Sturdy SUVs drive M&M’s Q2, but tractor sales limp: Should you buy the stock?

Analysts were largely bullish on the counter due to a steady demand for the automaker’s utility vehicle (UV) portfolio but remain wary of weakness persistent in the tractor segment.

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Shares of Mahindra & Mahindra (M&M) was flat at Rs 1,526 per share on November 13 after the company clocked strong second quarter performance for the fiscal year 2023-24 (Q2FY24). Analysts were largely bullish on the counter due to a steady demand for the automaker’s utility vehicle (UV) portfolio but remain wary of weakness persistent in the tractor segment.

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Tepid tractor sales – the major pain point

Phillip Capital, for instance, forecasted a 6-percent decline in the tractor segment for FY24 owing to higher dealer inventory, high base of last year, and uneven monsoon. Having said that, the brokerage firm maintained a ‘buy’ rating on the counter, sharing a target price of Rs 1,681 per share (implying 10 percent upside potential from current levels) as they expect UV capacity to increase by the end of FY24 and further in FY25 as well, due to upbeat consumer demand.

Those at Prabhudas Lilladher, too, shared similar sentiments for the auto major. “The second quarter performance of M&M underlined weakness in tractor volumes. Some of the key factors were likely higher contribution from margin dilutive farm machinery segment and mega launch costs of Oja and Naya Swaraj that impacted margins for the farm-equipment segment,” the brokerage firm said, reiterating a ‘buy’ call on the counter, with a target price of Rs 1,775 apiece (implying 16 percent upside from current levels).

M&M reported 67 percent on-year growth in Q2 net profit driven by higher volumes in the sports utility vehicle (SUV) dispatches, while revenue rose 16.6 percent year-on-year (YoY).

Overall quarterly volumes of the auto major were the highest-ever at 2.1 lakh units, however, tractor sales were down by 4 percent YoY.

ALSO READ: M&M Q2 FY24: Strong momentum in the auto segment

The farm equipment business’s Q2 performance was muted as revenue declined by 0.4 percent and profit by 15 percent YoY. The monthly business performance also indicated continued pain as tractor sales declined 3 percent YoY in October 2023.

Thus, going ahead, the management predicted the farm segment to be flattish YoY in FY24 due to base effect and uneven monsoon in Southern India. But the recent tractor launches could fortify market share, increase farm implements business, and provide operating leverage benefits, they assured.

SUV demand better off

Analysts at Motilal Oswal highlighted that the automotive segment saw a healthy double-digit growth during the festive season. “The bookings have been consistent. Demand momentum has been strong for higher-end products (priced over Rs 13 lakh). However, XUV 300 and Bolero have underperformed other products,” they wrote in a post result review note. The brokerage firm maintained a ‘buy’ call on M&M, sharing a target price of Rs 1,775 per share (implying 16 percent upside from current levels).

In Q2FY24, M&M revealed that the automotive segment’s profit jumped by 88 percent on-year, whereas revenue was up 22 percent YoY.

Looking forward, the management said that there was a good demand for XUV 700 high-end versions and indicated that it will increase UV capacity by FY25 when it launches the 5-door Thar SUV and new electric vehicles (EVs).

As of November 1, 2023, the open bookings of SUVs stood at 2.8 lakh units, reflecting resilient demand momentum.

ALSO READ: Festive demand leads to best-ever passenger vehicle, three-wheeler dispatches in October

Valuation and outlook

So far in 2023, M&M’s stock has surged 22 percent as against 7 percent rise in the benchmark Sensex. Currently, the stock is trading at 17.5 times (x) price-to-earnings (PE) ratio, much lower than the sector’s mean of 27x.

Analysts at Motilal Oswal believe that the auto major’s valuation is attractive compared to peers and may re-rate further in the medium-to-long term owing to a strong outlook.

“M&M has seen substantial re-rating in FY23 as the stock is now trading in-line with its five-year average core P/E (against discount of 30 percent earlier), driven by a strong performance in the SUV segment, market share gain in tractors, and a new launch pipeline in EVs,” they added.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.