Mahindra & Mahindra Limited (MM) Earnings Call Transcript & Summary

Hello, everyone. Good day, and welcome to Mahindra & Mahindra Limited's Q2 F '23 Earnings Call. We are indeed glad that all of you could join the call today. Before proceeding with the call, I will just read the safe harbor statement. Certain statements on this conference call with regard to our future growth prospects are forward-looking statements, which involve a number of risks and uncertainties that could cause actual results to differ materially from those in such forward-looking statements. Now I would like to welcome our senior management. We have today -- with us today, Dr. Anish Shah, Managing Director and CEO; Mr. Rajesh Jejurikar, Executive Director, Auto and Farm Sector; Mr. Manoj Bhat, Group CFO; and other senior management from both Auto, Farm and corporate team are here. We will begin with the management presentation followed by Q&A session. Please use the Raise Hand option to put yourself in the question queue. Now I hand over the conference to Dr. Anish Shah for his presentation. Over to you, Anish.

Thank you, Sriram. Good morning, good afternoon, good evening, everyone. We're glad you can join us today, and we'd love to take you through results for the quarter and a quick update on what we've committed versus what we've delivered and where we go from here. So let's start with the key messages. What you will see or have seen from the results is that Auto is driving very strong stand-alone financial results. Revenue is up 57% at the M&M stand-alone level, profits are up 46%. Beyond Auto, a steady performance across group companies resulted in consolidated revenue being up 39% and profits up 44%. And we continue our value unlock journey. We've seen Ontario Teachers' come in and invest in Susten to help take that business forward on a very strong growth path. And we've launched a platform for a Lifespace's business, MLDL, with Actis, which brings in capital into an area of business that could be very valuable for MLDL going forward. A quick look at stand-alone results. Revenue is up 57% for the quarter and 61% year-to-date. PAT after EI, up 46% for the quarter and 54% year-to-date. And as you will see, Auto is driving a big part of this performance. So a very strong tractor performance has helped the overall standalone results as well. If you look at consolidated. What we see is PAT before EI is 3% higher, but PAT after EI is 44% higher. It is a fair value gain from our stake purchase in Swaraj Engines as well as stake purchase in Sampo, which have contributed to this gain, which is a onetime event, and therefore, we show that separately. The question, though, is with a strong stand-alone performance, why is consolidated PAT before EI up 3% only. And the answer to that actually is it's a strong performance but it's driven by the events we saw in Mahindra Finance last year because what we saw there last year was a very high level of provision in the first quarter of INR 2,500 crores. And 106% of that provision was reversed in the subsequent 3 quarters. So what effectively happened is you have a big loss in Mahindra Finance last year first quarter. And therefore, this year, first quarter, the year-over-year comparison was fantastic. Our first quarter results were -- our consolidated PAT before EI was up 5.2x. And at that point also, we explained that is an anomaly driven by the provisions that Mahindra Finance had last year. And similarly, what we will see over the subsequent 3 quarters of the year is that because Mahindra Finance had much higher profits last year driven by the provision reversals, even a good performance this year is overshadowed by that provision reversal last year. And therefore, year-over-year, we see a reduction in Mahindra Finance. And therefore, if you look at numbers excluding Mahindra Finance, we see 25% growth in PAT before EI and 86% growth in PAT after EI. As we review the segments, Auto and Farm profits up 58%. Tech M and Mahindra Finance, they're down 32% primarily for what I explained right now. Growth trends are on a good path overall. What you see here is some reduction in the profits. It's driven by some one-offs that were there last year and some COVID-related benefits in a sense and holidays and so on. But as we look at the value unlock with Susten and MLDL that we talked about, and logistics acquisition of Rivigo, we see our growth gems on a very strong fourth year. And investments, which is including ForEx and other things, it's basically, to provide the complete picture, small numbers here, and don't really impact the overall numbers for M&M. So let's take a step back and talk about the commitment we made. We started 2 years ago by committing to a path to 18% ROE. And as you see on the right-hand side, year-to-date, we've delivered 20.5% ROE. We also talked about [ EPS ] growth. And that commitment came in almost a year after the capital allocation commitment. And at that point, we said we will do a 15% to 20% growth in EPS for the next 5 years. At that point, F '21 was the base. What you see on the right-hand side is that if you keep F '21 as a base, we are currently greater than 100% annualized growth. And if we were to close F '23 at a same pace as we closed in the first quarter, then it's significantly higher than 100% CAGR. So what we're going to do now is reset the bar, make it higher, and have F '22 be the starting point essentially from which we will look at the 15% to 20% growth for the next 5 years. And hopefully, we'll reset it again as we go forward. The third thing we promised was value creation with our growth gems. We talked about a path to $1 billion valuation in 3 to 5 years, which at that point was worth INR 7,500 crores. MLDL is the first to touch $1 billion and then pull back slightly. It's at INR 6,300 crores right now, almost a 6x increase in the last 2 years or 2.5 years. Susten has started that journey with Ontario Teachers' coming in at a valuation of close to INR 2,400 crores. We are on a path that will get us to 7 gigawatts at Susten and that will take us to a valuation of $1 billion. And beyond that, we've talked about leading ESG, a number of tangible actions in that space, the most prominent one being focused on renewable energy across other group businesses and really playing a leadership role at the World Economic Forum with regard to stakeholder capitalism. A number of different actions here though, we haven't covered all of them. And with that, allow me to invite Rajesh to take you through the Auto and Farm sectors.

