Despite Mahindra & Mahindra (M&M) recently providing a cautious outlook on tractor growth, brokerages remain bullish on the company, propelling its stock to higher levels. The stock has gained over 8% in the past 2 days.
Mahindra & Mahindra (M&M) reported a strong 15% YoY growth in its standalone EBITDA for Q3, surpassing Jefferies’ estimates by 4%. However, there are concerns as EBIT margins in the farm and auto segments contracted 50-80 basis points QoQ,
Particularly due to a deepening slowdown in the tractor market after a prolonged upcycle. While the new order inflow for the auto segment remains steady, the auto order book has significantly declined in the past three months.
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Here is what top brokerages predict on M&M
Jefferies on Mahindra & Mahindra
Jefferies retains a ‘Hold’ rating on Mahindra & Mahindra, accompanied by an increased target price of Rs 1,615, up from the previous target of Rs 1,580. The report indicates a cautious stance, suggesting that while M&M possesses a robust tractor business and an improved auto franchise.
Despite the overall growth, Jefferies notes a contraction of 50-80 basis points quarter-on-quarter in the EBIT margins of both the farm and auto segments. Of particular concern is the intensifying slowdown in the tractor segment, following an extended period of growth.
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Jefferies highlights a sharp decline in M&M’s auto order book over the last three months. However, the report also acknowledges that the new order inflow for the auto segment is holding up well, indicating a mixed picture for the company’s automotive business.
The report emphasizes that M&M’s stock is currently trading at 17 times the estimated core business PE for fiscal year 2025 (FY25E), which is considered relatively expensive. This valuation stands in contrast to the long-term average of 14 times FY25E core business PE. Jefferies expresses skepticism about the stock’s potential to deliver meaningful returns in the near term, linking this outlook to the current challenges in tractor demand visibility.
Elara Securities on Mahindra & Mahindra
Elara Securities has reiterated its ‘Accumulate’ rating, accompanied by a higher target price of INR 1,860, up from the previous Rs 1,688. The report delves into various aspects of M&M’s business, highlighting both positive and cautionary observations.
Elara Securities underscores the importance of monitoring M&M’s order book reduction, attributing it to a higher cancellation rate in recent months. The report suggests that this trend requires close attention, emphasizing the need for M&M to address and mitigate potential challenges associated with order cancellations.
The report suggests that M&M should explore avenues to increase volume contribution from lower-priced variants of the XUV 700 to sustain momentum. Additionally, the response to upcoming launches, including the Thar 5-door and XUV 300 refresh in the next six months, is anticipated to be a key factor influencing M&M’s market performance.
Elara Securities expects the farm segment to post sluggish volume growth on a high base. However, it anticipates a margin expansion of 120 basis points during FY23-26E. The report commends M&M’s impressive margin delivery in the auto segment.
Management guidance reveals a mid to high teens growth in the utility vehicle (UV) segment for FY25. The order book for M&M has been reduced to 226k units as of February 1st, down from 286k on November 1, 2023. The increased cancellation rate of 10% in Nov-Jan’24 is attributed to seasonality.
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Incremental order intake is reported to be approximately 50k units per month, with M&M targeting a Q4FY24 exit production capacity of 49,000 vehicles per month for the UV segment. However, the report notes a cautious stance on tractors, projecting a 5-6% contraction in FY24, primarily driven by weaker growth in South India.
Motilal Oswal on Mahindra & Mahindra
Motilal Oswal highlights that the company’s operating performance in the third quarter of FY24 aligns with their estimates. The adjusted Profit After Tax (PAT) of Rs 24.5 billion, reflecting a notable 10.7% YoY growth, surpassed Motilal Oswal’s expectation of Rs 23.3 billion. This outperformance is attributed to higher other income and a reduction in taxes.
Motilal Oswal maintains its FY24E/FY25E Earnings Per Share (EPS) estimates and reiterates a ‘Buy’ rating on M&M. The target price is set at Rs 2,005, based on the FY26E Sum-of-the-Parts (SOTP) valuation. Notably, this valuation includes Rs 214 per share for the electric-Passenger Vehicle (e-PV) business.
Motilal Oswal identifies key growth drivers for M&M in the fiscal year 2025, emphasizing the importance of the Sport Utility Vehicle (SUV) segment. The management’s guidance anticipates mid-teens growth in this segment, driven by robust demand and upcoming launches. Additionally, a recovery in the tractor segment is expected, facilitated by better growth prospects compared to FY24.
Motilal Oswal expects the SUV portfolio to achieve mid-to-high teens growth in FY25, surpassing industry projections. While the Society of Indian Automobile Manufacturers (SIAM) estimates 3-4% growth for overall Passenger Vehicles (PVs) and 10-12% for Utility Vehicles (UVs), M&M aims to outpace these figures.
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The report outlines M&M’s progress toward achieving a 4QFY24-exit capacity of 49,000 units per month for SUVs. However, the 4Q run rate is expected to remain flat due to the XUV300 ramp-down for mid-cycle enhancement. Current open bookings for various models stand at 226,000 units, indicating a strategic shift from the 2QFY24 figure of 286,000 units. This includes 101,000, 71,000, and 35,000 open bookings for Scorpio, Thar, and XUV700, respectively.
JM Financials on Mahindra & Mahindra
JM Financials has affirmed their ‘Buy’ rating, projecting a target price of INR 1,850. The valuation is based on a sum-of-the-parts (SOTP) analysis, considering a 16x multiple for the core business.
M&M’s 3QFY24 EBITDA margin, as reported, stands at 12.8%, showing a marginal -20 basis points YoY but a positive +20 basis points QoQ. JM Financials notes that this performance is 40 basis points above their own estimations, indicating a favorable operational performance for the company.
JM Financials anticipates a decline of 10% and 5% in the domestic tractor industry during 4Q and FY24, respectively. This contraction is attributed to subdued demand and inventory correction. The report emphasizes that a normal monsoon will play a pivotal role in enabling growth in FY25. The revival of tractor demand is identified as a key monitorable for the industry.
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In the auto segment, JM Financials notes that supply constraints have significantly eased. The gradual addition to Sport Utility Vehicle (SUV) capacity by 4QFY24, coupled with a substantial backlog of outstanding bookings exceeding 226,000 units, is expected to drive sales growth. The report underscores the importance of a healthy new bookings’ rate in sustaining this momentum.
JM Financials anticipates that higher operating leverage and favorable commodity costs will provide support to M&M’s margin performance in the future. The report emphasizes the strong demand tailwind in the auto sector as a driving force for this positive outlook.
