Standalone Auto margins were strong, led by demand for the new Thar model, while consolidated margins were significantly helped by SYMC’s exit. In addition, farm equipment margins were nearly at an all-time high as well, helped by lower international losses and continued strength in domestic demand. The company is largely behind the corporate restructuring exercise, and going forward we expect consolidated EPS to largely track Standalone + TechM (TECHM IN, Rs 960, Hold) + MMFS (MMFS IN, Rs 177, Hold). The rest of the significant loss-making entities have either been divested or restructured.
Core business is solid, with monsoons the key risk in the near term: The tractor business continues to be strong, with Q4FY21e and Q1FY22e likely to be very strong as well – led by base effect and positive Rabi crop outlook. However, beyond that the monsoon will play an important role. Already, tractors have done well over the past 3-4 years (management mentioned growth headwind due to high base effect), and secondly, government spend on many key rural schemes which in our view impacts tractor demand may come down in FY22 over FY21. We consequently have mid-to-low single-digit growth for tractor business over the next two years.
On the other hand, the outlook for pick-ups is strong, led by the industry’s growth, while the SUV business continues to benefit from Thar demand and the likely launch of the new XUV5oo (W601) over the next few months.
Other Q3 highlights: For the first time, the tractor business has seen two consecutive quarters of negative working capital, leading to strong cash generation. Lower core capex outlay and a likely reduction in investments in subsidiaries over the next three years should enhance free cash generation in the medium term. Positively, the most recent key launches – Thar and XUV3oo – are both seeing strong demand traction.
Valuations: The company is still trading at 14x/13x on core FY22/23e earnings (ex subs and dividend) which in our view is undemanding and is at c50% discount to MSIL. Improved traction for new product launches, better cash conversion and strong margin performance warrant an upward rerating, leading to our increase in target price to Rs 980 from Rs 830. We maintain our Buy rating.
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