M&M: Rural demand, normal monsoons and higher MSP to support volumes

Capital allocation, urban volumes, new regime key factors to be seen

The Mahindra & Mahindra (M&M) stock rose 7 per cent on Friday, aided by its strong operational performance, market share gains, and expectations of prudent capital allocation policies.

Though it was also hit by the Covid-led disruption, it was able to maintain operating profit margins of 13.6 per cent for the March quarter, and 14.2 per cent for FY20. Lower commodity costs, price hikes, and cost-cutting measures offset the pressure due to weak operating leverage.

M&M highlighted that tractor and auto volumes were hit by Covid-19 and the BS-VI transition, thus impacting revenues by Rs 356 crore. This led to a 35 per cent decline in overall revenues. While volume in the auto segment fell 48 per cent, that in the tractor segment dipped 2.4 per cent. 

However, the company is hopeful of an uptick, led by rural demand. 

Given its portfolio tilt, M&M gets the highest share of revenues from the rural segment vis-à-vis its larger peers. In addition to tractors, it gets more than half its volumes in the utility vehicle segment from rural markets.

 

 

On the tractor side, the company expects demand to be robust, spurred by a normal monsoon, good reservoir levels, higher minimum support prices, and government allocation to the rural segment. The tractor segment gained market share by 100 bps to 41.2 per cent in FY20, and growth momentum is expected to continue, aided by new launches.

As regards the auto segment, the company highlighted good momentum — especially from the rural segment — for its Bolero and Scorpio models, as well as for light commercial vehicles (pick-ups).

Urban demand, however, remains weak and could take a while to revive. Though inventory level is low — which is a positive — plant utilisation for the auto segment stood at 30 per cent. Barring a pick-up in demand, the auto segment could run into a road block.

While M&M has refrained from giving an outlook for FY21, factors such as stringent capital allocation, a cut back in capex, and the shutting down of loss-making subsidiaries (like its electric 2-wheeler business in the US), in addition to the rural uptick, are positives for the Street.

An exit from South Korean subsidiary SsangYong also comes as a relief, given it was primarily responsible for the impairment in Q4.

While near-term rural demand should support the stock, how the firm manages its capital allocation, execution under a new management, and volume trend in the urban segment will all influence its medium-term stock trajectory.