M&M in top gear even as margin compression, weak tractor sales woes linger

Mahindra and Mahindra investors chose to overlook profitability concerns and a downward revision in the FY27 guidance for the tractor industry. Instead, they seem to have drawn comfort from the company’s robust September quarter (Q2FY27) results and upward revision in the light commercial vehicle (LCV) industry guidance to double-digits from a high-single digit.

Reacting to its Q2 earnings announced on Thursday, the stock rallied 10% over the past two trading sessions.

Standalone revenue rose 26% year-on-year to ₹42,477 crore, beating consensus estimates by almost 8%. The automotive business, which manufactures a range of passenger and commercial vehicles, electric vehicles and mobility products, was the largest contributor, with revenue rising 36%.

This was aided by a 26% increase in SUV volumes to 183,000 units. Mahindra retained its leadership in the SUV segment, with a revenue market share of 24.3% and has maintained its FY27 SUV volume guidance at the mid-to-high teens.

Its electric SUV business also gained traction, with a 30.1% revenue market share. M&M plans five major product launches by June 2027, including a vehicle on its new NU_IQ platform and an all-new electric SUV. It is expanding monthly production capacity to 82,000 vehicles by the end of FY27, from about 68,000 currently, to address demand that continues to exceed supply.

Farm equipment revenue increased 1% in Q2, remaining a drag. Tractor volumes declined 6%, partly due to the festive calendar shift and weak rainfall in Maharashtra and Karnataka.

The management consequently revised its FY27 domestic tractor industry growth outlook to flattish, from its earlier expectation of about 5% growth.

According to Nirmal Bang Institutional Equities, this implies an almost 10% decline in H2FY27 wholesales. Core tractor margins are expected to remain under pressure in Q3, improve in Q4 and normalize in FY28.

Profitability concern

Overall, profitability remains a concern. The standalone gross margin contracted 360 basis points (bps) year-on-year to 20.8%. One basis point is one-hundredth of a percentage point.

Consequently, Ebitda increased 1.1% to ₹4,913 crore, with the Ebitda margin declining 300 bps to 11.6%. Commodity inflation, particularly in steel, copper and rubber, limited the benefits of higher automotive volumes.

Mahindra has implemented price increases of about 5% in automotive and 4% in farm equipment to offset these pressures. But that has not evaded earnings downgrades.

“We estimate FY27/28/29F Ebitda margins at ~11.9%/12.8%/13.4% (down by 50-180 bps) given lower tractor volumes and cost pressure,” Nomura Global Markets Research said, cutting its earnings per share estimates by 12% for FY27.

So far in CY26, the stock has declined about 17% versus a 3% fall in the Nifty Auto index. It trades at an FY27 price-to-earnings multiple of 20, Bloomberg data showed.

Analysts at Systematix Shares and Stocks (India) estimate automotive and tractor volume CAGR of 11.4% and 3.3%, respectively, translating into 7.2% CAGR in core earnings over FY26–28E.

“We believe a meaningful re-rating of the stock will be contingent on a reversal in raw material inflation and a recovery in tractor volumes,” Systematix said in its report.

M&M reiterated its commitment to 15-20% annual earnings per share growth and an 18% return on equity, having reported an annualized RoE of 21% in H1.