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MOSL: MAHINDRA & MAHINDRA: Inline; strength in Auto offsets weakness in FES

.  MAHINDRA & MAHINDRA: Inline; strength in Auto offsets weakness in FES

(MM IN, Mkt Cap USD19.4b, CMP INR1236, TP INR1400, 16% Upside, Buy)

• MM’s 1QFY23 operating performance was in line as the Auto business made up for weakness in the Tractor segment. While the Auto business is firmly on the growth path, led by a refreshed product portfolio, the outlook for the Tractor segment is uncertain, particularly for 2HFY23. The strong order backlog in SUV will continue to boost performance, aided by RM cost savings. Stability in the Tractor business will be a key performance driver.
• We raise our FY23/FY24 standalone EPS estimate by 7% each to factor in a strong order backlog in the Passenger UVs and improving semiconductor supplies. We maintain our Buy rating with a TP of INR1,400/share (Sep’24E based SoTP).

Cost inflation and weak mix hurt margin in 1QFY23

• Standalone revenue/EBITDA/adjusted PAT grew 67%/43.5%/57.5% YoY to INR196.1b/INR23.4b/INR14.7b.
• Volumes grew 46% YoY. Net realizations grew 14.5% YoY (but fell 4% QoQ) to ~INR721.1k/unit (est. INR705k/unit), led by ~15%/6% YoY growth (+4%/-5% QoQ) in Auto/Tractor realizations.
• Gross margin contracted by ~7pp YoY to 23.4% (est. 24.5%) due to higher RM cost and a weaker mix.
• However, the benefit of operating leverage diluted the ~200bp YoY fall in EBITDA margin to 11.9% (est. 12%). EBITDA grew 43.5% YoY to ~INR23.4b (est. ~INR23.7b).
• PBIT margin for the Auto business improved by 4pp YoY and 10bp QoQ to 5.7%. The same for the Tractor business declined by 4.3pp YoY (but grew 30bp QoQ) to 16%, impacted by cost inflation and an adverse model mix.
• Lower tax boosted adjusted PAT to INR14.7b (est. ~INR13.9b), a growth of 57.5% YoY.
• The net contribution from Auto subsidiaries, at the PBIT level, was a loss of ~INR331m (v/s a loss of INR670m in 4QFY22). 
• Its farm subsidiaries recorded an eighth consecutive quarter of positive PBIT of ~INR710m (v/s ~INR648m in 4QFY22).

 

Highlights from the management commentary

• The Tractor industry will see a 3-5% growth in FY23, despite a near normal monsoon and an acreage close to last year, as there are risks in the form of: a) unfavorable terms of trades for farmers, and b) lower government spending on agriculture and rural.
• Scorpio-N bringing in new customers as reflected in a) greater urban salience for the new model (77% v/s 45% for the old mode), b) shift in preference in South/West India (17%/28% for the new v/s 3%/21% for the old model).
• It is looking to substantially expand capacities in phases (the management didn’t disclose details) as it doesn’t want the waiting period to exceed beyond tree-to-four months. Semiconductor supply issues have resulted in a 10% loss of production.
• The benefit from lower RM cost will reflect from 3QFY23, given its inventory and contracts. Hence, the benefit won’t be much in 2QFY23.
• Peugeot was initially categorized as category A. However, COVID-19 has hurt the business fairly hard, impacting its performance badly. Since performance parameters have not been met in a time bound manner, it is under review now.