Jun 29, 2023
Rating: buy; M&M – Scaling up UV volumes
By Nuvama research
The company plans to expand market for UVs, tractors and LCVs auto major m&M’s Q3FY23 Ebitda Q3FY23 Ebitda of Rs 2,800 crore is in line with our estimate and consensus. The management is looking to ramp up UV production to 39k by FY23 and 49k by end-FY24, reflecting the strong confidence in the product line-up. Born-EV capacity would be additional. Tractor guidance remains at 5% for FY23. We are edging up FY24E/ FY25E EPS by 1%/2%, factoring-in a ramp-up in UV volumes and model cycle benefits. For the tractor business, we are also assuming some pass-through of commodity benefits. Maintain ‘Buy’ with an SoTP-based TP of Rs 1,577.
The revenue at Rs 21,600 crore is 8% above estimate driven by mix, price increase and merger of few smaller subsidiaries. Gross margin dipped by 120bp y-o-y and is up merely 50bp q-o-q to 24% due to limited pass-through of cost pressures in the tractor segment. QoQ gross margin improvement is the least for M&M vis-àvis other OEMs. Ebitda margin improved by 110bp y-o-y to 13%. The farm segment has gained market share by 90bp y-o-y to 41.4% Tractors has reported highest volumes of 104.9k units to date. It is the market share leader in UV revenue for four consecutive quarters, i.e. 20.6% versus 15.6% in Q3FY22.
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Guiding lights: 15–20% three-year revenue CAGR aspiration
We expect cash flows of the auto and tractor businesses to be largely utilised thereof. Investment in group companies would be funded by dividend/other asset monetisation. Management outlined a structured product pipeline (including upgrades and EV launches). Over FY22–27E, M&M would launch ten UVs (including five EVs), 13 tractors (two EVs) apart from a series of implements, and 17 LCVs/3W (five EVs). In UVs, the focus would be on core SUV, defined by high ground clearance, high seating and a 1,500cc engine.
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Outlook and valuation: On right track; maintain ‘BUY’
As the return on invested capital (RoIC) drags get addressed, the true franchise value of the tractor and LCV business would be recognised. Furthermore, some of the RoIC drags have started contributing to cash flows post-restructuring.
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