Good morning, good evening, all of you. Good to be with you again. Next slide. I'm going to walk you first through the highlights of quarter 2 on the Farm side. And as you can see here, we maintained our quarter 2 market share. But on a YTD -- H1 basis, we gained 50 basis points, and on YTD October basis, we gained 80 basis points. This is our highest quarter 2 volume and our highest quarter to export, and we saw sequential improvement in margin from 16% to 16.4%. On the Auto side, we continue to be strong -- slide, continue to be strong on the SUVs, where our revenue market share was at 19%, and we maintained our #1 position on revenue market share. We also had a 19.3% market share by volume in September. And in September and October, we were #1 by way of volumes market share in SUVs. This is the highest Auto quarter -- highest ever volumes in a quarter in Auto, 174,000. SUVs grew by 85% and pickups grew by 86%. We continue to be #1 in electric 3-wheelers with a quarter market share of 67% and the highest quarterly billing of 10,600. Again on the Auto side, our margin improved sequentially from 5.7% to 6.1%. Auto/Farm stand-alone results reflect 58% growth in revenue and 61% growth in PBIT. And when we consol -- look at the consolidated for Auto plus Farm together, again, it's 52% growth in revenues and a 55% growth in PBIT. This is the sequential margin. On the FES side, it's gone up from 15.7% to 16% to 16.4%; on the Auto side, from 5.6% to 5.7% to 6.1%. Talk a little about Auto margin improvement. A lot of -- there have been a lot of questions from all of you around how we're doing on Auto margin. Quarter 3 of last financial year F '22, we had said we have a 3% upside in Auto margins over a medium term. You can see that we've already realized 2.4% out of that 3% that we had spoken about, 3.7% and now gone up to 6.1%. This is led by the end of introductory pricing for 2 products, 700 and Thar, a structured cost reduction program and operating leverage kicking in. And we'll talk more about these as we go ahead. This is a cost optimization for Auto and Farm segments and combined both together. So on the top part of the chart, what you see is reduction in fixed costs, including personnel costs. In this year, we see an annualized saving of INR 570 crores over the F '19 base. We've also done fixed cost as a percentage of revenue. And as you can see, if F '19 was X, we are at X minus 460 basis points. And we've broken that up for you by way of how much is cost and how much is operating leverage. As 250 basis points are on cost and 210 basis points are on operating leverage. You also see the effective reduction that we achieved in material costs, and this is without commodity inflation, which is basically coming out of value engineering and negotiations. I'll now get into the FES part of the business. Rainfalls, as you can see and you know, has been reasonably good. At an overall level, 6% above LPA. And you can also see the geographic skew. So West, Central and South has been good and East has been bad, North has been okay, though we have seen some excessive rainfall, especially in South, in Karnataka and so on, which has not been very good in the short run to have excessive rainfall. Reservoir levels are at a good level. These are the 4 key levers that we talk about and we'll touch briefly on each of these right now. Market share, as I mentioned earlier, we've seen a 0.8% improvement April to October. A very successful launch of Yuvo Tech where 12.3% of our first half volumes of tractors came out of a new product. Farm machinery revenue grew 36% year-on-year, and our critical projects like K2 are on track. This captures how we are doing in our global subsidiaries. Overall, we have good profit. The profit -- quarter profits continue in the global subs. The highlight on this slide is the Brazil performance, which gets stronger as market share is now at 7.4% in the less than 100 horse power. And we see very good traction in that market. Moving to the Automotive business. The quarter -- the year-on-year performance, that is Q2 to Q2, went up by -- in revenues by 1.9x and in profits by over 4x. So it's been a strong performance by Auto coming back to INR 903 crores profit. Next slide. These are the key levers we'll talk around. We've highlighted these and we'll talk about our progress. So our volumes, as you can see, had gone to a level of 14,000 in the SUV portfolio. They are up to 34,000 in September and stayed above 30,000 in October as well. We'll talk a little around what we're doing to enhance capacities. Revenue market share has shown a strong upward trend. And as we've mentioned earlier, we continue to be #1 in revenue market share over the last few quarters but also #1 in volume market share in September and October. This slide captures our current state of bookings and also -- the current bookings as well as the open bookings. We have 260,000 open bookings as on 1st November. Overall demand momentum continues to be very strong, and Scorpio-N, of course, as we know, has been very successful launch. But Scorpio Classic, which is the refreshed version of the Scorpio, also sees a very, very strong momentum on demand. It was an action-packed quarter. As you can see, we started with an announcement around the British International Investment investing in our EVCo with a valuation of $9 billion, the booking opening of the Scorpio-N, the Jeeto CNG launch, the Maxx Pik-up launch. Both of these have done very well for their segments, and I'll talk about that when it comes to LCVs. Scorpio Classic has done very well. The BEV Design reveal, which we did in Banbury in U.K. on 15th August and the announcement around strengthening of the Volkswagen partnership, launched the Treo Zor Grand, the reveal of the XUV400 and the launch of the XUV300 Turbo Sport. This just captures -- we've spent time separately talking around this, but the 2 brand strategy for Born Electric, the INGLO platform in the variety of 4 products that would come out with the dates that are mentioned there. The all electric C segment SUV, XUV400 is ready for starting manufacturing next month, and we'll start bookings in January and hopefully start deliveries by end of January. This is a slide I'll spend a minute or two on explaining to you the capacity expansion plans. So Jan-March calendar year '22, which is quarter 4 of F '22, our capacity was 29,000, you can see the breakup there. The end of the current financial quarter, which is calendar year Jan-March, the capacities will go up to 39,000. And the end of the calendar year -- financial year F '24, which is calendar year Jan-March '24, will go up to 49,000. This does not include the capacities for the Bond Electric, which will be on top of this. The LCV 3.5 tonne categories where we are market leaders. We had lost some share mainly due to supplies. But you can see that we've recouped that very well. We are at 46.9% market share in quarter 2. And the 2 graphs below are a breakup of the above chart on the top. So the 0 to 2 tonne is where we've seen a very good improvement with the launch of the Supro Truck and now the Jeeto CNG. The LCV 2 to 3.5 tonne, which is the pickup category, has also seen our market share come back and has got strengthened with the launch of the Bolero Maxx Pik-Up, which has done extremely well and especially helped us gain market share in markets like South where we were traditionally not the leaders -- sorry, I should clarify traditionally not the leaders in the lower end of that segment, not in the large pickup but in the small pickups. The electric 3-wheelers have done very well again with a billing of 10,600 and market share of 67.2%. We launched the Treo Zor Grand, which has got a very, very good response as well. In summary, it's our highest ever revenue with the second highest ever PBIT. Farm sequential margins improved, Auto sequential margins improved as well. Auto revenue grew 2x with a 4x increase in PBIT. Our tractor market share went up 0.8% in the period April to October. Auto maintained its leadership in the SUV segment, and last mile electric mobility vehicle, 3-wheelers continue to do well. With that, Manoj, over to you. Thank you.

