Firm walking talk on key ROIC drags; FY23e EPS cut by 11% given competition and costs; there’s potential for re-rating; ‘Buy’ retained
M&M’s Q2FY22 EBITDA at Rs 16.5 bn came in line with consensus. Key highlights: (i) Strong UV performance. (ii) A structured launch pipeline in UVs, CVs, tractors and EVs over FY23–26. (iii) Auto subsidiaries sustained their Ebit-positive journey.
M&M continues to walk the talk on two key RoIC drags: UVs and subsidiary losses. However, recognising the costs and competitive pressures, we are lowering FY23e EPS by 11%. Maintain ‘Buy’ with an SoTP-based TP of Rs 1,098 (earlier Rs 1,111) as we roll forward the numbers to Mar-23e (unchanged valuation).
Q2FY22: Good showing
Standalone revenue at Rs 133 bn (up 15% y-o-y) was 7% above estimate. However, commodity cost pressure led to in-line (consensus) Ebitda of Rs 16.5 bn (down 22% y-o-y). The FES segment continues to do well (ASP up 4% q-o-q/6% y-o-y). As a result revenue at Rs 55 bn (up 1% y-o-y) outgrew volume decline of 5%. Automotive revenue at Rs 80 bn reported strong y-o-y/q-o-q growth led by mix as well as pricing action. FES subsidiaries reported the second consecutive quarter of Rs 1 bn+ profit. Auto segment volumes slid 32K due to ECU shortages. While the supply of chips remains dynamic, the worst is behind as Covid-induced shortages were severe in recent months.
Guiding lights: 15–20% 3-year revenue CAGR aspiration and 18% RoE
We expect cash flows of the auto and tractor businesses to be largely utilised thereof. Investment in group companies will be funded by dividend/other asset monetisation. Mgmt outlined a structured product pipeline (including upgrades, EV launches). By FY27, M&M will launch ten UVs (including five EVs), 13 tractors (two EVs), apart from a series of implements and 17 LCVs/3W (five EVs). In UVs, the focus will be on core SUV (covering 70% of market).
Outlook: Re-rating potential exists
As the RoIC drags get addressed, the true franchise value of the tractor and LCV business would be recognised. Furthermore, RoIC drags will start contributing to cash flow post-restructuring. Maintain ‘BUY/SO’ with an SoTP-based TP of Rs 1,098. M&M is trading at FY22/23e PE of 22x/22.9x (ex-listed subsidiaries).