Mahindra and Escorts stocks rise 4% each, riding on higher volumes

Street expects upward revision in growth guidance if trend persists

The stocks of Mahindra & Mahindra (M&M) as well as Escorts were up 4 per cent each on Friday, riding on volume uptick in the tractor segment in August. 

After reporting a decline of 14 per cent in the April-July 2019 period, the positive momentum could indicate a reversal of the trend. Analysts at Emkay Research believe the improvement in tractor volumes was driven by better customer sentiment, uptick in monsoon, and higher Kharif sowing. 

The first half of August saw tractor sales grow 11 per cent over the year-ago period. Growth in August was led by the Gujarat and Uttar Pradesh markets, both of which accounted for close to half the overall tractor sales. 

Sales in Gujarat were up by over 50 per cent during the month. 

July was one of the worst months, with volumes dropping about 13 per cent. Anish Rankawat of Nirmal Bang Institutional Equities believes the lower volumes were on account of a delay in monsoon, lower construction projects in the eastern region, inventory correction by dealers, and lack of participation by players in tractor subsidies. 

If the trend of improvement in volumes continues, analysts expect the industry growth guidance to be revised upwards. After its June quarter results, M&M had revised its sector guidance downwards. 

The company indicated that the sector would sell the same number of tractors in FY20 as it did in FY19, while its earlier prediction was for 5 per cent growth. In addition to a weak monsoon, the company had cited lower government spending, falling rural wages in the non-agricultural segment, lower crop prices, and weak rural spending for the weak show in the first four months of the financial year.

The two major listed entities that will benefit the most on account of improving volumes are M&M and Escorts. Over the past year, the stocks had lost 44-50 per cent each. 

Analysts at Emkay prefer M&M, given that the company continues to gain market share on the back of a favourable base and higher marketing initiatives. They also said that M&M’s dealer inventory was lower by 10-15 days, as compared to its peers.