Thank you, Rajesh. So a quick summary. In terms of revenue growth, 57% revenue growth. In terms of EBITDA, I think, as Rajesh mentioned, I think Auto drove both revenue growth and margin growth, I think a very strong performance from Auto in terms of EBITDA growth. Moving to the next slide. If I look at PAT before EI, the growth of about 38%. During the quarter, we had EI -- negative EI in the stand-alone books of about INR 240 crores across multiple entities. If we compare PAT after EI, I think the growth has been about 46%, which is compared to 1,433 going 2,080 crores. If I look at the consolidated view, again, it's coming out clearly. Auto is driving the growth, I think 85% growth on a consolidated basis. Farm, despite at the beginning of the year we had certain concerns on the market, it's turned out to be a very steady performance of about 12%. On the group companies, I think multiple group companies have done well. calling out a few which are unlisted, I think, Accelo has done really well. Our Car & Bike or Mahindra First Choice Wheels, that's almost doubled revenue on a quarter -- on a year-on-year basis. Logistics has done well. I'll touch upon a few of them as I go along. If I come to the consolidated M&M PAT before EI, as Anish explained, I think before EI it's about 3%. And I'll talk about Mahindra Finance in a subsequent slide. But coming to the EI element. I think that -- I'll explain a bit about the fair value gain. So during the course of the quarter, we bought a 17.4% stake in Swaraj Engines and completed the balance stake purchase in Sampo. So Sampo has become 100% subsidiary while as Swaraj has become a subsidiary. As part of that, under Ind-AS, we have to do a fair valuation of the entire stake when it moves from, in one case, associate to subsidiary; and in another case, a joint control company to subsidiary. So a bulk of this EI is coming from that fair value gain. And that's why I think, as Anish also mentioned, we have called it out separately. I think coming to Tech M, a good quarter from a TCV perspective, about $700 million in wins. Of course, I think there is a continuing demand for transformation products -- transformation projects. I think from a focus on operating margins, there was a sequential improvement in profit margins and a free cash flow improvement also. So while year-on-year, I think the overall profit after tax is a bit down, but I think the effort there is to improve some of the operating metrics in the business. On Mahindra Finance, this is what Anish was explaining. I think in Q -- and if I take the left-hand chart, in Q1 last year we had a provision of INR 2,500 crores, which during the course of the year was written back as the collections improved dramatically over the course of the year. And on the right-hand side, you have the current year. So if you look at Q2 last year versus current year, there's a gap of about INR 400-odd crores in the provision write-back, which is impacting the profit -- reported profit and hence, Mahindra Finance. But otherwise, the business is in good shape. I think collections seem -- are very, very good. In fact, disbursements are up, and we are seeing good level of performance from the business overall. Some of the growth gems. Logistics, as I mentioned, good growth, I think, driven by Auto and some of the recoveries in other segments. They've announced the acquisition of Rivigo, which is an express B2B business. And then overall, operating margins are recovering from last year levels. Hospitality, the India business continues to do well, and that is part of the overall behavioral trend change in India. If I look at the European business, because of the current situation, there are some challenges which they're working on. If I compare last year to this year, last year had some benefits coming from rent waivers, et cetera, which are no longer in effect. Hence, you are seeing some impact on profitability. And if I finally go to the real estate business, the institutional business continues to do well. We also tied up with Actis to create a platform for industrial and logistics segments. So -- and overall retail sales continues to remain strong. So I think these 3 businesses continue to do well. Finally, just a reconciliation, which is summarizing our movement in PAT after EI from last year to this year. Auto and Farm, as we mentioned, driven by Auto largely. If I look at the drop in Tech M and MMFSL, it is largely, as I said, Mahindra Finance. And then finally, EI is largely about the fair value accounting, which I explained in the past. Thank you so much.

Thank you, Manoj. We will now open the floor for question and answers.[Operator Instructions]

Okay. With that, we have already some questions which are lined up. First question comes from Amyn Pirani of JPMorgan.

My first question is actually a clarification on the upcoming BS VI Phase II and how it might impact the SUV business. So, a, the first part of the question is on the potential cost increases because some of your peers have given a very high cost impact on the diesel side. We know that your number has been on the lower side. So some clarification on that. And secondly, will the implementation be in the same way how we saw during BS IV to BS VI in the sense that do you have to clear the inventory at the dealer end? And will that lead to 1 or 2 months of some wholesales destocking?

Amyn, let me clarify both for you. Second one is kind of more what we are preparing to do rather than a clarification. So our cost increase, we can confirm is nowhere near what some of our peers have said. It will be in the region, depending on product, between INR 9,000 and INR 15,000 per vehicle. That's the clarification you are seeking. On the implementation period, this time just learning out of the -- so the regulation still is, it's supposed to be on the date of manufacturing and not on the date of -- which means that it should not be on registration or retail. However, we don't know if there will be any intervention like happened at the last minute from the courts and so on. So we are preparing ourselves for that. And we will hence make the transition to the BS VI.II adequately in advance to make sure that we are -- the end March pipeline is clean or relatively clean and anything else can be an upside from there. Amyn, does that clarify?

