Electric vehicle launch success key to further gains for M&M stock

SUV launches getting traction, weak rural demand a headwind for tractors

The launch of Mahindra & Mahindra’s (M&M) first electric SUV – SUV-XUV400 -- on September 8, was received with enthusiasm. M&M enters the competition in the new e-SUV segment, which also features Tata Nexon EV (87 per cent market share in electric vehicle or EV in FY22), the Hyundai Kona and MG ZS. The XUV400 appears to have slightly more range than the Nexon. The price tag is expected to be Rs 18-20 lakhs, similar to the Nexon EV Max. Bookings are expected to open in January 2023 with deliveries from the end of that month.

Under Mahindra’s partnership with Volkswagen (VW’s MEB supplies components for M&M’s INGLO platform), the company will launch five models with two brands – XUV and BE.

Mahindra expects its EV models to generate 20-30 per cent of its total SUV sales by 2027. The newly launched XUV400 will be moved into the new company, the EVCo. The goods and services tax (GST) differential between EVs (5 per cent) and internal combustion (50 per cent) in the SUV segment is one reason why the demand is expected to pick up in EVs.

While this launch is a good entry point, the company’s tractor division could see soft demand this season due to the weak monsoon data. Reports indicate lower vehicle registrations in states with high rural presence, which is probably due to weak demand after a subpar monsoon. If there is no pick up in the festive season, dealer inventories may remain high.

Demand for tractors has been quite weak in recent months. After a strong year-on year (YoY) growth in the first quarter for the 2022-23 financial year (FY23), registrations have declined YoY in July and Aug. In September, registrations appear likely to decline YoY. This is despite a low base with 25 per cent YoY decline in the year ago September quarter. It could negatively impact revenues in Q2 and, as mentioned above, Q3 will be critical since it encompasses the festive season. Analysts are assuming tractor volumes will be almost flat between 2021-22 and 2023-24, with a maximum YoY growth rate of around 5 per cent in 2022-23 over 2021-22, and maybe 7 per cent YoY in 2023-24.

M&M could nevertheless do well, given successful launches in the highly competitive SUV space, despite the exposure to tractors, where it’s a market leader. Notably free cash flow is expected to expand from around Rs 707 crore in 2021-22 to around Rs 3,500 crore in 2022-23. The company managed to maintain an operating profit margin of 11.9 per cent in Q1FY23 despite a sharp rise in raw material expenses.

The aggressive EV strategy could help it grab significant market share in the new space. The success of XUV400, along with market share gains can lead to a rerating of the stock.

The stock has moved up by 70 per cent in the last 12 months and by 1.5 per cent in the last month, following a 3.5 per cent spurt on Friday to Rs 1,288 a share. Analysts have valuations ranging between Rs 1,400 (by June 2024) and Rs 1,500 based on a 9 times enterprise value to operating profit on FY24 estimates.

Apart from the company’s significant holdings in subsidiaries such as Tech Mahindra, M&M Financial Services, it’s hard to assign a clear value to the electric vehicle unit until there is some booking data in Q4FY23.