The hurdles ahead in Mahindra’s swift ride
Premium- Demand for M&M’s vehicles is strong but supply chain issues and limited capacity pose hurdles
- M&M aiming for 20-30% electrification in its SUV portfolio by FY27; ramp up of charging infra key
Mahindra & Mahindra Ltd’s (M&M) investors have had a good ride. The stock touched a 52-week high of ₹1,298.7 last week on NSE and is now just 5.5% lower than those levels. Investors are excited about the automaker’s roadmap for its electric vehicle (EV) ambitions after it unveiled its Born Electric vision on 15 August.
M&M plans to launch five electric sport utility vehicles (SUVs) under the brands XUV and BE and they will share a common platform, INGLO. Four of these vehicles are likely to be launched between 2024 and 2026. In the near term, M&M believes it will be able to competitively price its EVs in terms of the total cost of ownership given tax arbitrage between internal combustion engine vehicles and EVs, it said at a recent investor meet hosted by Kotak Institutional Equities. It also pointed out that utility vehicle buyers are not price sensitive and thus, achieving 20-30% electrification in its SUV portfolio by FY27 is possible. But a significant ramp-up of charging infrastructure is critical to attain such penetration levels.
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Analysts are gung-ho about M&M’s prospects because of the strong product pipeline and robust order book. The automaker’s new launches have been received well. At Kotak’s investor meet, M&M’s management highlighted that its domestic utility vehicle segment had received more than 240,000 bookings, of which more than 100,000 bookings are for Scorpio-N and 70,000 for XUV700.
However, supply chain constraints are restricting its ability to cater to such solid demand. “The company highlighted that 10-12% of the production is impacted because of a shortage of electronic parts from China, which is expected to improve over the coming weeks," said analysts at Kotak in a report on 18 August.
Also, unfulfilled orders because of limited capacity remain a major pain point with the capacity of Scorpio N at about 6,000 units per month, said Varun Baxi, an analyst at Nirmal Bang Equities, in the Q1FY23 review report. “Waiting periods of 1-year plus would involve a lot of order duplications and might lead to last-minute cancellations. Thus, we remain conservative and build in about 55-60% conversion of the current order book in our numbers for FY23," he said.
M&M aims to raise capacity. This would also aid in regaining market share in the domestic utility vehicle segment.
“The stock could see further re-rating based on how quickly M&M is able to ramp up production to meet the strong demand and if the company maintains market share gains," said Aniket Mhatre, an analyst at HDFC Securities.
The outlook for M&M’s farm equipment segment is blurry. The company expects the tractor industry to grow by a mere 3-5% in FY23. Unfavourable terms of trade for farmers and lower government spending in agricultural and rural areas are key issues. However, normal rainfall augurs well, and the company would be a beneficiary of a potential pick-up in the rural economy.
Further, softening commodity costs help on the margin front and its benefits can be expected to accrue from H2FY23 onwards. Margins for the newer products in the auto segment could be lower initially because of aggressive introductory pricing. However, this would improve led by scale, cost-control measures and increased pricing.
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M&M’s shares have risen 56% in the past year, suggesting investors are factoring in a brighter picture. An increase in cancellation rates for its new models or lower-than-expected volumes would throw cold water on investor hopes. Also, the execution of its EV strategy necessitates closer tracking.
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