Yes, yes. That's very helpful. Secondly, on the LCV side and the overall auto margin. You may not answer the question, you may not want to give the details, but LCV historically has been a very polarized market. You lead in 1 category significantly, the other guy leads in the other category quite significantly. But we are seeing that you are now starting to make inroads in the lower segment. So how sustainable is that? And secondly, some of your peers have reported very divergent trends in CV margins. So when we look at the Auto margin and the improvement, is LCV also moving in the same direction? Or are there some competitive pressures coming on the LCV side? If you can help us on that.

Yes. Amyn, you rightly said, I am not going to answer that question in detail. However, directionally, we are not under any competitive pressure on the LCV side. We are not doing predatory pricing to gain market share. It's the product which is enabling us to do that and margins on both the segments of LCV have held up.

The next question is from Jinesh Gandhi of Motilal Oswal.

My question, first question pertains to tractors. So we have seen a reasonably good recovery during festive. So what was the retail sales growth we saw during the festive season and what is our renewed outlook for FY '23 for tractors?

The retail in the festival season was pretty good, close to double digits. However, we are not changing significantly our outlook for the full year at the moment because last year, quarter 4 was on a pretty high base. So we would wait and watch. So we're staying with the full year outlook in the region of 5% plus. So we've said 5% earlier. We think it can be somewhere between 5.2% and 6%, 6.5%. But we're basically staying with the region of 5%.

Okay. And secondly, with respect to the RM cost impact. So did we continue to see inflation in 2Q or benefits have started to come in? And effectively, what kind of savings do we expect from 3Q onwards?

Is the question related to tractors, auto?

Both of the businesses.

So clearly, some of the commodities have started coming downwards. The effect of those commodities in the different businesses will -- in the different product groups differs depending on the composition of materials. On the Auto side, there's a far greater import content, even if it is by way of Tier 2 of suppliers. So there is a foreign exchange effect, which is negative even in a declining commodity price situation. So clearly, effects of commodity reduction are coming in, and we expect them to come in more clearly between Q3 but more tending towards Q4.

Okay. The next question is from Kapil Singh of Nomura.

Thank you for the very detailed presentation, particularly on capacity expansions. My first question is on that itself. So if I see the plan, we are taking Scorpio-N capacity to almost 10,000 per month by Q4 FY '24. And Scorpio Classic continues at about 5,000, so almost 15,000 a month for both of these together. And similarly, for Thar family, I imagine Thar 5-door is also coming, but we are keeping it at 6,000. So could you just talk us through what is happening there? Is there some product intervention in Scorpio-N that will take it? Or do you think the current demand itself is strong enough? And similarly for Thar 5-door, why don't you think that it would be a higher number?

So Scorpio-N, we expect this momentum to continue and we think 10,000 is a reasonable capacity at this point of time because we've not even started exports. So this is, as you know, we have about close to 2-year wait period, and we're still getting orders way more than the rate of production that we have going at the moment. So we think we should prepare for that. Scorpio Classic, actually demand is higher than the capacity that we have planned as things go, and we're out to wait and watch and see how that's going. That 5,500 number does include exports of Scorpio pickups as well, as we've said on the slide. So it is actually 4,000 plus 1,500. So that's on the Scorpio piece, and we feel very comfortable with that. On the Thar piece, we have not -- this doesn't include the Thar 5-door. And it's primarily around -- yes, it does not include the 5 door, and it's primarily around the current portfolio of products. There are a few versions of Thar that we will see coming out in the quarter 1. And we think that with that, the demand will be in the region of 5,000 to 6,000 a month. So that's without 5-door. So with 5-door, the capacity will go up further. We are very optimistic on Thar 5-door, turning out to be very good.

Yes, that's what I thought. But it will come out before this time frame, right, before Q4 FY '24?

It's going to be timed around that time. We haven't announced the time, but it will be in calendar '24.

Okay, okay. The second question is to you, Anish. You've set some bold targets and great to see the company hitting both on cost reduction as well as ROE. But now -- you are known for setting bold targets. So from here on, on cost reduction and on ROE, how do we see the evolution in terms of margins? Are you setting some or going to set some new targets on cost reduction? Also, if you could take into account the fact that some of the electric vehicle portfolio will be expanding both on electric side as well as on SUV side. So with that together, is there scope for reviewing this target on margins and on ROE?

So a Kapil, let me take that in each of those categories. First, with regard to ROE, we don't expect to set a target higher than 18% because we're now in growth mode. We wanted to make sure we could get to that target. And we actually, as you've seen, have done that much faster than what we had initially planned for. But we feel that, that's good return for shareholders unless we hear different from our investors. We will maintain 18% or higher as we go forward but really be a lot more aggressive in driving growth because we have the capability to do that, and that's where the EPS growth numbers come in. And there, again, we have been able to deliver far higher than what we had initially expected and what we had committed. And it's something that we will continue to push more for. So the maximum push is going to be towards scaling up our businesses to growing our businesses. Cost reduction will continue. And that's something that we will be prudent on. We always have been good at that. At the same time, we'll just make sure we are not cutting too thin because we want to be able to drive growth. So with the discipline that we have on cost reduction and ROE, we will take our energies and really drive growth with that. Then to your question on EVs and margins. I think what will always happen is with new launches, you will see some impact on margins in the Auto business because that's the model that is there. But by that time, a number of our products should be mature, should be able to withstand the slightly lower losses from the new margins. And what you have seen here is we've again delivered on margins faster than what we promised. We had talked about a 300 basis point increase a year ago. At that point, we had said in the medium term, we were thinking of it somewhere in the range of 2 years to be able to get there. But we've achieved 240 of the 300 basis points already. And we should be able to get past the next 60 and continue on that margin front. We do see more upside on margins for us as we go forward. And therefore, we are not worried about the slightly lower margins that we will see at any launch.

