M&M's stock races ahead on strong Q4 performance, outlook healthy

Mahindra & Mahindra (M&M) reported very strong results for the January-March quarter of the last financial year (Q4FY24), beating consensus comfortably. The margins of the automobile business improved 170 basis points (bps) year-on-year (Y-o-Y) to 8.8 per cent, while FES (Farm Equipment Sector) margins improved to 15.8 per cent (up 60 bps Y-o-Y), despite a decline in volumes due to cost optimisation and lower raw material costs.

The market valuation of M&M hit the Rs 3.12 lakh crore mark for the first time on Friday, as the company's shares touched a 52-week high on the bourses. There is a strong demand momentum for utility vehicles (UVs) and hopes for a revival in tractor demand will be the key growth drivers during FY24-26. The Q4FY24 revenue and Ebitda and adjusted profit after tax (PAT) grew 11 per cent, 16 per cent and 3 per cent Y-o-Y, respectively to Rs 25,110 crore, Rs 3,240 crore and Rs 2,040 crore. The FY24 revenue, Ebitda and adjusted PAT grew 16 per cent, 24 per cent and 35 per cent Y-o-Y, respectively.

The Q4FY24 revenue grew 11 per cent Y-o-Y to Rs 25,110 crore as volumes grew 3 per cent Y-o-Y. The Average Selling Price (ASP) grew 8 per cent Y-o-Y to Rs 8.75 lakh per unit. The gross margin expanded 150 bps Y-o-Y to 26.5 per cent. But higher other expenses (up 80 bps Y-o-Y) held Ebitda margin to 12.9 per cent (up 50 bps Y-o-Y).

Higher other income helped Adjusted PAT to hit Rs 2,040 crore, up 3 per cent Y-o-Y. The company declared a final dividend of Rs 21.1 per share for FY24, up from Rs 16 per share in FY23. Free cash flow to the firm (FCFF) in FY24 was at Rs 6,450 crore (vs. Rs 5,700 crore in FY23) due to better-operating cash flows of Rs 11,280 crore (vs. Rs 9,130 crore in FY23), despite higher capex of Rs 4,830 crore (Rs 3,430 crore in FY23).

In the auto segment, Q4FY24 revenue rose 20 per cent Y-o-Y to Rs 19,910 crore. Volume and ASP rose 13 per cent and 5.5 per cent Y-o-Y, respectively. In FES, the revenue declined 13 per cent Y-o-Y to Rs 5,230 crore. Volumes fell 20 per cent Y-o-Y, but ASP (up 9 per cent Y-o-Y) compensated.

M&M is looking at expanding monthly UV capacity to 64,000 units by FY25-end and 72,000 units by FY26-end, from the present level of 49,000 units. The company gained market share in tractors by 130 bps Y-o-Y to 39.4 per cent with industry volume down 19 per cent Y-o-Y in Q4. The likely volume growth in FY25 would be around 2 per cent with a sharper volume rise in FY26.

The management maintained its previous guidance of mid-to-high teens growth in FY25, led by new launches (XUV 3XO, Thar 5 door) and the launch of lower variants of XUV700. In FES, M&M expects tractor industry volumes to grow 5 per cent Y-o-Y in FY25, assuming a better monsoon as predicted by the India Meteorological Department (IMD). The first half of FY25 may be weakened by ongoing elections, but the second half of FY25 should see a pickup. The April’24 volumes exceed internal expectations. M&M has a pending order booking of 221,000 units, as of May 15, 2024.

The capex outlays for autos and farms would be Rs 27,000 crore and Rs 5,000 crore, respectively during FY25-27. The auto capex is further segmented with Rs 12,000 crore allocated to electric vehicles (EVs). This is higher than the prior three-year period of FY22-24 when it had a capex of Rs 19,500 crore.

M&M outperformed its own targets on earnings and delivered a return on equity (RoE) of 18 per cent in FY24, and it maintains long-term guidance of 18 per cent RoE even as it has raised its capex guidance. Analysts have upgraded earnings and valuations. According to Bloomberg data, 26 out of 28 analysts polled post results are bullish on the stock which is up nearly 100 per cent in the past year; one each has a ‘hold’ and ‘sell’ rating. Their average one-year target is Rs 2,625 for M&M, which closed 6 per cent higher on Friday at Rs 2,514.45 on the BSE.