Mahindra & Mahindra Limited (NSE:MM) Q3 FY23 Earnings Concall dated Feb. 10, 2023.
Corporate Participants:
Sriram Ramachandran —
Dr. Anish Shah — Managing Director and Chief Executive Officer
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Mr. Manoj Bhat — Group Chief Financial Officer
Veejay Nakra — President Automotive Division & Member of Group Executive Board
Hemant Sikka — President of the Farm Equipment Sector
Analysts:
Kapil — — Analyst
Gunjan — — Analyst
Nitij Mangal — CLSA — Analyst
Hitesh — — Analyst
Amyn Pirani — JPMorgan — Analyst
Yogesh Aggarwal — HSBC — Analyst
Presentation:
Sriram Ramachandran —
Good afternoon, everyone. Thank you for being here today. Also I welcome all those who are joining through webcast. Warm Welcome to the Q3 FY ’23 presentation and analyst meet. Today we have got, we have Dr. Anish Shah, MD and CEO; Mr. Raja Jejurikar, Executive Director, Auto and Farm Sector; Mr. Manoj Bhat, Group CFO, joining us for the meet today. Also, we have the entire the senior leadership team of Auto and Farm, joining us today for the meet. With this, I hand over the podium to Dr. Anish Shah, for his opening remarks and for the presentation.
Dr. Anish Shah — Managing Director and Chief Executive Officer
Good afternoon, and welcome, everyone. It’s great to have you here with us in person, again, after many quarters of these online meetings. So I’m glad we’re starting to get back to normal. As you will see, we’ve had an excellent quarter once again, key messages, strong operating performance at the standalone level, quarter three is up 52% before EI which is more operational, year-to-date is up 47%. At the consolidated level, continued strong performance there as well. Q3 up 35%, year-to-date up 76%, the GAAP will narrow a bit, this is driven by Mahindra Finance. As you know, last year Mahindra Finance had INR2,500 crores provision in the first quarter, all of it came back in the next three quarters. So comparisons for the first quarter this year looked excellent. For the next three quarters, they will look a little weaker, so year-to-date is a number we look at. We will expect the fourth quarter comparison that will be lower than last year, so you will see that 76% probably come down a bit.
And finally, we made a number of commitments, and we will give an update on that. But happy to say that we’ve delivered on all the commitments that we made so far. So on a standalone basis, revenue up 41% for the quarter, 54% year-to-date. We talked about PAT before AI, Auto and Farm are both driving this very strong performance at the standalone level. As we look at consolidated Mahindra Finance actually has come in with strong results, and that has helped increase the gains at the console level beyond what Auto and Farm is contributed. So there as we see both in terms of PAT before EI, and after EI strong numbers, there are some numbers here after EI that we will be relooking at our accounting policy. So for example, and what we’ve done consistently is, gains in our growth gems accounted as EI, so Susten gain is INR1,400 crores, that’s counted as EI for us today. But that’s really not EI, because that’s what we plan for. We want our growth gems to continue creating value, that’s what we’re investing for. So we will be looking at the accounting policy and then making the appropriate changes as we go forward on that front. So which is why you see a much greater number, sort of post EI there versus before EI.
Our commitments, you’ve seen this slide before, at least on the left hand side, the right hand side is an update in terms of where we have been. We started with the path to ROE at 18%. Happy to say that, year-to-date this year, we are at 20.3%. Second, on EPS growth, we talked about a 15% to 20% EPS growth, and as you look at the numbers here FY ’21 to FY ’22 is up 263%, and on ’22 to ’23, actually year-to-date is higher than the number shown here. This compares sort of three quarters versus four quarters. But we’ve got a robust EPS growth from year-to-date basis this year as well. From a scale standpoint, we committed to driving scale in our core businesses as well as scaling up our growth gems. And you’re seeing that across the businesses today. We talked about Auto margins being up 300 basis points in the medium term. We’ve actually achieved that faster than we had expected when we said that a year ago. And Rajesh will talk about margins being up 320 basis points.
We’ve delivered gains from the Susten deal. In addition to that, we sold some Kandivali land, which will help our life space businesses grow. And our logistics business has made a second acquisition in Rivigo and is positioning itself very well to really take advantage of the potential for logistics in India. So lots of activities with regard to our growth gems as well.
And finally, talk about leading ESG, something that’s important for us. We’ve done a lot of things in this area, and happy to report the recognition that we’ve got. The first and only Indian auto manufacturer to be in the Dow Jones Sustainable Index, and that’s just one of the many global recognitions that we are getting now. But more important than the recognition is the work that we’re doing to drive sustainability.
With that, let me hand it over to Rajesh to talk about details on Auto and Farm.
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Hi. Good afternoon, everyone. And like Anish said, we’ve had a good quarter, walk you through it. I’m sure you’ve gone through a lot of the numbers. I’m going to be quick on them.
For the Auto and Farm together, this was the highest ever revenue, 42% growth in the quarter; highest-ever PBIT of over INR2,000 crores, again, very huge 64% growth. For the Farm, highest ever quarter three volumes, 14% growth, 1.6 share point gain in the quarter. Cumulative YTD is a 0.9 gain in tractor market share.
The Auto, highest ever quarter three volumes, 176,000, 45% growth and continue to be Number 1 in SUVs by revenue market share, with a gain of about 500 basis points from last year quarter to 20.6%. Three wheelers, highest ever volumes again and a continued market leadership of 63.5% market share. So very strong growth numbers, as you can see, both on revenue, volumes and profits.
These are the numbers that you would have probably gone through earlier. You can see here the revenue went up 42% for the quarter stand-alone. The PBIT went up 64% with a very good split now between Auto and Farm. If you look back the previous quarter, you can see that it was really farm-led, but with Auto turning around, you can now see Auto and Farm both contributing around the same number.
Look at consolidated, I’ll do this quickly, PBIT grew 62%. And now I’m going into the farm equipment. We expect the industry to grow over 10%. We’ve said a little over 5% last time. We wanted to watch — we’ve seen a very good three months, better than what we had expected. We were being cautious and conservative. And we put out saying it will be in the region of 5% upwards, but we didn’t expect it to be ending up where it is going right now. At this point of time, we feel comfortable that it will cross a 10% growth for the year.