The next question is from Raghunandhan of Emkay Securities.

So my first question on the model launch cycle, there is a gap between XUV400 launch and the dedicated EV launches starting from end of CY '24. During this period, no major launches are expected. How would you keep the focus on stimulating the market? Would the focus be on variants and refreshes like Bolero, Thar 5-door, your thoughts on that?

Raghu, you meant what we will do holistically or only in the EV space?

On the 4-wheeler space, sir.

Okay. Yes. So Raghu, like you rightly said, we are done with the major launches, which is the 700s, Scorpio-N and 300, Bolero Neo. All of these are now giving us a very strong portfolio of products and Thar, course. I did mention that we are doing a few versions on Thar, which will come out in the coming quarters. And then we have the 5-door, as you said. There will be other refreshes as well. And then, of course, we have the 400, which itself is going to be a very exciting launch. So that's basically, we're talking about 1.5 years or so, and we think there is enough between the current portfolio of products and what we are planning to keep the market excited. Raghu, does that answer your question?

Yes. The order book is strong at 260,000. How do you see the model mix? Does it continue to remain skewed towards higher-end models? What would be the monthly bookings for XUV700 and Scorpio? And trying to understand that capacity expansion.

The chart that we've shown actually has the monthly bookings on each of these products and they are at the moment closer to what we are taking up as the capacity expansion. So we're getting 8,000, 9,000 bookings of each of these. And as I mentioned earlier, this is without even starting any exports of these products. So we feel reasonably comfortable with getting to utilizing this capacity. But even if we don't, the cost of -- that we are investing in capacity expansion is not that high, and we must keep that kind of a headroom available to leverage opportunities. So basically, a lot of the investments are going into balancing capacities like specific aggregate or something like that. So we feel comfortable with the level of bookings that we have. The current level of bookings that are coming in are in the region of 9 -- 8,000, 9,000 a month for 700 and Scorpio-N. And that's while putting a 18-, 20-month wait period on most of the versions. The versions that are selling are still very skewed to the higher end.

Just a last question. On electric wheeler, there are hatchbacks and compact sedan launched by competitors that are being well received. Would you plan at bringing back electric hatchbacks and sedans of Mahindra, which were discontinued?

No.

The next question is from Chirag Shah, Edelweiss, Nuvama Securities.

My first question is for Anish. In respect to the investment portfolio that we have, you have been very vocal about Mahindra Finance and it seems to be delivering as an investor for M&M. Now on Tech Mahindra, if you could allude to what -- as an investor in Tech Mahindra, what are your thought processes? What are the benchmarks we are looking at and delivery time lines? Because in overall scheme of things, it plays a very big role for M&M value creation as such. And time of [indiscernible], it appears that it seems to be lagging slightly versus the peer side on quantitative terms. That's my first question.

Chirag, you're right about Mahindra Finance. We have shown significant progress, and net NPAs are down to 2.9% this quarter, which is something that we had been planning for and has really created in a sense a positive surprise for many. But it was part of the story we had outlined for Mahindra Financing. This is a path to getting a business, which is a solid business with a strong earnings potential and more stability in its NPA profile. And you see that not only on net NPS but also at the gross NPA level both for stage 2 and stage 3. So there's an inherent improvement in that business. I would say that we are not done as yet on that. I think there's still a lot more potential there, not just from an asset quality standpoint, but also from use of technology and data. And a lot of work is underway on that front. So I do believe that Mahindra Finance still has a good way to go in terms of value creation for us and our shareholders.

My question was for Tech Mahindra that you have not been vocal about Tech Mahindra.

I'm getting to Tech Mahindra, Chirag. I fully understand your question. I just wanted to give the context of Mahindra Finance first. Tech Mahindra you right as well. That we are a little further behind in that journey as we are for Mahindra Finance. Margins is one key area of difference between us and our competitors. And there are again a number of factors that are driving that. The team is focused on it now. They have a number of initiatives underway. These are things that do take some time to change just given the magnitude of the impact it can have. And I would just say that we are early in that process right now. We will come back with more definitive steps and actions on that and a path and a time line as we did for Mahindra Finance.

Yes. And my second question is on the commodity side. You alluded to it that -- from here on, what kind of benefit can we expect on the commodity basket? If -- directionally, if you can indicate because it would be really helpful to understand the commodity impact for M&M. And given that your product positioning is today, you are in a very good position to retain most of them. So that's my specific question for Manoj or Rajesh, anyone if you want to do this.

Let me give it a shot here. Chirag, good to hear from you. Chirag, there are the multiple factors at play. So steel clearly is coming down but there's a certain proportion of steel. Semiconductor shortages is not allowing us to leverage benefits in that because as we ramp up volumes, we are not able to get benefits because of the kind of pricing impact that comes into play. The other is the role of the dollar because on everything that is imported, the foreign exchange is a dampener. So there are balancing factors. And on the net, we will see gains but it's very hard to see these multiple forces at play. The proprietary parts in Auto is a much higher percentage of the cost than is in, for example, in tractors. And proprietary parts are not necessarily coming down in the commodity -- at the commodity cycle. So there are multiple factors at play here, Chirag. So it's very hard to give a specific number. But like Anish mentioned, we explained the margin trajectory to keep improving as we go forward.

The next question is from Pramod Kumar of UBS.

