Founded in 1945 and headquartered in Mumbai (India), M&M is the flagship company of the Mahindra Group and one of the premier automotive companies in India with leadership position in farm equipment, utility vehicles, IT and financial services. Its product line encompasses SUVs, pickups, commercial vehicles, tractors, electric vehicles (EV), two-wheelers, and construction equipment. It is also the world’s largest tractor company by volume. In its latest quarterly results (2QFY25, ended September 2024), automotive and farm equipment contributed 56% and 21% of the sales mix, respectively, whereas services contributed the rest 23%. The company has 69 manufacturing facilities around the world, with 47 of the plants present in India. It employs 260,000 people in over 100 countries.
Vehicle penetration backed by favorable macros
The Indian auto industry, perceived as a key indicator of overall economic health, is experiencing robust growth on the back of a steady increase in vehicle penetration, driven by a rise in middle-class income and a huge youth population. The Indian passenger car market is expected to register a CAGR of over 9% to reach USD54.8bn by 2027 from USD32.7bn in 2021 (IBEF). M&M passenger vehicle demand also grew in sync along with the industry and the company witnessed its highest ever annual sales of 4.2 million units, up 8.4% YoY, in FY24. The surge in demand for passenger vehicles has been led by the SUV segment, which saw its share increase from 21% in FY12 to 60% in FY24. Additionally, the growing acceptance and adoption of EVs will provide further impetus to the industry. Keeping the future growth in mind, the company has recently launched two new electric Sports Utility Vehicles (SUVs): the XEV 9e and BE 6e.
Indian tractor industry faced muted demand in FY24, declining 7.4% YoY to register an annual sales volume of 876,000 units. M&M domestic tractor sales declined 6.4% YoY to 3,64,526, however, markets shared reached to 41.6% gaining 40bps YoY. The long-term prospects of the industry remain positive, driven by newer technologies in the farm sector and the continued focus of the government.
Green shoots are already visible in the segment with the company expected to clock double-digit growth in 2HFY25, aided by surplus rainfall, a rise in Kharif output (sown in the rainy season and harvested later), and a hike in MSP of key rabi crops (sown in the winter and harvested in the spring). Government spending, which witnessed substantial growth in Aug’24-Sep’24, is expected to continue in 2FHY25. M&M continues to maintain its market leadership in the segment through its core brands, Mahindra and Swaraj.
Gains in market share in auto & farm segments
Over the last five-year horizon (FY20-24), M&M demonstrated steady growth in net sales, registering a CAGR of over 12% to INR987.6bn. Net sales is further projected to increase to INR1,137.8bn in FY25 and INR1,298.5bn in FY26 by analysts. EBITDA grew at a CAGR of 10.7% to INR247bn during the same period, with margins expanding by over 347bps to 17.6%. In its most recent quarter (2QFY25), the company witnessed increased traction in revenues and profitability, achieved on the back of market share gains and margin expansion. Revenue grew over 10% YoY to INR379bn, driven by a 190 bps YoY surge in SUV revenue market share to 21.9%, positioning the company as the leading SUV player in terms of revenue. In addition, volume-wise the SUV business maintained its leadership at 2nd position in market share for nine consecutive quarters, reaching 136,000 units in 2QFY25 end. The group further solidified its market share in the farm equipment segment, growing it by 90bps YoY to 42.5%. Net profitability of the services segment increased 1.8x to INR9.5bn, primarily driven by 20% growth in AUM of financial services, coupled with better traction of industrial businesses and consumer services.
Positive stock performance tracking solid fundamentals
M&M is currently trading at a P/E ratio of 29.5x (based on estimated FY25 EPS of INR103). The stock is valued slightly higher than its peers Maruti Suzuki’s and Hyundai Motor’s P/E of 24.1x and 26x, respectively. M&M is also trading higher when valued through the EV/EBITDA approach with a multiple of 20.0x, compared to 15.2x of Maruti and 15.1x of Hyundai. The company’s current valuations may appear to be expensive compared to its peers, but, considering the decent trajectory of positive financial performance and encouraging outlook, the valuation levels appear to be justified. However, tracking the positive fundamentals, the stock has already delivered returns of over 75% YTD, and over 5% post the release of 2QFY25 results on November 7, 2024.
Overall, from a long-term perspective, the company appears to have a strong foothold in the domestic automotive market, considering its market leadership position in the automotive and farm equipment business, and further enhanced by the launch of new EV units. Moreover, strong traction from the services business, which is well supported by the surge in profitability in TechM, MMFSL, and Growth Gems (including Lifespace, Logistics, and Holidays) should aid the long-term story of M&M. However, the auto industry being directly correlated to the broader economic environment, might be impacted owing to the recent slowdown in urban consumption. India’s GDP growth also reportedly slowed to a seven-quarter low of 5.4% in July’24-Sep’24, against RBI’s projection of 7%, ringing alarm bells across different sectors including auto.