Many factors are enabling that. The two, that we’ve seen change in the second half, one is an improved government spending in rural and agri. We were watching for that, that we see as a key factor. That’s enabled growth. The monsoon is not new. The terms of trade with farmers have improved quite significantly, especially we’re seeing mandi prices of most crops, especially wheat being much higher than the MSPs. And that’s enabling a much better return to farmers. The terms of trade are not back to the earlier levels, but they are much better than what we had anticipated. And we’re seeing that, that is a key enabling factor.
We often talk about tractor market volatility. When you look at — and we always suggest don’t look at one year or a quarter at a time. When you look at here, it’s 9.5% CAGR F ’22, F ’23. You know about our market shares, but here’s, on the quarter, we gained 1.6%; and YTD, it’s a 0.9%, gain we are at 41%, strong recovery on our market share over the last few quarters.
Some key building blocks towards that. One key enabler has been the success of Yuvo Tech Plus. It’s a significantly upgraded tractor launched at a very good price, contributes 15% of the total volumes right now. So that’s enabling — a key enabler to growth. We added 120 new dealer points YTD, two key marketing campaigns have played out very well. And in 30 to 50 horsepower, which is 75%, 80% of the market, we’ve gained 1.7 share points.
We’ve been talking about scaling up our farm machinery business. We believe there’s a big upside here. We’ve spoken about how large the farm machinery market is globally compared to the tractor market and how India actually follows. It’s the reverse in India. We’ve seen a 45% YTD growth in our farm machines already in this year. That is in spite of harvester seeing a slow year this year.
We expect that to start changing, and we have a plan to move to 10 times where we’re going to end up this year, by the year 2027. Multiple actions are in place, a new product pipeline and movement, a lot of manufacturing in-house to a new plant in Pithampur in Madya Pradesh. Rethinking our channel, reach channel access and how we’re going to do that across different types of products. And of course, when I say global expansion here, it’s exports from India.
We’ve seen good sequential improvement in farm equipment margins. As you can see, it’s moved up from 15.7% to 16.6% over the last four quarters.
With that, I’ll move on to the Automotive business. The chart on the left shows you domestic volume growth. The red graph is the SUVs and then you have the LCV less than 3.5 tons, both have seen very strong growth. That’s enabled us to drive revenue growth of 53% last quarter to this quarter.
This chart shows you market share. You’ve heard a lot about the SUV market share, but we don’t talk so much about our LCV less than 3.5 ton market share, seeing significant growth. You want to normalize that curve, it’s a five share point gain that we are seeing from the levels at which you were. It is a competitive segment and in this competitive segment. We’ve seen a very robust increase in our market shares here.
Strong booking pipeline in UVs continues. We, on first February, have an opening book open booking of 266,000, as we are reinforcing to every stakeholder it’s why we feel very good about the response that we’re getting to every new launch, we do worry about the waiting time. It has come down somewhat, but it’s not at a level at which either we are comfortable or our customers are comfortable.
I’m just flagging this off, because we think it’s a very significant achievement to get on a body on frame product like Scorpion in five star and cap rating we believe, is a very significant achievement by our product development teams. And it does — as we’re seeing starting to influence brand choice and the overall endeavor that we made in the area of safety is playing out now in India as customers are becoming more conscious about safety ratings.
We launched the Thar rear wheel drive recently. It’s done extremely well. We went in with a very aggressive, as one may call it, price, we aim to redefine the segment. The 9.99 lakhs was done with a view to take on the subcompact segment of SUVs, because this product can then get into mainstream. And that’s really what it’s beginning to do. We’ve seen a very strong, robust booking in the few weeks since we’ve launched it.
The XUV400 started off very well as well. We opened bookings on 26th of January. We’ve got to 15,000 bookings in 13 days. We had put out in the original press release that we will aim to do about 20,000 in the course of the first year. So we are, at this point of time, happy with the response of 15,000 bookings. We will, as some of you know, deliver the first auctioned XUV400 later this evening. And those of you who are in the room, I will be there. I hope to witness it.
We have spoken about the trucks and buses portfolio. And I just want to reinforce that we have a very strong product portfolio. We’ve created a new platform in the ICV segment we are seeing a very good traction in retail over the last few quarters. And we will see ourselves building on this further. We’ve — as you would have heard and read by now, taken a readjustment of the value of the assets of this business, and we believe that will set us up well for the future as well.
Quickly, at the Auto financials, 196% growth over last year in Auto profits to 990. And what we had said medium term and at least in my vocabulary was not four quarters, but we’ve been able to deliver that sooner than we thought we would, and we are happy with that. Manoj asked the question, which I’m sure you will ask what’s next, not today. I’ve been able to convince Manoj that I’m not giving out new targets so soon. But you can see we have all the key enablers in place. A lot of work we’re doing on efficiencies, costs, and all of that is playing out in improving our margins to what clearly is the best-in-class margin.
To summarize, it’s the highest ever revenue, highest ever PBIT, sequential improvement in Farm margins, the 320 basis point margin improvement in Auto in over the previous year. Strong improvement in tractor market share. Auto SUV leadership continues and a very strong momentum on three wheelers, electric.
With that, I’ll hand over to Manoj. Thank you.
Mr. Manoj Bhat — Group Chief Financial Officer
Thank you, Rajesh. So first of all, welcome. And I’m sure many of you are staying back for the event, so we’ll find some time to interact. But I think many of the key points have been covered by Anish and Rajesh.
So if you look at the numbers, clearly, Auto is driving the growth. From an EBITDA perspective, we are at 13% OPM during the quarter, and that’s an improvement of 160 bps. Again both, I think while Auto is a standout performer, but even Farm has had a very, very healthy quarter. I think that’s one thing in all the highest ever, I think we are missing the strong performance of the Farm segment.