Rajesh, on the Auto side, you're already kind of ahead of schedule on the margin [indiscernible] as Anish said, for the Automotive EBIT margin. But given the expected price increase for competitors on RDE, do you see that you could probably use [indiscernible] to further improve the profitability of your Automotive's operation? Because, a, you have XUV -- we haven't had the full quarter of XUV full pricing yet and [indiscernible]. So that's ideally should be coming in from 3Q. And post-RDE, ideally, you should be able to take up prices higher than your cost given that competition is talking about much significant cost increase. So your edge in the marketplace will only get better. So given all this, is there a potential that we can easily go past the peak automotive EBIT margins what you have done?

Yes. Pramod, just one word of caution firstly before I respond to your specific questions. When we look at a comparison with the past, by way of what was the peak margin that's achieved, we have to correct for the numerator-denominator effect of the margin on cost. And that is not unsubstantial. I mean, it was to the extent of 1.5%, 2% just when the transition to BS VI happened, right? So with every such either BS VI transition or commodity price inflation that we've seen or the regulatory changes that are coming in, or now, the BS VI.II, we are not able to, at every time pass on the margin on the margin. And even if you are able to pass on the cost, the percentage margin does get impacted, right? So when we are comparing with our peak margin, I think our peak OPM was in the region of 14-odd percent in Auto, which is in the region of 10% now, right? So you at least correct to 2.5 -- 2 to 2.5 of that which is the denominator numerator effect, right? So then the gap is not as much. So I don't necessarily think that percentage margin in a commodity inflationary environment like we are is best way to look at it. It's probably better to think about it as margin per vehicle and multiplied by the growth story of a number of vehicles that we sell, where we will see a much greater increase in absolute profit opportunity. That being said, let me still try and answer your question. I just thought let me put that as a context. Is that helpful, Pramod?

Yes, yes, absolutely, absolutely.

Just to create a kind of not necessarily blindly compare with historical levels, but just correct for the role that inflation is playing where we're not able to add margin on cost at every stage of cost increase. That becomes easier to do when the environment is not inflationary. So while competitors may be talking about what their increase in BS VI.II costs are, let's wait and see how it plays out by way of pricing opportunity. Any opportunity that we will get by way of -- to take price increases, we will, without losing the sweet spot value proposition and the volume momentum. So that's always a balancing act. You've seen us do that very effectively in Thar and 700, where we have recouped margins as soon as we've got out of the introductory pricing period. And we would continue to do that, but we will do that very cautiously. In Thar, we will see some actions that we are taking which will keep our price points attractive and intact. So I think we have to do that without losing volume momentum, and I'm sure all of you will agree that volume momentum in this business is the biggest driver of absolute profit. Pramod?

And on the EV side, Rajesh, if you can just help us understand, outside of the Volkswagen alliance, the partnership [indiscernible], what are the kind of in-house capabilities what Mahindra is looking toward, especially on the software side, the electronic -- the electric and software architecture, especially? If you can just help us understand what kind of [indiscernible] in terms all this is going to be in-house rather than dependent on external [ power ] vendors. So if you can just -- because trying to understand whether the in-sourcing of technology and in-house [indiscernible] be stepping up meaningfully for us as we transition to EVs?

That's a great question, Pramod. And honestly, that's something we grapple with all the time. But what we've concluded right now is we need the right mix of the skills we built in-house versus the leveraging of outside partners in the area of software and new tech. Let's take the example of 700, and that will help us think about the EV journey as well. 700 has very, very good tech and a very good leveraging of interfaces by way of the driver monitoring systems and the AdrenoX and all of that. And we've done that with not too many software engineers even at that stage of the journey. Of course, we are significantly ramping that up as we get into EVs. But we've got to be careful not to try to replicate skills which are available outside and especially people who've done work in that space, who have a better ability to retain talent of that kind. So we'll keep a very important mix -- appropriate mix of what we have inside versus outside. But we will own all the key software-related IPs related to human-machine interface because that's what we think will be a brand differentiator.

Sounds great. And before I go compliments to the team for great execution and especially to the R&D team for delivering such phenomenal cost structure [indiscernible] I think it's a great job done. Congrats.

The next question is from its Hitesh Goel of CLSA.

[indiscernible] SUV pie, right? So I mean, investors are really grappling with this situation that SUV demand is very high in India, right? So can you give us some color in terms of customer -- what is the entry-level customer? Is it the -- or upgrade or replacement, some mix in terms of your portfolio? Like to understand sustenance of this demand.

Hitesh, I just want to make sure I understood the question right. So is the question about why SUV as a percentage to PV is as high as it is? Is that what you want to understand more? Or...

No, no, in your portfolio, what I want to understand is the replay in your -- as a customer pie, right? Is it the first time customer which is first-time buyer? What is that proportion or a replacement of the existing car, which is leading to upgrade? Or it's an additional car purchase in a household? So you must be tracking these like Maruti generally gives that. So just to get a sense that pre-COVID versus today, how is this demand coming through? Is it this additional car purchase which is driving that or replacement upgrades which is happening in the SUV pie? So if you have some data or color on that, it would be helpful.

