SUV sales boost M&M Q1 earnings, analysts expect stock to hit Rs 1,725

Mahindra and Mahindra shares rose as much as 4.5 per cent to hit an intraday high of Rs 1,530 after it posted an estimate-beating 98 per cent jump in first-quarter profit, boosted by strong sales of its expensive sport-utility vehicles (SUVs).

The results for Mahindra – the country’s second-largest SUV maker by volume – were in line with rivals Maruti Suzuki and Tata Motors, which also posted higher-than-expected profits on the back of strong SUV sales.

Mahindra's "good set of numbers," will continue to be backed by higher operating leverage and cooling commodity prices, which in turn would prop margins up further, said Himanshu Singh, analyst at Prabhudas Lillader.

The first quarter profit margin before exceptional items rose to 10.4 per cent from 7.7 per cent a year before.

Mahindra also said its plans to launch a new range of electric SUVs were on track. The company currently has one mainstream electric offering in its four-wheeler stable - the XUV400 – for which deliveries began in March.

Chief Executive Officer Anish Shah said the company was not "looking for additional funding in the EV space," a day after roping in Singapore's Temasek as an investor for its EV unit – Mahindra Electric Automobile.

"We have a very strong business and we have the cash flow to fund it. Very likely, the auto cash flow itself will fund everything that it needs," Shah said on the EV arm, which also counts British International Investment as an investor.

Mahindra has so far infused Rs 1,600 crore in its EV arm out of a planned investment of Rs 10,000 crore by fiscal 2027, Group CFO Manoj Bhat said.

“Mahindra & Mahindra operating performance was marginally above our estimate as EBITDA margin expanded 100 basis points to 13.4 per cent. We believe M&M should outperform both the divisions as in SUV – it has a major share of high-end SUVs wherein demand is relatively better and tractors – there are launches in light weight category through OJA and Swaraj,” brokerage firm Motilal Oswal said in a note.

The brokerage firm raised its FY24 and FY25 estimated earnings per share (EPS) by 10 per cent and 5 per cent respectively to account for better operating margin and higher other income.

Motilal Oswal has buy recommendation on Mahindra & Mahindra for target price of Rs 1,725 per share.1

Mahindra & Mahindra’s RBL Bank investment

Financial services business is a core area for Mahindra & Mahindra. This investment is based on a long-term view (7-10 years), with an objective to understand banking, which will enable it to enhance the value of its financial services business. Mahindra & Mahindra is not looking to invest more (beyond 3.5 per cent) in foreseeable future unless it sees compelling strategic value at some point. It is not looking to have a board seat, Motilal Oswal said.

Mahindra & Mahindra SUV business

Mahindra & Mahindra had open bookings of SUVs at 2,81,000 with average new bookings of 48,000 per month in first quarter of current fiscal. Moderation in new bookings visible in XUV300/400 (6,000/month from 10,000/month in 4QFY23), Thar (10,00/month from 14,000/month in Q4) and Bolero (9,000/month from 10,000/month in Q4). Momentum in XUV700 and Scorpio remains intact. Average cancellation rate was less than 8 per cent in 1QFY24.

Mahindra & Mahindra is witnessing a moderation in demand in its portfolio of products priced less than Rs 10 lakh (Bolero and XUV300).

“While the outlook for tractors remains stable, we expect the auto business to be the key growth driver for the next couple of years. Despite deterioration in the mix, we estimate revenue to grow at 14 per cent, EBITDA to expand at 20 per cent and profit after tax to rise at 20 per cent over FY23-25,” Motilal Oswal said. 

The implied core price to earnings (P/E) ratio for M&M stands at 15.6 times. While the valuation is still attractive versus peers, M&M has seen a substantial rerating in FY23 as the stock is now trading in line with its five-year average core P/E driven by a strong performance in the SUV segment, market share gain in tractors and new launch pipeline in EVs, the brokerage firm added.

(With Reuters inputs)