The other point on the EI element, I think we covered briefly. So during the quarter, we looked at the MDPD business. It was always a category C item where we had to evaluate. So we completed that evaluation and looked at the future valuation of the business and compare it with a carrying value. So we have taken a hit in the financials, which is to the tune, before tax, is about INR680 odd crores, and there’s a tax benefit on that. So what we have done for this representation is kind of equated it out, while in the numbers, you might see something slightly different because that tax benefit is also coming on account of the CEI.
I think the other thing to say is there are some compensating entries, so the net impact is lower, which you see here. From a consolidated perspective, two things to highlight here. So one is I think Mahindra Finance had a very strong Q3 last year, because if you go back, I think Q1 was a big provision. And then we had strong reversals come through the year. And we had committed that those reversals will happen in that year, and we actually did better than what we committed. So that is obviously that kind of reversal cannot be a normal situation, so we are seeing some impact of that on the group companies from a profit perspective.
From a revenue perspective, I think it’s a very steady growth in the group companies. I think the — on this one, the only item I would like to point out additionally is I think the exceptional item on account of the Sustain transaction and the accounting treatment is there’s a gain on the sale, plus a revaluation of our stake. So that’s flowing through the numbers. So if you think of it, there’s a positive on account of Sustain and there’s a negative on account of the Mahindra Trucks & Buses division. So if you look at the number, it is a 35% growth, but that includes that benefit coming through from a Sustain perspective.
Quick one on the group companies. So one is Tech Mahindra. I think from a revenue perspective, a 20% growth, deal signings have been fairly steady at around INR700 million. I think the key focus here is on margins. And the reason for that is clearly the manpower cost increases and inflation has impacted the cost structure and the pass back to customers is going to probably take a longer time. And that’s something which there’s a lot of focus on.
If you look at Mahindra Finance, very healthy disbursement growth, and your GNPA is coming down to 5.9%. So pretty much, I think the focus on collections as well as a focus on growing the business continues. And the PAT is down, as I mentioned earlier. From a growth gems perspective, three listed entities. If you look at logistics, I think the revenue is up 17%, largely driven by the strength of the Auto sector. We had the EVGO acquisition, as Anish mentioned. I think the focus there is integrating that acquisition and making it profitable because while we bought it, I think it was obviously asset which was not profitable, and that’s something we are turning around as we go along.
From a hospitality perspective, very strong occupancy numbers in India. And I think the customer additions have also come back to the pre-COVID levels. The one thing there is because they had ForEx impact, so that’s why you see a loss number there. And I think there’s one more impact I’ll talk about from a ForEx perspective in our numbers.
And from a real estate perspective, the company continues to do very well from our residential launches as well as residential sales as well as institutional sales. I think all three segments continue to do well. I think that’s something which will reflect in the numbers in the quarters going back years going by. But this quarter, there was an exceptional gain, which has impacted profits positively. And it’s — after that, we are showing a 33% gain.
So in summary, I think if you look at the waterfall, I think two or three things. One is Auto and Farm is a big positive. Tech M and Mahindra Finance, I think the bulk of this drop about INR156 odd crores is coming from Mahindra Finance. I think I spoke a bit about the growth gems. On the investment side, it’s largely ForEx-led again because we have a ForEx exposure in one of our subsidiaries, a ForEx loan exposure. So that’s been marked. So that’s where you see that negative. And then the EI swing, which I explained. So that’s the kind of buildup from 1987 to 2677.
With that, I think we have a small video to show you. So can we have the AV, please?
[Video Presentation]
Questions and Answers:
Sriram Ramachandran —
With that, we open it up for questions.
Yes, Kapil, go ahead. And Gunjan after that.
Kapil — — Analyst
Thank you, and congratulations on achieving most of the targets that we set out. My first question is to Rajesh. If I look at the SUV order book, we are getting roughly about 50,000 a month kind of order inflow and the wholesales have been closer to 30,000 — 30,000 to 35,000 a month. We’ve also had the launch of 400 and the rear wheel car. So I would have expected the order book to increase a bit more, right. So I just wanted some color on that from the point of view that we are going to 39,000 a month capacity and then 49,000 a month. So how you are thinking about that?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Yes. So Kapil, multiple ways to try and explain that. One is we have improved the deliveries a lot in the current quarter. So you do — as you deliver, you are going to — and that’s the benefit that we want and which is why we keep saying we do want to bring down the order book. This kind of an order book is not good for market, it’s not good for customers, not good for anybody. I mean let’s — it’s nice to say we have 260,000 plus orders, but that’s not our desire. I just want to put it out here today. We will be happy if we can come next quarter and tell you we brought the order book down.
There will be many customers who want to buy, who don’t want to book a product now and say, okay, I’m going to wait 12 months or 15 months or whatever at that time. So if you want to get demand momentum, it’s going to happen as we bring the order book down. So firstly, I won’t think about the order book size going down as a cause of worry. I would see it as a sign of positivity, which means hopefully, we are doing better with way of deliveries, retail and so on.
So if you say two quarters down the line, we should be at 260,000, I would not be happy with that situation. We have to bring the order book down. This is not a good situation to be in. I mean if you’re saying we have 260,000 orders for a monthly sale of 35,000 orders, it is not a good situation, whether it’s 30,000 or 40,000 or 45,000. So we have to bring the order book down.
And customers are expecting that we are going to do that. The many customers who come in and say, no, this is not tenable anymore. If you tell us it’s going to take eight months, 10 months, whatever. So I’m not too worried about that. We still see a very strong momentum. A lot of the order book does get consumed as we are delivering, and we’ve delivered pretty well in the coming quarter. So I wouldn’t worry about that. You’re right, if you do a very mathematical calculation. Of course, we’ve launched two new products. So there have been some orders, so some — there’s been some adjustment downward of fulfilling orders of existing products, while we’ve created some orders of new products. But that’s also a cycle, right. So every time we bring in something new, that creates excitement that will enlarge the order book. But really for products which are there, we really have to bring the order book down and bring down waiting period. I think we brought down waiting period by month and a half or so, right now, but that’s not good enough.
Does that answer your question, Kapil?