Yes, I'm not -- we do have the data. I don't have it off hand at the moment because it varies product by product, so not prepared with that. But let me try and give you more of an insight around how that's playing out. So the higher end of the portfolio, which is the XUV 700 and Scorpio-N and Thar even, it is about additional vehicles into multiple car-owning households. Of course, there are younger -- there will be a small percentage of Thar buyers who are first-time buyers, the young couples, so on and so forth. And they decided that instead of buying their first car as a sub 4-meter conventional compact SUV, they will go in for something like a Thar because that kind of allows them to explore a different lifestyle. So there's some of that as well. But there are a lot of very SUV-passionate people who are buying into products like Thar and Scorpio-N in particular and also XUV700. So that's one piece of the equation. And there are typically additional vehicles in those households. And they're coming out of saying this is a product that I would love to have, it's affordable and accessible and I can afford to either replace my second car or third car or whatever in the household with something like this. So that's one set. At the entry level, which in our portfolio will be the XUV300, Bolero, Bolero Neo. That segment is more mainstream and they would in the urban cities be the single vehicle owner. And in rural India, the Bolero Neo would also typically be a single vehicle household, some may have an additional car or two in a joint family. So I think what right now is working in the newer part of our portfolio is an inherent passion or innate passion for exploring a new space with vehicles like of this kind, which allows them to break away from the pattern of normal vehicle ownership. That's our qualitative read on what's happening and why there's so much energy and excitement.

And just a follow-up there. Top 65 cities would form what proportion of your volumes -- SUV volume? Because that is the key 1 million-plus cities, right, in India in terms of population. So just, say, top 50, top 100, some number if you have, just to get a sense. Is it urban-centric demand?

The XUV 700 and Scorpio-N would be very high in these cities. For -- in fact for Scorpio-N, just to give an example, Scorpio is weak in South, and Scorpio-N is making that up by creating a very strong position in the South. But these 2 products have a very strong urban bias and would be a very large proportion in the bigger towns, which is either say, top 65 to top 100 towns. The Bolero, Bolero Neo is still primarily sold in the less than top 100 towns. So let's say, the less than 5 lakh population town. So the Bolero Neo has a very strong skew there. The Scorpio Classic has a very strong skew to less than 5 lakh population towns. And the 300 has got probably half and half between urban and rural.

Great, great. And just last follow-up. Can you give us some sense on your SUV portfolio, how much is petrol and how much is diesel?

XUV300 is roughly half and half on petrol and diesel. Thar and 700 are in the region of 25% petrol. And the Scorpio-N is about 20% petrol.

Then there is one question from Rishi Vora of Kotak Mahindra in the chatbox. I just read out. Can you please talk about the export strategy for SUV segment? Which models will you be exporting and which geographies will you be targeting initially?

Yes. Rishi, like I think I mentioned a little earlier, we've not really been able to leverage our export strategy given so much domestic demand. At the moment, we've recently just started XUV300, which is getting a very good response. XUV300 is available in left-hand drive and right-hand drive, so it will open the wide spectrum of markets that we have, which is markets like South Africa, where we have a strong presence. But we're also going to Latin American markets and so on. We do have -- so that's on XUV300. The 700, Scorpio-N, et cetera, will go into, at this point of time, most right-hand markets around the world. So South Africa, Australia and New Zealand, all of these. But we have to still get momentum on these because we have to start releasing some capacity for meeting our export needs.

The next question is from Chandramouli of Goldman Sachs.

[indiscernible] on the automotive business. So specifically on the Scorpio-N, is it going to be a gradual increase in capacity over the course of the year? Or is it going to be an inflection in the last quarter? Just trying to understand the slope of capacity increases planned on this model.

No, it won't be a slope. Because basically, when the capacity kicks in, most of these right now are constrained by aggregates, which are cutting across products. So it will move from 6 to 10. There's no in between point.

Got it. That's helpful. Second question is on the Farm margins. So some of your peers in the Farm segment have been facing margin pressure in the first half of fiscal '23. And your margins have improved sequentially quarter-on-quarter despite seasonally lower volume. So just trying to understand what were the key drivers of Farm margin expansion this quarter?

Good to hear a positive question on Farm margin. Thanks for that, Chandra. I think we've been mindful of pricing, not letting the festival season overrun us. We're also seeing a positive benefit of some successful launches like the Yuvo Tech, which has allowed us to take a market position above the other portfolio. Earlier, we had the Yuvo, which was a very good product but was too expensive. We've been able to reconfigure it to bring out all the important tech features but at a much better value proposition. So some of these things have helped us improve the product mix. We've also been working on the HP mix to help improve the margins. So multiple things that we are doing. Price, discount management, margin -- I'm sorry, model mix and horsepower geography mix as well -- I mean, horsepower mix as well.

Got it. That's helpful. And just last question is on the XUV400 electric car. So I think in the previous investor meeting, you had indicated that you'll think about the appropriate price point after showing the product to dealers and taking feedback. So I just wanted to understand over the past couple of months, what is the sort of opinion you're forming here? And is this product potentially able to qualify for same subsidies from a localization standpoint?

No, FAME is not applicable in this category. It should -- I think your question probably, Chandra, was around PLI. And at this point of time, we think it will qualify -- we expect it to qualify for PLI. We've not yet decided on pricing because we are going to start the test drive process early December. That's when we will start getting a much better feel on customers. But the overall excitement on the ground is very positive.

The next question is from Jay Kale of Elara Capital.

My first question is regarding the model-wise capacity that you had showcased. If you see XUV700, that's getting a step-up jump in capacities only in Q3 FY '24. That's almost 18 months. In March '22, also, you had a similar 6,000 capacity, if I'm not wrong. And this is one of your highest ASP products, which also does wonders to your brand, Mahindra. So from that perspective, what was the thought process in kind of allocating capacity increases between the models? Was availability of chips for this higher model a consideration? And couldn't we have kind of -- because 18 months down the line, sometimes the model loses its -- or kind of the excitement is kind of dampened with other model launches as well. So are we losing an opportunity of capitalizing on the strong demand for XUV700?

