Healthy growth, valuations point to more gains for Mahindra & Mahindra

Auto segment to drive growth on the back of improving demand, new launches

Auto major Mahindra & Mahindra’s (M&M) March quarter performance was a mixed bag with an outperformance on the revenue front while margins saw a slight miss. Revenues for sports utility vehicle (SUV) maker and tractor leader came in at a robust 32 per cent on the back of a 22 per cent jump in volumes while realisations too improved by eight per cent.

Both the key segments of auto and farm equipment posted 29-36 per cent growth in revenues that was largely volume led. In the auto segment, demand momentum on the back of new launches remains strong with 57,000 fresh bookings a month and overall increase in backlog despite an increase in production.

The company highlighted strong bookings across its key SUVs with open bookings at 292,000 units as compared to 266,000 units in the December quarter. Two thirds of the open bookings are for the Scorpio-N and the XUV700, both of whose production is being impacted by the semiconductor shortage. The management indicated that supply-related issues impacted overall volumes to the extent of 10,000 units in the quarter.

The company is looking to improve its capacity by 10,000 units to 49,000 units a month by the end of the year. While this will be enough to cater to the internal combustion engine based demand, further capacity enhancement by about a fifth may be needed for the company’s born electric programme. A range of electric SUVs are slated to be rolled out towards the end of next year.

While there are healthy bookings, the improvement in rural demand conditions will also weigh on the outlook for the company as 40 per cent of its SUV portfolio (Bolero Neo, Scorpio Classic and Thar) is rural and semi-urban focused. The company ended the year with a SUV market share of 19.1 per cent and was up 370 basis points over the year ago quarter; the exit market share (end of Q4FY23) was 19.6 per cent and was up 170 basis points higher YoY. The auto segment is expected to be a growth driver for the company with FY24 volumes expected to rise by 12 per cent.

On the farm equipment front (tractors), the company posted a 23 per cent increase in volumes with its Q4FY23 market share at 40.7 per cent, up 230 basis points YoY and was at the highest levels over the last 12 years. Its share in FY23 was at 41.2 per cent and is up 300 basis points over the last couple of years. The company is seeking to boost its share in the lower horsepower segment on the back of new launches. Its share of the market (lightweight segment accounts for 50,000 to 60,000 of sector volumes) in this segment is lower than the company average. Going ahead, the company expects the sector to grow in low single digits led by normal monsoons, healthy reservoir levels and government spending on the rural segment.

In addition to volume growth of the two segments, the margin trajectory would also be a key monitorable. While gross margins in the quarter expanded by 100 basis points sequentially operating profit margins were down 60 basis points. Lower sales mix of the more profitable tractor portfolio (volumes were down 15 per cent sequentially) while auto segment sales were up seven per cent, coupled with lower leverage led to the margin disappointment. There is a 900- basis-point difference between segment margins of tractor and the auto segment.

The firm is expected to post healthy growth going ahead. According to analysts led by Jinesh Gandhi of Motilal Oswal Research, “Despite deterioration in the mix, revenue, operating profit and net profit are expected to grow at an annual rate of 14, 19 and 16 per cent respectively over FY23-25.” The brokerage has maintained a buy rating even as the stock is trading in line with its five-year average core P/E. The stock, which is up 38 per cent over the last year, has seen a substantial rerating led by traction in SUV volumes, market share gains in tractors and plans in the electric vehicle space. The brokerage has maintained its estimates and its target price of Rs 1,500 a share.

While Emkay Research has cut its earnings per share estimates to account for the operating profit miss in the quarter, they too have maintained a buy rating given supporting valuations of 9.8 times its FY25 core earnings estimates. They have reduced their target price to Rs 1,500 from Rs 1,590 a share earlier.

From the current price this translates into an upside of 17 per cent. Given that valuations are a discount to peers and there are healthy upsides from the current levels, investors can accumulate the stock on corrections.