Auto segment to power Mahindra & Mahindra's gains in the near term

Brokerages remain positive on Mahindra & Mahindra as robust SUV demand, market share gains and capacity expansion offset near-term pressure on operating margins

The results of auto major Mahindra & Mahindra (M&M) for the first quarter of financial year 2026-27 (Q1FY27) missed consensus estimates. While revenue growth was strong, operating performance fell short of expectations due to declining gross margins. However, the company is confident given strong underlying demand represented by robust booking as well as enquiries across its sports utility vehicle (SUV) portfolio.

 

While the farm equipment segment may face headwinds on demand and margin fronts, the auto segment is better placed given sustained demand momentum and price hikes, which could help maintain or improve margins. Most brokerages are bullish on the stock given market share gains in auto and resilient outlook for tractors. The stock surged over 3.6 per cent, making it one of the Sensex's top three gainers during the trading session on Friday. At the current price, it is trading around 22 times its FY28 earnings.

 

Led by the auto segment, overall revenue increased by 23 per cent year-on-year (Y-o-Y) and was in line with estimates. Auto segment revenues registered a growth of 24 per cent, led by an 18 per cent uptick in volumes, while the rest was on account of higher realisations. Revenues from the farm segment improved by 19 per cent, and this was entirely on account of volumes as realisations remained flat. 

 

The company maintained its leadership position in light commercial vehicle (52 per cent), tractor (44.9 per cent), and electric three-wheeler (39.5 per cent) segments. In the SUV space, it has a market share of 25 per cent, which was up 50 basis points (bps) on a sequential basis. Electric SUVs accounted for about 12 per cent of its volumes in Q1FY27.

 

Given robust demand, the company is ramping up capacities in the second half (H2) of FY27. It is adding 10,000 units in the internal combustion engine (ICE)-powered vehicles and 4,000 units in battery electric vehicles (BEVs) ahead of launches in FY28. Over the longer term, it plans to double its utility vehicle capacity to 132,000 units per month by FY31.

 

On the farm equipment side, the company pointed out that tractor demand remains healthy as of now given the higher mechanisation on account of labour shortages, rabi cash flows, and higher government spending.

 

Even as topline growth was strong, the operating performance was muted. The uptick in operating profit was limited to 5 per cent and was below estimates on account of commodity inflation and mark-to-market losses on hedges. Overall operating profit margin contracted 210 bps to 12.2 per cent. While the auto segment margin fell by 180 bps to 7.1 per cent, farm-segment profitability was lower by 130 bps to 18.5 per cent.

 

The company is negating some of the cost pressures by price hikes and cost-optimisation initiatives. It is expecting margins in the auto segment to improve, though it will depend on input cost trajectory. In the EV business, medium-term profitability will be driven by pricing power, economies of scale, and cost efficiencies.

 

Given the commodity-led margin pressures, Emkay Research has cut FY27-FY28 earnings per share by 2-4 per cent. The brokerage has, however, retained its “Buy” rating on the stock, with a target price of ₹4,100 given the robust underlying SUV demand.

 

For CLSA, M&M remains its top pick in the auto space on account of sustained utility vehicle market share gains driven by strong execution and upcoming launches. It also expects a resilient tractor outlook, with volumes up 19 per cent Y-o-Y in Q1FY27. The other triggers, according to CLSA, are strong traction in the BEV space and ongoing capacity expansion to support demand. It has upgraded the stock to “Outperform”, with a target price of ₹4,588.