M&m’s Fy23 Ride is on a bumpy road
Mahindra & Mahindra Ltd (M&M) stock was rewarded for its strong performance in its automotive segment during 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 segment saw its sales volumes improve by 44% year over year (year-on-year) to reach 155,902 units in the fourth quarter.
Additionally, the demand environment for this segment is expected to be firm. Open bookings stand at more than 170,000. In this, the backlog for the XUV700 exceeds 78,000 and the company sees the rate of new orders doubling that of production every month, management told analysts. Margins continue to be pressured by high input costs, but recent government measures to combat inflation have cooled prices. Management is optimistic about further margin growth in the automotive segment. In the fourth quarter, the Ebit margin reached a multi-quarter high of 5.6%, helped by operating leverage. For now, the company has maintained its earlier guidance of around 7% auto margin in the medium term.
Supply chain constraints are also not completely outside the business. The semiconductor shortage situation eased in the fourth quarter, leading the company to report record commercial vehicle volumes in the quarter. Even so, wait times are longer, and the company doesn’t see that drastically diminishing, although it feels the trajectory is positive in terms of the chip situation. The opening up of China after the lockdown also bodes well.
“Our reseller check suggests that production levels have gradually improved over the past several months as M&M has onboarded new suppliers for chip supply. With this, the company is servicing the current and growing backlog for XUV700 and Thar,” Prabhudas Lilladher analysts said in an initial note.
While the automotive segment is better positioned, M&M’s core high-margin agricultural equipment business is lagging. Here, the Ebit margin at 15.7% in the fourth quarter was at its lowest in several quarters and the volume of tractor sales fell 22% year-on-year. The outlook isn’t so bright either. M&M management expects the tractor industry to see single-digit growth in FY23. Demand for tractors was good in April and May, but there was a slight slowdown after the government recently announced a wheat export ban, the management said.
“There is a potential tailwind of rural demand on the back of agricultural commodity inflation translating into better farm incomes. That said, a high base and the cyclical nature of the industry would need a strong catalyst to drive tractor volume growth year-over-year, in addition to a good monsoon,” Kumar said. Rakesh, senior automotive and technology analyst at BNP Paribas Securities India. M&M would be a major beneficiary of the revival of rural markets as it held a 40% market share in tractors in FY22.
Due to the recovery of its auto segment, M&M shares have risen 19.3% so far this calendar year, comfortably outperforming the nearly 5% returns of the Nifty Auto sector index. However, a significant increase in the stock from the current level would depend on the dynamics of the rural economy. In addition, a further sharp rise in raw material costs and the company’s limited ability to pass on the rise would weigh on performance in the short term.
“We expect the higher input cost to impact the operating performance of the business to some extent, which is why we are lowering our Ebitda (earnings before interest, tax, depreciation and amortization) of 50 basis points (bps)/65bps for FY23E/FY24E, respectively,” Reliance Securities analysts said in a May 30 report. One basis point equals 0.01%.