Q3FY24 Review: Mahindra & Mahindra: Q3 in-line but underlying industries slowing

15 Feb 2024 , 03:35 PM

M&M’s Q3 Ebitda (+15% YoY) was in line with analysts of IIFL Capital Services estimate. Growth was driven by SUVs and 3Ws. The industry growth outlook for PV, CV and tractors have softened in recent times. PV industry growth is expected to decelerate to 3-4% in FY25. CV industry has also weakened, with a large part of the up-cycle having played out. Mgmt. cut tractor industry guidance for FY24 from “flattish” to 5% decline. Tractor inventory is high and will need correction. Reservoir levels have dropped, which implies that volume recovery will need to wait till 2024 monsoon turns out to be normal. Analysts of IIFL Capital Services EPS estimates are largely unchanged with cut in tractor volumes off-set by other moving parts. Analysts of IIFL Capital Services expect core EPS growth to decelerate to 10% over FY24-26. Retain ADD with TP of ₹1780. 

Q3 Ebitda in-line with est.: 

Rev grew 17% YoY (2% miss) driven by strong growth in SUV/3W volumes. Ebitda margin expanded 20bps QoQ to 12.8% (40bps beat), led by gross margin expansion. Absolute Ebitda were in line with analysts of IIFL Capital Services expectations. Auto Ebit margin expanded 160bp YoY and 40bp QoQ to 8.3%. Tractor Ebit margin contracted 110bp YoY and 50bp QoQ to 15.5%. 

SUV continues to grow but order-flow / order-book coming off: 

M&M is likely to end FY24 with 28-30% growth in SUV volumes, driven by new models. However, new-order-flow and order-book seem to be tapering. The order-book in Feb 2024 stood at 226k vs 286k in Nov 2023 – a sharp fall. Analysts of IIFL Capital Services have been highlighting that retails (per Vahan) have not kept pace with wholesales – quite surprising given the large orderbook. Mgmt. has guided to mid-to-high teens growth for M&M’s SUV volumes in FY25 (analysts of IIFL Capital Services forecast 10%). This is higher than expected PV industry growth of 3-4% and SUV industry growth of 10-12% (per SIAM). 

Tractor industry has weakened substantially: 

Mgmt. cut FY24 industry volume growth guidance from “flattish” to a decline of 5%. The tractor cycle worsened due to erratic rainfall in 2023 and weak festive sales. Dealer inventory is high, which may need correction in coming months. As a result, the outlook for coming months is weak; mgmt. expects 10% YoY decline in Q4FY24 (including impact of high base in Q4FY23). Reservoir levels have dropped. Recovery in the industry would depend on normalcy of monsoon in 2024 (4-5 months away).