By HDFC Securities
Mahindra & Mahindra’s Q1 PAT, at Rs 14.7 bn, was below our estimate of Rs 16.5 bn due to lower-than-expected margin in the FES segment. FES margin remained under pressure due to the inability to pass on rising costs and an adverse mix impact. We remain optimistic about M&M’s aggressive future roadmap for its core auto and FES segments (target of 15-20% revenue growth CAGR over 2025 and 18% RoCE). M&M’s new UV models are currently seeing strong demand (order backlog of 240k+ units). On the back of its record high bookings, we expect the company to regain some of its lost market share in the coming years.
Further, M&M expects the tractor industry to post 3-5% growth in FY23 and the positive highlight is that it has gained 90bps share in Q1 to 42.7%. Its international FES subs have posted eighth consecutive positive PBIT in Q1, despite an adverse macro, which is commendable. Due to Q1 earnings miss, we have lowered FY23 EPS by 3% while maintaining FY24 EPS. Maintain Buy, with a revised TP of Rs 1,416/sh (earlier at Rs 1,390/share) as we roll forward to June 2024 estimates.
Q1 PAT below estimate: M&M Q1 PAT at Rs 14.7 bn was below our estimates due to lower-than-expected margin in the FES segment. On a segmental basis, FES segment margin remained flat q-o-q at 16% (vs our estimate of 17%), despite 63% q-o-q volume growth due to (1) the company’s inability to fully pass on higher costs and (2) an adverse mix in Q1. Auto segment margin was in line with our estimate at 6%.
(1) M&M has an order backlog of 140k+ bookings currently (XUV700: 79k; Thar: 25k, XUV 300: 13k, Bolero: 15k, Scorpio old: 7k bookings). Apart from this, the recently launched Scorpio has garnered a record 100k bookings in the first 30 mins of its launch. Further, the company intends to launch Scorpio Classic in Aug (replacement for old Scorpio). Apart from this, it intends to expand the Thar offering with more affordable options.
(2) Management indicated that chip shortages have hurt its ability to ramp up supplies. The fact that most of the company’s outstanding bookings on key models like XUV700 were for high-end models has aggravated this issue. The other constraining factor has been engine capacity ramp-up. The company is planning a steep jump in the production capacity for its models in the coming months.
(3) Management expects tractor industry to post 3-5% growth for FY23E.
(4) M&M has taken 1.5-2% price increase in autos and FES segments in Q1 as well. Management expects the benefit of declining input costs to be visible from Q3 onwards. It continued aggressive cost-cutting (reduced Rs 9 bn of fixed costs in FY22 and Rs 2 bn in Q1).