Jay, to share your concern by way of saying that we should do it earlier and we really would like to do it earlier, and we will try to do it earlier. Based on the current plan, we are -- because this is not just capacity at our end, this is capacity in the whole supplier ecosystem. And it does take for many of these parts, 15, 18 months because this is like almost a completely new set of tools or dies or whatever that are being created to take this capacity up to this level. And some of them are aggregate parts, which are across the engine, and that will impact 700 and Scorpio-N. So while we're going to do everything possible to try and make it happen sooner, this today is our most realistic expectation. We are hoping that we don't lose the market momentum. And I feel good about it because -- I feel positive that, that won't happen because the rate of new bookings, as we said, is still very strong. The rate of cancellations is less than 5% for 700 in spite of a long wait period. And the reason for that is it is fundamentally a very strong value proposition, very well loaded product at a very good price. But we will do everything possible to try and ramp up faster.

Sure. And just a last bit on clarification on your CapEx. So this capacity increase, post this also, you still maintain your earlier CapEx guidance split that you had done in the earlier presentations, right, for Auto, Farm, et cetera?

Yes, we had built in this capacity expansion. We have not shared these capacity expansion numbers with you, which we are doing today. But this capacity expansion was already triggered off and was hence in the numbers that were shared earlier.

Sure. And any thoughts on Farm, tractor capacities given that we probably could breach our peaks in this year on the tractor industry. How are we looking at over the next 2, 3 years? Are we being a little cautious and not expanding capacities over there? Or you think that this momentum could continue?

We have right now capacity utilization range of 85% to 90% in tractors. And we have an opportunity to add a shift in our Zaheerabad plant. And in -- on the Swaraj side, we are creating a third plant, which we had already announced earlier, which is underway and should be ready. So both the Mahindra brand and the Swaraj brand have upside from where we are. Today, we're at 85%, 90% capacity utilization. And again, the Swaraj plant, the investment was baked into the numbers that we are sharing.

The next question is from Jairaj of B&K Securities.

You talked about cost increase in the -- for [ RD announced ]. Now for tractors, they are going to get TREM IV and TREM V. So what can be the cost increase vehicle level for both?

So TREM IV at this point of time is planned only for greater than 50 horsepower, which has got postponed, as you know. I think it's premature to share the cost increase. We wouldn't like to at this point of time. Anyway, it's only a very small portion of the portfolio. What is possibly -- likely to happen is the 52 to 55-horsepower customers will move to below 50, and the 55 to 58 will move upward to 65. And that's how we think this will play out. Let's watch and see where that -- how the market reacts to the trend forthcoming. But fortunately, that's only 7% of the industry. On TREM 5, it's still a while away, and there's a lot of work to do. So it's too early to have cost information on that. Also, there is a dialoguing happening through PMA with the ministries on what is the appropriate timing and value addition of that in this segment.

The next question is from Pramod Amthe, Incred Capital.

This is with regard to the CAFE norms. Even though norms itself are not so stringent on penalty, but considering you guys are rating ESG on a top priority and hence, I wanted to know your position currently on CAFE norms where do you stand as a firm? One. And second, how are you tweaking your portfolio? Because it's a combination of tweaking product and the product mix. So how are you looking at making your product mix to meet the norms as you go forward? Second. Third, with regard to the same, some companies are looking at the lightweighting and hence a chassis based to monocoque and also diesel to a hybrid system. How do you look at these alternative technologies in the context of CAFE norms?

Like you rightly said, we're doing multiple things to manage where we will be on CAFE norm, and we expect to meet that using our EV portfolio apart from rejigging configuration of diesel, gasoline, weight classes, so on and so forth. So all of that is being done, except we are not going the path of hybrid. Apart from that, multiple things are being done and you are absolutely right on a commitment to sustainability and ESG. And we expect to meet the CAFE norms.

And Rajesh, would you like to say where you currently stand on CAFE tests? What's the path to cover?

I don't think we would want to share that in public domain, but just to confirm to you that we will comfortably meet that with the launch of the 400 electric in this calendar year -- in this financial year.

The next question, which would be the last question for the conference, would be from [ Miguel Surana of GI Mutual Fund ].

Congratulations on a good set of numbers, sir. One thing I wanted to know is, why the cash flow negative to the tune of INR 5,000 crores when our EBITDA is around INR 5,000 crores in the positive for the half yearly number on a consolidated basis?

So I think the -- can you repeat the question? Are you looking at consolidated or stand-alone?

Yes, yes, I'm looking at the consolidated number.

I think consolidated is probably not the right way to look at it. I think take the stand-alone cash flow. Let me give some color and we can reconcile it offline on the INR 5,000 crore negative. But overall, if you look at it, during the quarter, we repaid debt of about INR 2,200 crores and also we paid out a dividend. So that's -- if I relate it to the first half, those are 2 big cash outflows. But overall, the cash flow has been positive and it is actually very strong at the stand-alone level. And at the consol level, I think it is -- it's a more complex exercise. So I can take it off-line with you. And Sriram, we can pick it after.

Sure, sure. Okay. Sir, if I can just squeeze in one question from the chat, which was sent to me earlier. [ Mitul Shah of Lion Securities ]. So you wanted to know the price hike across segments in Q2 and October, and also the festive retail sales, if that can be provided.

Mitul, so on the tractor side, we took approximately a 2% increase in July and a 1% increase in November, on November 7. So that's on the tractor side. On the Auto side, we took a 1.5% to 2% increase in September.

Okay. And also the festive retail sales trend.

Festive retail sale, on the tractor side, I think I had indicated retails were in the festival period of around in the region of 10%, which was a good tractor -- good retail momentum. On the Auto side, I think percentage doesn't matter, it'll probably be over 100%. So I'm really not commenting on that.

Okay. Thanks, Rajesh. Okay. With that, we come to the end of the conference. Thank all of you for attending this conference and also thank all the senior management to take time and being here. Thanks a lot, and a good evening to all of you.

Thank you.

Thank you, everyone.