Mahindra & Mahindra indicated that demand environment for the auto business has been stable in general but it expects slower growth for tractors in FY24 even under normal monsoons due to high base and three Navratras in FY23.
Mahindra and Mahindra (M&M) share price shed over 2 percent intraday on March 9. At 10:41am, the shares traded at Rs 1,263.20, down Rs 27.00, or 2.09 percent, on the BSE. The scrip touched an intraday high of Rs 1,292.05 and an intraday low of Rs 1,262.70.
Domestic research and broking firm Motilal Oswal has maintained its ‘buy’ call on the stock and expects a compounded average growth rate of 20 percent in EPS and 2pp RoCE improvement over FY23-25, along with cheap valuations. It expects M&M to reach a target price of Rs 1,525 per share, an upside of 20 percent from current market price.
"We cut our FY24 EPS by 8 percent to factor in lower tractor and sports utility vehicle (SUV) volumes growth, and the adverse impact of losses from new businesses," it added.
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SUV demand holding up well amid macro challenges
M&M does not see any sign of demand moderation for its SUVs. Its orderbook is steady despite an uncertain macro environment. But there are signs of sustained stress at the lower segment in rural markets, Motilal Oswal said.
Chip supply improving but still restricting full capacity ramp-up
According to the M&M management, the waiting period for the SUVs has come down by 1-1.5 months, largely benefitting from supply chain recovery. While supply chain issues are improving gradually, the situation is still volatile. The sole issue at this point remains the shortage of semiconductors, while the other supply chain issues have been resolved substantially since China is opening up.
Hence, M&M is not able to ramp up its SUV production to full capacity of around 39,000 units per month as against an average wholesale of 30-33,000 units.
Tractor growth to be low on high base, even in normal monsoon
The FY23 tractor demand benefitted largely from higher mandi prices of crops than MSPs and as FY23 had three Navratras, apart from other favorable agro-economic indicators. M&M is now focussed on building inventory before the festive season in March 2023. However, the FY24 tractor volume growth would be lower on a high base, even in case of a normal monsoon, as there would be only one Navratra in FY24, the report by Motilal Oswal said.
Margin expansions likely, but commodity price inflation a risk
M&M sees scope for margin expansion from the third-quarter levels in both auto and farm equipment sector (FES). The auto business has many levers for margin expansion in the form of price hikes, easing semiconductor premium as supplies improve, and cost-cutting measures, being offset by ramp-up in EVs.
For the FES segment, the tractor business margins are likely to improve but a sharp ramp-up in farm equipment will dilute the margin expansion. However, rising prices for commodities from the lows of Q3 FY23 could be one of the key risks for margin expansion, the brokerage firm noted.
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