M&M’s FY23 ride is on a bumpy road
Premium- M&M’s auto segment demand is strong with more than 170,000 open bookings
- But higher input costs and supply chain constraints are causes of concern for M&M
The Mahindra & Mahindra Ltd (M&M) stock was rewarded for decent performance in its automotive segment in the March quarter (Q4FY22). Shares of the company hit a 52-week high of ₹1,011.75 on the NSE on Monday, and ended the day’s trading session up around 5%. This vertical saw sales volumes improve by 44% year-on-year (y-o-y) to 155,902 units in Q4.
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Further, the demand environment for this segment is expected to be firm. Open bookings stand at more than 170,000. In this, the order backlog for XUV700 is over 78,000 and the company is seeing the new bookings rate at twice that of production every month, the management told analysts. Margins continue to face pressure from high input costs but the recent measures by the government to tackle inflation have cooled prices. The management is optimistic about a further uptick in auto segment’s margin. In Q4, the Ebit margin rose to a multi-quarter high of 5.6%, aided by operating leverage. For now, the company has maintained its earlier guidance of around 7% in auto margin for the mid-term.
Supply chain constraints are also not completely out of the company’s way. The semiconductor shortage situation eased in Q4, leading to the company reporting record utility vehicle volumes in the quarter. Even so, the waiting periods are longer and the company does not see this coming down dramatically, although it believes the trajectory to be positive in terms of the chip situation. The opening-up of China after the lockdown also augurs well.
“Our dealer check suggests that production levels have gradually improved over the last few months as M&M has onboarded new vendors for chip supply. With this, the company is servicing the current and growing order book for XUV700 and Thar," said analysts at Prabhudas Lilladher in a first cut note.
While the automotive segment is seen in a better stead, M&M’s key high-margin farm equipment business is lagging. Here, Ebit margin at 15.7% in Q4 was at a multi-quarter low and tractor volume sales plunged by 22% y-o-y. The outlook is not so bright, either. The M&M management expects the tractor industry to grow by single digit in FY23. Demand for tractors was good in April and May, but there has been a bit of a slowdown after the government recently announced a wheat export ban, the management said.
“There is a potential rural demand tailwind on the back of agri commodity inflation translating into better agricultural income. That said, a high base and the cyclical nature of the industry would need a strong catalyst to drive tractor volume growth y-o-y, besides a good monsoon." said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas Securities India. M&M would be a key beneficiary of revival in the rural markets as it held a market share of 40% in tractors in FY22.
As a result of the turnaround in its automotive segment, M&M shares have risen by 19.3% so far in this calendar year, comfortably outperforming sectoral index Nifty Auto’s nearly 5% returns. However, a meaningful upside in the stock from the current level would depend on the momentum in the rural economy. Also, a further sharp rise in raw material costs and the company’s limited ability to pass the increase would weigh on the near-term performance.
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“We expect the higher input cost to impact the company’s operating performance to some extent, hence we slightly decrease our Ebitda (earnings before interest, tax, depreciation and amortization) margin estimates by 50 basis points (bps)/65bps for FY23E/FY24E, respectively," said analysts at Reliance Securities in a report on 30 May. One basis point is 0.01%.