The slowdown in the automobile market has become broad-based in the new fiscal. While demand is seen to be contracting across the board, the market for utility vehicles (UVs) has grown by 56 per cent in the April to August period, compared to the corresponding period in the previous year. The auto industry is undergoing a structural shift, as consumers are skipping the sedan and migrating to UVs directly from small cars. Mahindra & Mahindra is a key beneficiary of this, as the company enjoys a 48 per cent market-share in this segment. In the April to August period, the company has sold 101,362 UVs. Expectedly, the market is waiting for the launch of the Quanto (mini Xylo) and a premium SUV from the Ssangyong family from M&M’s stable.
A thriving demand for UVs is also changing the volume and revenue mix of M&M. The volume share of the farm equipment business is down to 32 per cent in Q1FY13 compared to 36 per cent in Q1FY12, says Brics Securities. The revenue share of tractors is also down from 42 per cent to 35 per cent in the same period.
This shift worried some analysts as the tractors business has higher margins than the UV segment. This perception is also changing as the strong demand in the UV segment and softer commodity prices would help shore up margins.
Despite M&M’s strong play in the UV space, the market is not looking at an earnings upgrade. Brics Securities says it would not raise the valuation multiple as it expects tractor sales to fall by three per cent in FY13 and grow by four per cent in FY14. However, if the Quanto sells over 1,500 units a month and commodity prices remain soft, then an upgrade is possible.
However, a revival in the monsoon and firm food prices are making another segment of analysts believe that rural demand too, will hold up. While sowing area is down by four to five per cent, food prices are up, which means that farm income will be higher. Deepak Jain, automobile analyst at Sharekhan, says M&M is a proxy play on food inflation. Jain has revised his volume growth assumption upwards for M&M’s tractor division to five per cent for the full year as demand is likely to pick up in the second half. He has also revised its margin expectation for FY13 and FY14 slightly upwards, given the fact that the margins of the farm segment are double that of the automotive segment.