Q3FY23 Review: Mahindra & Mahindra: Strong earnings delivery continues

13 Feb 2023 , 12:45 PM

M&M’s Q3 Ebitda beat our estimate by 5% with margin surprise in the Auto segment. Outlook for the SUV segment is strong as the company is reaping the dividend of a good model cycle in recent years, with a strong order-book and plans to increase production capacity aggressively. Margin outlook is also positive with strong pricing power and operating leverage. Tractor growth is strong in FY23, but may taper down in FY24/FY25; Margins are also likely to be range-bound.

In SUV segment, M&M has an order-book of 266k, equivalent to 7-8 months’ sales. M&M plans to increase SUV production capacity from 29k per month at FY22-end to 49k by FY24-end. There is good visibility for SUV volume growth in FY24 (we forecast 19-20% growth). Margin outlook for the Auto segment is also positive. Although most of input cost benefit is reflected in Q3 margins, there is scope for margin expansion from higher pricing (post introductory pricing for new models) and operating leverage. Compared to 6.7% Auto Ebit margin in Q3, analysts of IIFL Capital Services forecast 7.4%/8.0% in FY24/FY25.

Tractor industry volumes are set to grow ~11% in FY23. However, mgmt. sounded cautious on growth in FY24/FY25, with uncertainty on rainfall after 4 years of normal rainfall. Margin performance of the Tractor segment (+15bp QoQ) was weak, when seen in light of 13% QoQ jump in revenue and expectation of benefit from fall in input costs. Management indicated that margins are likely to remain in the current range, unless commodity prices fall further from here. Overall, tractors with single digit Ebit growth, may be a drag on overall EPS growth in FY24.

Analysts of IIFL Capital Services have upgraded core EPS forecast by 3-4%, following these results. Retain BUY with TP of Rs 1,565.