Kapil — — Analyst
To some extent. But yes, I mean, the math is still something — basically, what I’m trying to understand, is there also a cancellation factor here?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Yes, there is a cancellation, as we’ve said, between — from product to product, between 5% to 7%. I mean that’s the number that we’ve been talking about. And that number, by and large, holds out. We’ve said that earlier, too, and that holds out. In some products, it may be 8%, 10%, but on an average, we would say it’s 7% to 8% cancellation.
Kapil — — Analyst
Sure. And second, also wanted to know that now we are selling almost twice of what we were selling pre-COVID, right? So how your — and the customers that we are having now are probably more premium customers as well, right? So how you are preparing the network for higher volumes and more premium customers? And possibly, this number will increase another 30%, 40% if I look at the capacity plans, right, so just some color on both these aspects?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
And to your question, I would add a question on how are we preparing our network for selling electric, which we’re realizing needs very different selling scale because you’re selling category. I mean we’ve been observing — I’ve been myself in some showrooms through the 400 process. The kind of questions customers are asking, while they’re making a decision on EV, we do have to be much better prepared by way of our dealerships being able to handle those questions, what happens to battery end of life. There are multiple things that customers want to know, repairability, so on and so forth.
So I’m just adding to your question to say, yes, as our customers get more premium. I think the volume part, I’m not so concerned about dealers when they see volume and they see money, then they figure, most of our dealers figure ways to bring capital in. So I’m not really worried about the volume increase. We’ve also expanded our network in all the metros where a lot of the growth has come in from. So I think from an ability to handle volume point of view, we’ve built in all the gaps, especially in metros, we’ve expanded network.
The critical task ahead of us is really the skill upgradation and how well we are able to play out story, the sales story or the experience story for especially our category of customers are extremely passionate. There’s a lot we are doing around it. But I think we have a long way to go as well.
Kapil — — Analyst
Okay. Any more details you can give, like what exactly you’re doing? And also on network, any numbers you have, how much it is, how much we want to expand?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Veejay, you want to take it?
Veejay Nakra — President Automotive Division & Member of Group Executive Board
I think one important thing I would just want to say is that, as we are expanding the channel, we are very, very mindful and conscious that we don’t want to overinvest the dealers in large infrastructure because the whole purchase model and the consumer journey is very fluid and it’s changing. And we believe in the electric area, it will change even more.
So what we’ve done is we’ve actually created a concept, what we call the Cube. And last year, our YTD, we have done about 130 cubes across the country. And the whole idea is — I’ll come to the rural, but on the urban side, we’ve done about 130 cubes were high-traffic locations, we set up 800 to 1,200 square foot location, one maximum two vehicle parking, couple of test drive vehicles, high on digital for customer engagement. And that’s worked very, very well because the ROI or, let’s say, the ROCE from a dealer perspective, it’s very, very good on business case.
As far as rural is concerned, we’ve opened about 220 touch points across the country. It doesn’t sound like a very large number. But looking at penetration for now, I think 220 is the kind of number we were gunning for. We’ll probably get to about 350 by the end of the year.
Dr. Anish Shah — Managing Director and Chief Executive Officer
Veejay, you want to talk anything else, skill upgradation, the boot camps that we do?
Veejay Nakra — President Automotive Division & Member of Group Executive Board
Yes. So okay, with every launch now…
Dr. Anish Shah — Managing Director and Chief Executive Officer
Just on customer experience…
Veejay Nakra — President Automotive Division & Member of Group Executive Board
Yes. So the whole idea of Cube is a very different customer experience. You typically would not — so for example, we’ve done a lot by using Salesforce as a platform on which we are creating the omnichannel journey so that when the customer kind of walks into these places, the consultant already has a lot of information about the customer, in the sense, which model, which variant, what has been the contact with the call center, what has been the last conversation of the consultant with the customer.
A lot of it is in place. Some of it is still WIP. But that’s the whole approach towards consumer journey. Now that’s one side of building capability. That is how do we get our consultants to be more friendly in terms of interacting with the customer from information available. Second is when the customers walk in these days, the kind of questions they ask is absolutely different. Nobody wants to know power, torque, dimension, that homework has already done, comparisons are already done. So they come in with very particular questions.
So what we’ve done this time around with the last three launches is, we actually do what we call a boot camp, which is live with the product. So we get sales consultants from our dealerships to a mother location, which, let’s say, is Chakan or some of our previous launches or it could be Nasik. And we get them to stay there for like a week, 10 days. They immerse in the product, we bring in subject matter experts on technology because all our vehicles, these are very high on technology.
So that’s, again, a different way in which we are building capability. A lot of that we’ve done with 400, as Rajesh also alluded to that, consumers want to know about battery. They want to know — I mean, there was a very interesting question, one customer asked in the showroom. When you try and explain, this is an electric vehicle. So the customer said, is this a toy car, who could imagine a customer walking into a showroom and asking a question like this, right.
So I think there’s a lot we are learning and there’s a lot that we are doing in terms of the way in which we are building our capabilities.
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Veejay, I want to add. A couple just to add to that, technology is going to change the game. And Veejay, if you can just talk about metaverse, and how we’re using that. And you may not need dealers to do everything in this case. So go ahead.
Veejay Nakra — President Automotive Division & Member of Group Executive Board
So, so far, what we’ve done on the metaverse is just building blocks. Right now, the website is on the whole 400 experience is the metaverse experience, which is on two dimensions on a screen in front of you on your laptop phone. What we are now moving to is an immersive experience at two levels. One is when the consumer will walk in through VR gear will give a very, very different experience, including a test drive. We’re looking at simulators as an option and even hologram, holography as an opportunity going forward in terms of the immersive experience we will give.
So we are really leveraging on all the new-age technologies in terms of the immersive experience we’ll be able to give customers, including test drives.
Kapil — — Analyst
Thank you
Dr. Anish Shah — Managing Director and Chief Executive Officer
Kapil, we gave a very long answer, but…
Veejay Nakra — President Automotive Division & Member of Group Executive Board
Yes, sorry about that.
Dr. Anish Shah — Managing Director and Chief Executive Officer
We normally don’t get questions.
Kapil — — Analyst
I like that.
Dr. Anish Shah — Managing Director and Chief Executive Officer
We normally don’t get questions like, we are happy, when we get questions like this.
