Mahindra & Mahindra Limited (M&M) stock was rewarded for its good performance in its automotive segment in the March quarter (Q4FY22). Company shares hit 52-week high 1,011.75 on the NSE on Monday, and ended the day’s trading session up nearly 5%. This vertical saw sales volume improve by 44% year-on-year (y-o-y) to 155,902 units in Q4.
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Besides, the demand environment for this segment is expected to remain strong. Open bookings exceed 170,000. In this, the order backlog for the XUV700 is over 78,000 and the company is seeing double the new bookings rate every month as compared to the production, the management told analysts. Margins remain under pressure from higher cost costs, but recent measures by the government to tackle inflation have cooled prices. Management is optimistic about further growth in margins for the auto segment. In Q4, aided by operating leverage, Ebit margin reached a multi-quarter high of 5.6%. For now, the company has maintained its earlier guidance of around 7% in auto margins for the medium term.
Supply chain constraints are also not completely out of the company’s way. The semiconductor shortage situation eased in Q4, with the company reporting record utility vehicle volumes in the quarter. Still, the waiting period is long and the company doesn’t see it shortening dramatically, though it sees the trajectory as positive in terms of chip status. The opening of China after the lockdown is also a good sign.
“Our dealer checks show that there has been a gradual improvement in production levels over the past few months as M&M inducts new vendors for chip supply. With this, the company is servicing the existing and growing order book for XUV700 and Thar,” analysts at Prabhudas Lilladher said in an earlier cut note.
While the automotive segment is seeing a better position, Mahindra & Mahindra’s flagship high-margin farm equipment business is lagging. Here, Ebit margin was 15.7% in the fourth quarter, which was a multi-quarter low and tractor sales declined 22% year-on-year. The outlook is not so bright either. M&M management expects single digit growth of tractor industry in FY23. The management said that the demand for tractors was good in April and May, but there has been a slight slowdown after the government recently announced a ban on export of wheat.
“There is a potential rural demand tailwind behind agricultural commodity inflation translating into better farm incomes. That said, a higher base and cyclical nature of the industry would require a strong catalyst to drive tractor volume growth apart from a good monsoon,” said Kumar Rakesh, a senior automobile and technology analyst at BNP Paribas Securities India M&M. Hoga is a major beneficiary of the revival in rural markets as it had 40% market share in tractors in FY12.
As a result of the turnaround in its automotive segment, M&M shares are up 19.3% so far this calendar year, comfortably outperforming the sectoral index Nifty Auto’s nearly 5% return. However, a meaningful jump in stocks from current levels will depend on the momentum in the rural economy. In addition, a further sharp rise in raw material costs and limited ability to pass on the company’s growth will impact near-term performance.
“We expect higher input costs to impact the operating performance of the Company to some extent, hence we have revised our Ebitda (earnings before interest, taxes, depreciation and amortization) margin estimates by 50 basis points (bps) for FY23E/FY24E. ) / do a little less than 65 bps. respectively,” analysts at Reliance Securities said in a report on May 30. One basis point is 0.01%.