Strong auto business likely to offset tractor slowdown for M&M stock

The December quarter (Q3FY24) results of Mahindra & Mahindra (M&M) were better than expected. The revenue was up 17 per cent year-on-year (Y-o-Y) to Rs 25,300 crore and in line with consensus estimates. The operating profit margin at 12.8 per cent was ahead while operating profit grew 15 per cent Y-o-Y. The consolidated adjusted net profit at Rs 2,660 crore was also up 34 per cent Y-o-Y.

The farm equipment segment (FES) margin was lower at 15.5 per cent, which was offset by better auto margin at 8.3 per cent. The net profit beat estimates driven by lower tax outgo and higher other income.  

The key growth drivers in FY25 are likely to be SUV demand – the management’s guidance is of mid-teens growth on the back of healthy demand and new launches, while tractors will see recovery led by better growth prospects.  

Revenue growth during the quarter was driven by volume growth of around 11 per cent Y-o-Y. The average selling price (ASP) grew 5 per cent Y-o-Y. The gross margins expanded 60 basis points (bps) Y-o-Y to 24.6 per cent on lower commodity costs. In the auto segment, the revenue grew 24 per cent Y-o-Y to Rs 18,580 crore. The unit volume grew 20 per cent Y-o-Y while ASP rose 3 per cent Y-o-Y. In FES, revenue grew 0.5 per cent Y-o-Y to Rs 6,730 crore. Volumes declined 3 per cent Y-o-Y, while ASP grew 5 per cent Y-o-Y.

The management expects the SUV portfolio to grow by mid-to-high teens in FY25 as compared to Society of Indian Automobile Manufacturers (Siam’s) industry projection of 3-4 per cent for overall passenger vehicles and 10-12 per cent for utility vehicles.

The company is on track to achieve an end-Q4FY24 capacity of 49,000 units per month for SUVs but expects the Q4 run rate to be flat due to the XUV300 ramp-down for enhancement. Open bookings stand at 226,000 units (versus 286,000 units in Q2FY24), including 206,000 bookings for Scorpio, Thar, and XUV700. In FES, tractor volumes will decline 10 per cent Y-o-Y in Q4FY24 and 5 per cent Y-o-Y in full-year FY24.

But the guidance for FY25 tractor demand is “directionally positive”. Dealer inventory is slightly higher than 30 days and the company expects to bring it down in the next three months.

The last-mile mobility (LMM) business has qualified for both PLI and FAME schemes.

Products are ready and will get the first disbursement in Q1FY25. NIIF’s India-Japan Fund (IJF) invested at a valuation of Rs 6,600 crore, 10 per cent higher than the previous valuation.

The auto business is expected to be the growth driver for the next two years due to a healthy order backlog and new launches. The near-term outlook for tractors remains weak, but expect tractor demand to revive in FY25 to mid-single digit growth. The order book offers assurance for the next six months’ sales at least. The tractor sales will recover in FY25 though it may still be below FY23 levels.

The company indicated that auto and farm segments are both generating healthy cash flows and if required, the cashflows will also be available to fund EV-related investments (Rs 10,000 crore by FY27) and to fund ‘Growth Gems’ like Susten (Renewable energy). PLIs eligibility is also there for EVs and E-3wheelers.

The stock shot up 6.5 per cent on the results but according to analyst consensus, there could be a significant upside.