Veejay Nakra — President Automotive Division & Member of Group Executive Board
I’m glad that this is a non-financial question.
Gunjan — — Analyst
Thanks for taking my questions. Just keeping the discussion on the UVs, there is a lot of chat around the regulations, right? There are two RD as well as Cavenham. I know RD you all had spoken about 9,000 to 15,000 sort of increase. So maybe just a refresh on that. Is the number still the same as we’re getting closer to the deadline.
And also, are there any models which could entail a higher cost increase because some of the products didn’t go through launch recently? So maybe RD and also on Cavenham again, where we stand in terms of the target CO2 emission? And does it mean we should be worrying about any penalties for F ’23?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Yes. So we are by and large on that target because there are some models which will go up to 20,000 to 22,000. So that’s the range. So by and large, in the region of the cost that we told you. And on CAFE, we’ve done a lot on our ICE portfolio to be optimized, and we don’t see any penalty at this point of time coming out of CAFE with the launch of the 400, which will bridge any gap that may be needed. So we are comfortable in all scenarios.
Gunjan — — Analyst
Including the XUV400 deliveries that you will do in Feb and March?
Dr. Anish Shah — Managing Director and Chief Executive Officer
That’s part of it. So I’m just saying with whatever that’s planned to be sold now of XUV400 between February and March, we are confident that in any scenario of regulation that the government may have or any scenario of penalty which they have not been able to finalize, we’ll be okay.
Gunjan — — Analyst
Okay. Got it. Just shifting the discussion to tractors. Now looking at the margins for this quarter, this was clearly a good quarter from an operating leverage perspective. We did see steel benefit also flowing through, but the margin expansion isn’t as meaningful.
So just wondering directionally, is it because we don’t want to take significant price increases, so we will relook the range from a next 12, 18 months perspective? Not — I mean how should we think about the margins there? And also from an outlook perspective, you yourself mentioned 9% CAGR, and this tends to be a cyclical industry. So F ’24, does it mean from a demanding base, we could see industry sort of plateauing out and there’s also no risk, which potentially can be a risk to monsoons as well? So some color on the tractor business.
Dr. Anish Shah — Managing Director and Chief Executive Officer
Yes. So I’ll take that as two questions. One is tractor margin and how does one read that and interpret that. The second is around next year. Second one is easier to answer because I’m not going to answer it. No, we typically, it’s a little early to put out a tractor forecast for the next year. We also wait to see what happens in the last few months, and then we wait to see what’s the latest, that’s coming out of the monsoon forecast. So we’ve seen four years of normal monsoon, which has never happened before. So you’ve got to factor all of that in.
So we’ll wait a little bit to see where this year ends up, before deciding what’s going to happen next year. But in respect of the growth of next year, I think what we have to keep in mind is 900 plus 1000 is a very robust industry size. And there’s hence a lot that — it’s not a small size. So you may on that size of industry see one or two years of low growth, and that’s part of the cycle city. So we just need to factor that in mind.
On the first question on tractor margins, we’ve passed on all the material cost now. And as we’ve been saying in the past, the impact of not passing on the margin on material cost has a big impact on margins as a percentage, but we’ve passed on all the material costs that have happened through the commodity cycle.
The reductions that are happening in commodity prices is having a decimal impact on margin right now. That’s not large enough to offset the very big impact on margin not passed on, on material cost over almost a two year period. So it’s like, I think in the order magnitude 80,000 of — we’ve taken price increases of INR80,000 in two years. So it’s a lot.
And when you’re taking that kind of an increase in material costs and not passing the margin, in a high-margin business, it has like, I think, 4% odd impact just not passing on the margin. So if you had passed on margin on the material cost increase, our margin would have been higher by 4% odd percent. That’s roughly our estimate.
So that’s really the gap that you have to keep in mind there. So when we are saying we are in the region of 16.5, 17, if you are — didn’t have the effect of margin not passed on, that would have been 20 plus. So which is why you’re seeing a robust profit impact, but it doesn’t show as a percentage margin right now. I don’t think that percentage margin will easily come back to that level until we see a significant decline in commodity because that’s when you are not dropping prices as fast to the commodity prices are dropping.
So just as you see a lag when the commodity price is going up, then you’re not able to pass on as quickly. Here, you don’t pass off as quickly as the commodity price is dropping. So that’s when you start getting the benefit of the margin. So I think we’ll have to wait a little bit to be able to recover the margin not passed on. But from a material cost, we’ve passed on everything.
Gunjan — — Analyst
And bulk of the reset in the steel contracts is already reflected in this quarter. So there’s no tailwind that necessarily flows through in quarter four from steel leasing that we saw?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Sorry, from what part?
Gunjan — — Analyst
Bulk of this steel leasing is already reflected in this quarter. There’s no tailwind that we should expect going into quarter four, right? That reset is already reflected.
Dr. Anish Shah — Managing Director and Chief Executive Officer
Yeah.
Nitij Mangal — CLSA — Analyst
Hi, this is Nitij from CLSA. So my question is just continuing on the discussion on tractors. Actually, first is on the Trem four norms, we have seen a substantial price increase, which has happened on the 50 HP plus tractors because of the Trem four norms getting implemented on the 50 HP plus tractors. Your competitor is talking about that the norms for the less than 50 HP will get postponed to FY ’25. So any color you can give us on that or how the government is thinking on that?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Hemant, do you want to comment? Hemant is also the President of TMA. So maybe you want to just wear that hat, Hemant.
Hemant Sikka — President of the Farm Equipment Sector
The Trem five currently applies to only 50 HP and above tractor that has got implemented from 1st of January, and we have made the switch on that. Coming to tractors, which are between 50 HP and 25 HP, which will form bulk of the industry, and that was to happen 12 months from now, most likely, it would get delayed because there has not been any instance where when the Trem four has got so much delayed, the Trem five cannot hold its time line. We need a minimum change over the period of four years.
