<p>Utility major Mahindra & Mahindra’s (M&M) March quarter performance, though ahead of Street estimates, could have been better but for the impact of the merger of its Verito (car) business.
The stock, however, didn’t react much, given the Street’s concerns over the weakening performance of the tractor segment. Powered by a 25 per cent growth in auto segment volumes, M&M reported 38 per cent year-on-year (y-o-y) revenue growth to Rs 9,387 crore. Adjusted for the Rs 740-crore revenue from Verito (part of another group company earlier), revenues grew 28 per cent. At 10.3 per cent, Ebitda margins dropped 239 bps y-o-y and 137 bps sequentially due to a sharp jump in raw material costs, merger of the loss-making Verito business and higher share of auto.
The key worry for M&M is the slowing sales of the relatively high-margin tractor segment whose volume share fell to 28 per cent in the quarter, compared to 36 per cent in the year-ago period. Sales were down 8-21 per cent between January and April. The company has lost one percentage point in market share to 41 per cent due to falling sales in key states and a drop in the sales of non-agricultural tractors.
The management expects a five to six per cent y-o-y growth in tractor volumes for FY13 (from 8-10 per cent earlier) and is banking on good monsoons to boost growth. So far, weak crop prices and high interest rates have inhibited growth in the segment. The silver lining for the farm equipment business has been its steady segment-level margin of 15.7 per cent. The situation could worsen if M&M joins other tractor makers in aggressively discounting sales, something it has avoided so far.
In contrast, auto sales, driven by the Scorpio, Bolero and XUV500, are expected to remain strong (over 20 per cent growth), aided by the launch of a multi-purpose vehicle, an electric car from the Reva stable, a smaller Verito and a mini Xylo.
Analysts are hopeful of the auto division driving performance in FY13. Some have even raised their current year estimates. So, the auto division’s performance is crucial and would reflect on the stock, which analysts believe, already factors in the weak tractor outlook. For now, most of them are positive on M&M, with one-year price targets of Rs 700-740, based on the sum of the parts valuation.