About the Company:
Mahindra & Mahindra (M&M) operates in 3 major segments-
1. The Automotive division: This includes Passenger vehicles, Commercial Vehicles & 3 Wheelers. M&M commands a 21% revenue market share in the SUV segment. Key products include XUV 300 & 400, XUV 700, Thar, Bolero, Scorpio Classic & newly launched Scorpio-N. M&M is the country's second Largest Commercial Vehicle Company, the largest Small Commercial Vehicle Company (<3.5T), and the No.1 CV Exporter. Brands in this segment include Bolero Pik-up, Blazo & Supro.
2. Farm Equipment segment (Tractors & Farm Equipment): M&M has maintained its leadership position for the last 40 consecutive years in the tractor industry in India. Major brands in this segment include Swaraj, Trankstar, Erkunt & Sampo. It has a sizeable global farm business and is present in 4 of the 5 largest markets in the world.
3. Subsidiaries, Associates & Investments: M&M holds controlling stakes in subsidiaries M&M Financial Services, Mahindra EPC Irrigation, Mahindra Holidays, Mahindra Lifespaces, Mahindra Logistics & Swaraj Engines. It also holds a significant stake (~25%) in Tech Mahindra. M&M also operates some allied businesses with a minor presence in 2-wheelers with the Jawa brand.
Segmental leadership:
M&M has carved out a niche for itself in various segments that it operates in and has been maintaining dominant market shares in each of them:
- SUV: #2 in Volume market share & #1 in Revenue market share
- LCV: #1 IN LCV <3.5T
- E-3W: Market Leadership with 59.5% market share in YTD F24
- Farm machinery: Market share at a dominant 41.8%
(Volumes in Unit Lakhs)
What is the financial performance of the various business segments?
Automotive Segment: Fortunes for the automotive segment have changed substantially since FY23 with the improvement in the passenger vehicle segment (SUVs). In FY23, it did a revenue of Rs. 59,303 while in the past 12 months, it did a revenue of an astonishing Rs. 70,191 Cr and we estimate that it will close FY24 with revenues of more than Rs. 75,000 Cr in this segment.
The key thing to note here is that cars are mostly taken on loans and macro factors like inflation, interest rate, and consumer confidence drive the demand. Thus, the PV segment is cyclical with a 3 to 4-year horizon. Historical trends suggest that growth comes in bulk and remains strong for 2 to 3 years. This cyclicity comes with significant operating leverage benefits as well as disadvantages. Coming to profitability, in FY23, the Automotive business did a Profit of ~2800 Cr whereas in FY24 it should clock a PAT of ~6000 Cr.
M&M under the name Last Mile Mobility (LMM) is also in the E-3W segment wherein it manufactures Alfa, Treo and Zor Grand. The company sold 27,104 units in Q3 and added 65 LMM Exclusive outlets in FY24.
Farm equipment segment (FES)
While M&M is doing well in the Auto segment, FES is going through a weak demand environment. Rural demand is subdued, and Management has guided for 10% degrowth even in the next quarter. Depending on the intensity of El-Nino, this pressure from the FES division shall impact profitability even in FY25.
What are the headwinds?
M&M is currently capacity-constrained for delivering on its existing delivery commitment. New booking can’t increase if delivery time isn’t reduced and thus slow growth in capacity building has impacted its delivery and booking. However, it is actively working on getting capacities back on track to achieve its Q4FY24 exit capacity of 49,000 Units per month. The actual run rate for volumes though shall be lower due to ramp down in XUV 300 production as the company is working on product-specific demand-supply mismatch.
MoneyWorks4Me Opinion:
We had recommended a buy on M&M in March 2022 @ Rs. 739 and the stock has more than doubled for our investors since then. With SUV capacity reaching decent levels, we feel Automotive segment shall do substantially well with all-time high margins. Farm division shall be a definite drag on the segment level for some quarters but it shall be partially offset by margin improvement in the Auto Segment. We remain optimistic about M&M due to (a) Strong order flow for the newly launched SUVs; and (b) Dominant market share in high margin Farm business. We value M&M Standalone at 16x FY25 PAT, after taking a 30% haircut for subsidiaries and 25% haircut for Tech Mahindra we have upgraded MRP for M&M to Rs. 1,864. The stock has run up post results for the right reasons and we still feel that there is valuation comfort in the price.