So TMA is talking to the ministry, and we have put up our case. And right now, it is an active discussion. Mostly in our discussion, we have found them to be hearing, listening to our concerns. But right now, no decision has been taken. So we — as TMA, we are in continuous engagement with the government to see that they follow the norms. But globally, everybody has followed, but it’s usually a four to five year time period between one Trem to another Trem, that’s how it’s done. So if you ask me my personal view, even FY ’25 seems to be very early.
Hitesh — — Analyst
I just also had a question on the tractor margins, if Manoj can give us more granularity. Basically, I think steel contracts have got revised quite substantially, and we’ve seen that in commercial vehicles margins and — but I think it’s happening more at the panel and not at the component level. So when do we see that coming down in the component level? Because at some point in time, steel should come — prices should come down there as well, right? So what is happening exactly, if you can…
Mr. Manoj Bhat — Group Chief Financial Officer
So Hitesh, I don’t think I’ll add much to what has been said. But from our perspective, I think the reasons are known. I think the commodity price cycle, we are watching closely because China opening up, like it or not, is going to be a factor across the board. So — and you also know that there’s a lag effect.
So I think while it’s our endeavor to be operating at the highest margins possible and which we are trying to do, but I think some of these conditions, I will refrain from kind of giving a view on where the margins will head. Having said that, as we have demonstrated in the past, I think the goal is to improve margins. And that’s — and there will be certain pulls and pressures sometimes for short term. And as we said last time, 300 bps, four quarters back, I think we have reached the numbers earlier than we thought, and that’s something which will continue. But I don’t want to go into the specifics of which quarter what will happen.
Dr. Anish Shah — Managing Director and Chief Executive Officer
Also on the commercial vehicle, you are seeing a much greater operating leverage kick in compared to tractors. So I don’t think it’s comparable right now, because commercial vehicles have gone through a huge industry down cycle. So you’re seeing — and that’s our industry driven with a very high operating leverage, like tractors.
So when you see a big volume upswing, you will suddenly see margins go up. So that’s what’s happening in the CV market. That’s not comparable to tractors right now because a 10%, 12% growth is not giving that kind of operating leverage that you’re seeing in CV. So I really don’t think you should compare what’s happening to CV margin connecting that with steel contracts. I think it’s just — my sense is it’s more operating leverage right now.
Amyn Pirani — JPMorgan — Analyst
Hi, this is Amyn from JPMorgan. Two questions from my side. First question is actually on the light commercial vehicles. We’re seeing that in the sub two ton category, the volumes have already started to show some weakness, whereas the two to 3.5 ton, where you are more dominant, is still strong. So my question was that, do you think that this weakness in the lower category is just a precursor of some issues in demand? Or is it specific to that category and you don’t see this playing out in the whole segment?
Dr. Anish Shah — Managing Director and Chief Executive Officer
I think that’s a fair observation, something we are watching closely. There are segments in the economy that are going to be more price-sensitive driven. And the less than two ton LTV, I would put it in that category as same as small-sized passenger vehicles. So these are segments which are seeing pressure, inflationary pressure, so on and so forth.
I think it’s too early to say that that’s a stressed point, but that’s something that we would watch closely for. I think anything — any segment right now, which is extremely price sensitive, we are to watch for. Fortunately, on the SUV side, we are not in that space too much. But the LTV less than two ton could be in that space. We’re not seeing that in last mile mobility electric.
So that’s the dichotomy because there, we are seeing very good momentum maybe because cost of ownership, e-commerce growth, all of that is enabling that, whereas the less than two ton LCV segment doesn’t have that much e-commerce momentum. So maybe that’s one differentiating factor that’s more dependent on stands and fleet open market stand operators as they’re called. But it’s something, I think it’s a fair point is something we watch closely for.
Amyn Pirani — JPMorgan — Analyst
Okay, thank you. And second question for Anish. So we have met or surpassed most of the medium-term group targets that you were talking about. I think even Mahindra Finance is now at 16% ROE, which I think among the large listed names was in the B category, maybe going towards A. So as we look to the next one to two years, will it be more about consolidation? Or do you think it’s time to up the targets?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Time to up the targets.
Amyn Pirani — JPMorgan — Analyst
Okay. Any numbers you would like to share right now?
Dr. Anish Shah — Managing Director and Chief Executive Officer
So okay, let me give you a little more thoughts on that. I’m not going to give you numbers right now, but I’ll give you thoughts on it at least. You’re right, we’ve made commitments delivered. I’m hoping it’s more than most, but close to almost everything we’ve said, we’ve talked about the four large businesses, and we said they need to be on track and grow at a very significant pace and generate high growth from specific opportunities there.
So Farm machinery, you saw was a specific opportunity generating high growth. In Auto, breaking out last mile mobility is a significant growth area for us. And you will see that as we go forward as well as to the level of aggressiveness that we have there, and we really want to be Number 1, in that space despite big competitors, and we will find ways to get there.
Beyond that, EV is a growth area. And in general, auto product has taken it to a great level. Mahindra Financing, right, is I would say, halfway through the turnaround right now, not completely there. We’ve talked about a two year turnaround plan. We’ve gone through the first year, and we talked about asset quality. Asset quality today, Stage three is less than 6%, 5.9%, net NPA is 2.5%.
We want to be able to demonstrate that in any economic downturn, Stage three will not go more than 8%. Now that number may change slightly based on what we are — our final analysis shows. But the set of actions that we’ve talked about, that will enable that to happen. It’s about changes in some policies, changes in bringing in diversification and products, going after the rural affluent. So you’re getting products where you have a much lower inherent NPA, which we didn’t have because if you look at our GNPAs and compare them with any of the NBFCs or banks in that segment we play in, we are better than them.
And we’ve been better even in the downturns, but the problem is we were only in that segment. So we showed a 16% GNPA during a downturn. Whereas others had enough things to buffer them, which we did not. So that was one part of it.
The second part was technology and data, a lot of work and progress done on that. The third was really bringing in a very strong team and that’s something that we have done. There is not just a new CEO that will be announced, but the next level of leadership team also has come in from various large banks in the country and technology houses and so on.
So that entire turnaround is on track. You’re seeing the results. You will continue to see more results there. TechM, we need to do a little more. There’s still a lot more to be done on margins in TechM. That will — you will start seeing more of that, but we are sort of a little behind on TechM as compared to Mahindra Finance.
