Q1FY24 Review: Mahindra & Mahindra: Q1 in-line; Volume slowdown is a risk

7 Aug 2023 , 12:03 PM

M&M’s Q1 results were in line with analysts of IIFL Capital Services estimates. The strong YoY growth in Q1 was driven by Auto segment; Tractors were weak. Although SUV growth has been strong so far, analysts of IIFL Capital Services note signs of moderation in PV/SUV industry. There is softness in low-end models (XUV300, Bolero). In recent months, M&M’s SUV retails have been lower than wholesales, despite all models having waiting period and order-book. LCV industry volumes are declining, while Tractor demand is also not firm. Mgmt. is hopeful of margin improvement from benign commodities and costreduction efforts. Analysts of IIFL Capital Services have increased EPS estimates by 3-4%, on higher other income (Ebitda largely unchanged). M&M’s recent purchase of 3.5% stake in RBL Bank was a surprise, as it is contrary to the “prudent capital allocation” narrative. Mgmt. kept the door open, on further investments in RBL, if there is “compelling strategic value at some point in the future”. 

Q1FY24 in line with estimates: 

Q1 revenue grew 22% YoY (in-line), driven by strong 21% growth in auto segment volumes. Ebitda margin expanded 110bps QoQ to 13.4% (in-line). Absolute Ebitda/Ebit were also largely in line with analysts of IIFL Capital Services estimates. Lower interest expense led to a 3% beat at PAT level. Auto Ebit margin expanded 20bps QoQ to 7.5% (in line); FES margin expanded 80bps QoQ at 17.5% (50bps miss). 

All is not rosy in SUV segment: 

M&M’s SUV retails in Q1FY24 were 10% lower than wholesales. This is surprising given M&M’s disclosure of a strong order book for almost every SUV model it sells. Mgmt. admitted there is some softness in demand for lower-end models. The order-book stands at 281k vehicles, slightly lower than 292k reported at Q4-end. This is equivalent to almost 8-month production. 

LCV and Tractors on “not-so-firm” ground: 

The LCV industry has been declining YoY for the last 3-4 months; so is the case with M&M’s LCV volumes. Analysts of IIFL Capital Services forecast 0% growth for the LCV industry in FY24. Tractors have also been to a slow start in FY24. Although M&M’s mgmt. refrained from providing any guidance, Escorts’ management recently guided to industry growth of low-to-mid single digit.