled by higher other income
* MM’s 2Q standalone revenue grew 27% YoY to ~INR425b, broadly in line with our estimates, driven primarily by a strong ~15% growth in blended ASPs and a 11% YoY growth in volumes.
* RM costs came in higher than expectations, resulting in gross margins dipping 360bp YoY to 20.8% (estimated 21.5%).
* EBITDA margins came in line with our estimates at 11.7% (estimated 11.5%). EBITDA grew by 1.8% YoY to INR49.5b (in line).
* Auto segment’s revenue grew 36% YoY to INR339b (in line), while PBIT margins at 7.7% beat our expectations of 7.1%.
* Farm revenue was flat YoY at INR85.9b, while farm PBIT margin beat our expectations at 16.8% (vs. est. of 16%).
* Other income was above our est. at INR28.3b due to a higher-thanexpected dividends received from subsidiaries.
* Consequently, PAT exceeded our estimate, up 13% YoY to INR51b (estimated INR45b).
Key highlights from the management commentary
* Standalone auto PBIT margin improved QoQ to 9.8% from 8.9%, supported by ~5% price hikes, mix improvement, hedging and cost actions despite sharp steel, copper and rubber inflation.
* M&M retained mid-to-high teens FY27 SUV growth guidance, with Scorpio at full capacity and waiting periods across the portfolio. SUV capacity is set to rise from ~64.5k/month to ~82k by FY27-end and ~92k in FY28.
* EV penetration reached ~12% of SUV volumes in 1HFY27. Management sees adoption becoming increasingly self-sustaining, while scale, localization and supplier negotiations should gradually improve EV profitability.
* FY27 tractor industry growth guidance was reduced from +5% to flat, implying a double-digit decline in 2HFY27. Weakness is concentrated in Maharashtra and Karnataka, while northern markets remain relatively resilient.
Valuation and view
* On account of better-than-expected segmental margins and higher other income, we increase our earnings estimates for FY27/FY28 by 7.5% each. On the back of its healthy launch pipeline and positive consumer sentiment, management provided a strong outlook for FY27E across segments: MM UV at mid-to-high teens, and the LCV industry at double digits. MM cut tractor guidance from mid-single digits to flat for FY27, which we have already factored in into our estimates. We estimate MM to post a CAGR of ~20%/ 13%/14% in revenue/EBITDA/PAT over FY26-28. Reiterate BUY with a TP of INR3,850 (based on FY28E SoTP).
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