So these are the four large places. Growth gems, we’ve talked about, we’re on track there, and we’re seeing good progress across the growth gems. The next thing we’re going to look at is something much bigger. And it’s going to be in an area where we can truly add value. We’re going to be very selective about where we go there. It may be in a related industry out of what we do right now. It may be taking one of our businesses and scaling it up much further.
So we are starting to think about that because we’ve generated a lot of cash from our investments as we call it, from group companies. We are staying firm with saying Auto and Farm cash will not be used for investments. You said that before, you’re seeing that again, and we will stay with that. If we have excess Auto and Farm cash, we will give it back to investors.
But where we’ve generated a lot of cash from investments, we feel we can put that in and where we can grow much faster than market, we will. So that is our philosophy. As we have more numbers on that, we’ll come up with it, but we’re upping the game.
Yogesh Aggarwal — HSBC — Analyst
Hi, this is Yogesh from HSBC. Anish, just wanted to follow up on your comment on Tech Mahindra. This is your largest associate and most contributing to SOTP from our perspective. The company has performed below par for a few years now. And while it makes 20% ROE, which is your threshold, the Board seems to be very tolerant in the last few years. So I wanted to — just wondering, is there a thought process to do some restructuring? Or are you happy with 20% ROE? Because within the sector, that’s the lowest ROE now, and it’s been quite volatile last few years.
Dr. Anish Shah — Managing Director and Chief Executive Officer
So tolerant is not a word we are using too much, as you will see. There is room for growth. Let me also highlight some of the losses that Tech Mahindra has achieved. In terms of new account wins for large accounts, it’s actually done very well. And as you would compare it with its larger peers as well, it actually has done much better on that count, depending on how you see it.
It has been able to penetrate new segments, while telecom has been the mainstay in the past, financial services, health care, there are many large accounts who’ve come in and seeing the value that TechM has to offer that. It continues to be one of the leaders from a customer standpoint with regard to being able to solve customer problems and be flexible and nimble and agile in doing that.
So there are many pluses there. There are areas where there is scope for improvement. And I won’t go into detail right now. I will leave that to a sort of tech analyst meet for that. But there are areas of improvement there, and I think some of them have been mentioned in that call as well. And the net result has to be a higher margin and, therefore, a higher ROE.
The answer is I’d be happy with the 20% ROE and the current margin? No, we’re not. What is the plan to get there? We will talk more about it as we go on. We are in the middle of a CEO succession plan as well. And that’s something that we want to make sure that, that is completed first before we go out with a detailed sort of plan, and that may also be a one or two year turnaround, similar to what we’ve done with Mahindra Finance.
All I can say what the succession is it’s been done in a very structured, very thoughtful manner. The Board is leading that, and we will make sure that it is done very smoothly, as we’ve done when I came in, as we’ve done with Mahindra Finance, and we’re ensuring that in TechM as well, we will have a very smooth succession as we go forward. So as that happens, we will come back with more on it, on TechM.
Yogesh Aggarwal — HSBC — Analyst
Thanks. Hi, this is a question to Rajesh. So this is in regard to the EV pricing or the competitive intensity on the EV pricing. So definitely, the competition is surprised by the price which you brought, and there is some pricing actions taken in the marketplace. So I wanted to understand your thoughts in terms of pricing your product considering you brought a superior battery technology.
And isn’t it much of a space available there to price your products easily to get the market share which you require? Or you feel it’s still a very nascent market and, hence, the aggression can still play out?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
I think the first part of your statement was a comment, so I’ll just take that as noted. And the second part, I think, is the question, which is how much room is there for growth? And what’s the price at which growth can come? I’m reading that as the question, would that be about right?
Yogesh Aggarwal — HSBC — Analyst
Yes, the market size of the opportunity. Or is it very small that you need to fight on the pricing?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
My experience with pricing is you know whether it’s right or wrong only after it’s done. So it’s — before the event, you never know whether you got it right or not. It’s only when you done it that you realized that, did you really mess it up or did you get it right. Our inclination is to make sure we get it right. And then there’s enough room to recoup as you go along, even if you underpriced it.
In the EV story, as we’ve spoken about in the earlier conversation around customer experience and so on, right now, I don’t think it’s a — pricing is the key factor here. It’s more about selling the category and getting customers to understand the category benefit and the barriers to change, including how do you get charging set up in your society. Will you get permission, not, the multiple sets of questions people have.
So I don’t — my sense right now is that for the category of customers coming in with the penetration in the C segment, as we’ve said earlier, is like less than 1% SUVs, and in the B is 2.5%. That’s the electric category penetration right now. So there’s enough headroom, but it’s going to need very good overcoming of entry barriers from a customer standpoint. And really, that has to be the focus.
The question is, could we have launched it at a slightly higher price? Maybe the answer is, yeah, it could have and it wouldn’t have made much of a difference. But as we had also announced that this entry price was for 5,000, 10,000 numbers for the two variants. So we would be moving to a higher price point, which we haven’t announced yet.
Yogesh Aggarwal — HSBC — Analyst
And related to the EV business, again, since it’s almost like four, five months Born EVs have been displayed. What’s the progress in terms of technology, what you want to bring there or the supply chain? What you want to change with the tie-ups globally, which you’re trying to do there? That’s one.
Second, looking at your own journey through the acquisition of EV products and now launching XUV400 and the Born EV, where you are trying to experiment more outside world and the in-house capability being built, is there anything like early more advantage in EV business? Or it’s more about how quickly you learn and learn the ecosystem?
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
So, the first part of the question is, how are we progressing on what we announced in August last year in Banbury. So far, we are progressing well. We are on target dates and we’ll put out a set of things that we need to get done by this time. We are on track. Actually, we’re building one of the protos about now. So we’re at a very good stage by way of progressing on the dates that we put out.
At this point of time, we don’t see any risk to the time lines that we had put out for the three products that we have said will be the — if you remember, we put out five products. We had said one was a concept, three have been kicked off and one was WIP from a kickoff place, three which we had kicked off are on schedule. There’s some work happening on closing out on the one, which was a BE 07 and the BE 09 which was a concept car, we are again at some advanced stage on what to do around that.
