JM Financial

Target: ₹1,400

CMP: ₹1,274.85

Mahindra & Mahindra (M&M) reported Q1 FY23 EBITDA margin of 11.9 per cent (-190 basis points year-on-year, +60 bps quarter-on-quarter) below our estimates due to unfavourable product mix and higher RM cost inflation. 

In the tractor segment, despite the high base of FY22, the industry is expected to grow by 3-5 per cent in FY23 on the back of steady kharif acreage and healthy reservoir levels. Benefit of softening commodity prices will reflect from Q3 FY23 margins. The management indicated that the long-term CAGR for the tractor industry stands at 7-8 per cent owing to lower farm penetration. Also the company targets to grow its implements business (₹400-500 crore in FY22) by about 10x in the coming years given the large size of the industry (₹70,000 crore).

The M&M Auto division is witnessing supply-side challenges owing to semiconductor shortage and capacity constraints (10% of volumes getting impacted). In terms of demand, wholesales are likely to be supported by high outstanding bookings (140k+ open bookings excluding Scorpio-N). The recently-launched Scorpio-N has received strong customer response with over 100k bookings. About 26 per cent of these bookings were online with higher share of booking from the Southern/urban region vis-à-vis the outgoing Scorpio. M&M maintained its leadership in revenue market share for the SUV segment at 17.1 per cent for Q1 FY23 (17.8 per cent for Q4 FY22). The company is looking to ramp up capacities while being mindful of their

future focus on EVs. Peaking tractor cycle and customer response to new models are some of the key monitorables to our call. In addition, the company endeavours to reduce costs (target EBIT margin 6.5-7 per cent) through reducing product and fixed costs.

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