So overall, we are directionally on the path to meet the time lines that we had put out. We feel one of the great values of partnership in this space is not just around technology, but vertically integrated supply chain because in the next four to five years, supply chain of EVs is going to be one of the key success factors and the right costs. And that’s where we feel we’ll get the greatest value of the Volkswagen partnership, because they’re investing a lot, and they have a fully integrated supply chain all the way down to the mine.
So, that’s the part that we feel comfortable with from a fortification standpoint. The multiple new technologies, as you rightly pointed out that we have spoken about, and we are actually on track to creating a very, very good advanced tech product. What will — an early mover advantage really play a huge role, I don’t think so, because technology is evolving so quickly that if you’ve come in to early and locked into the wrong technology, you’re going to — that’s not going to help.
So, it’s better at this stage for — I think we’ve conceptualized our new portfolio at a time when we were able to take in most of the new technologies that are coming in. And we are really creating something future ready because we really believe the category explosion will happen around 2024, 2025. So we don’t think early mover advantage is a really critical thing in this scheme. You got many questions, I hope I have covered most of them.
Dr. Anish Shah — Managing Director and Chief Executive Officer
I’ll just add to the early mover advantage. In this industry, there is no advantage in that sense. We’ll come out with five electric products. We’re very confident we will take leadership in there, but we will not be able to maintain that leadership if we don’t keep coming up with a good set of products because this is just a powertrain. The consumer is going to look for design. It’s going to look for other features in the car. It’s going to look for pricing, all of those factors that come into play.
If you look back at the history, at one point, we had a 55% market share in SUVs. We lost that, because we had others come in with much better products, etc. We had to change our game coming with a much stronger set of products, and we’ve gained back a good amount of market share over the last two or three years, and we still have sort of some way to go on that. So we have to stay on our toes in this space.
Someone is going to come in with a better product or a better set of products, and it will launch if we’re not ready for it. So we really don’t see any scope for complacency or any advantage, not just at the early mover, but even at the next level, you’ve got to continually be able to do that.
Sriram Ramachandran —
Okay. So there are a couple of questions from the online. There’s one question from Chandramouli Muthiah, of Goldman Sachs. The question is your tractor peers have been calling out down trading and commodity cost pressures, but you seem to be managing this operational trends pretty well. Your tractor industry volume guidance also seems to be heading higher over the past couple of quarters. What are some of the things you are doing differently in this space?
Dr. Anish Shah — Managing Director and Chief Executive Officer
Would it have been possible, Sriram, to have asked this question earlier to some of the other questions on tractor margin? I’m glad someone thinks we are managing tractor margin well. So thanks, Chandramouli, for that.
We have been taking aggressive price increases. I think what we have to keep in mind is that we’ve gained market share while doing that. When you are at the kind of market share where we are to gain a 0.9 YTD market share or 1.6 in the quarter is a pretty substantial gain in market share. So we always manage the trade-off between margins and market share, and that’s the hardest part of the tractor game. It’s very easy in our position to say, okay, let’s just go and increase margins. But we know that that’s a very dangerous game to play, and it’s very easy to take 1% or 2% margin increase right now and then lose competitive advantage and guided declining market share.
So that’s not something we will do. Neither will we throw money away to get market share, buy market share, but neither will let the reverse happen. So neither will we chase margins blindly to in a way that we are going to erode our market share, our market position. So that’s the trade-off. I think Hemanth, and team managed really well, which is used products and technology. The Yuvo Tech is a great example. It was a derivative of the Yuvo product, but brought costs down significantly by retaining what customers really value.
And now the premium of Yuvo Tech over our traditional H1 platform, as we call it, is very affordable for customers to move up, and that’s why we’re seeing 15% of the volume come from there. With that, we’ve been able to bring in several key technologies to customers at a much more affordable price than what we were able to do with the Yuvo that we had originally. So I think that’s been one key element, which is the delivery of the product strategy.
There are many new things that Hemanth, and team are doing around introducing newer digital technologies, IoTs and you’ll hear more about that as we go along. So we would want to lead the product curve, in a manner speaking, try and decommoditize the category with through product differentiation.
So Sriram, I think that would be, I think, one area I would kind of focus on seeing what we’ve done well. And we’ve taken price increases appropriately at the right time, apart from everything else.
Mr. Rajesh Jejurikar — Executive Director, Auto and Farm Sector
Just one thing I’ll add on tractor margin. I think it came up, but I just emphasize it. We’ve talked before that farm machinery will have a negative impact on tractor margins. We’ve talked about farm machinery going 10 times by ’27. And we want to do that aggressively. We will accept low margins on farm machinery for the next five years. And as it grows at the margin, it will have some impact on tractor margins. We will be — sorry, on farm margins, not tractor margins, sorry, on FVS margins. And we will look at breaking it out soon as it becomes material enough so that we can start separating tractor margins versus farm machinery margins to look at overall FVS margins. So what you see today is some negative impact coming from a growth in farm machinery as well.
Sriram Ramachandran —
Another question from Chandramouli was in terms of Scorpio, number falling from 130,000 to 119,000, that’s a backlog. Is it only because of the production backlogs or production issues or any other factors involved?
Dr. Anish Shah — Managing Director and Chief Executive Officer
I think we spoke about that earlier. And yes, there has been a 10% cancellation on that. And some of the cancellation has been on models, which we — in the case, unlike XUV700, just to clarify this, the learning out of XUV700 is we’ve got a very high percentage of high end, which was completely what we were not prepared for. So in Scorpio N, we basically said, let’s prioritize these date, which is the highest version of Scorpio-N. First, so we actually only produced that for the first two and a half, three months.
So we’ve cleared a lot of that waiting period because we just produced the high-end. In the process of that, what’s happened is the people who booked some of the lower-end version, then their wait time has gone up beyond the comfort zone. So we have had some cancellations around that. But as soon as we start the production of that, which will be around now towards the end of Feb, we’d expect that momentum to come back.
[Ends abruptly]