M&M: Tractor outlook should lift sentiment

The company has hiked its guidance for tractor volume growth to 20% in the current financial year

Mahindra & Mahindra reported better-than-expected operational performance on a standalone basis in the September quarter (Q2) driven by strong volume growth of 36% in its farm equipment (tractor) segment as well as 11% growth in the auto segment. Strong volumes along with price hikes across products led to revenue growth of 15.6% year-on-year to Rs 10,172 crore.

While revenues were marginally below expectations of Rs 10,194 crore, M&M managed to report an operating profit growth of 28.3% to Rs 1,468 crore and margins at 14.4%, up 140 basis points, on a year-on-year basis. Bloomberg consensus estimate had pegged operating profit at Rs 1,295 crore. The higher profitability was on account of better product mix, economies of scale and ongoing cost reengineering efforts.

Its net profit was up 28.8% year-on-year to Rs 1,253 crore (versus expectation of Rs 1,023 crore) aided by a strong operational show as well as other income which went up 41%. The latter was largely from dividends with incremental increase coming due to Tech Mahindra. 

The tax outgo has also increased by half to Rs 486 crore due to the loss of fiscal incentives at various plants such as Haridwar. However, despite the good numbers, the stock fell 6%, which can be partly attributed to worries over the potential impact from demonetisation and partly due to the fall in broader market on Friday. But with the management upping the tractors outlook (which was announced close to the fag-end of market hours) expect the same to lift sentiment.

Given the strong Kharif season as well as good trends of the Rabi season, the company expects its rural portfolio which includes both the tractors as well as utility vehicles (UVs) such Bolero, Scorpio as well pick-ups to do well. 

It has increased its industry growth guidance for tractors from 15% to 20%. Given that M&M grew its tractor volumes at 36% while the industry grew at 27.6%, it has gained market share which is now pegged 42.6%, its highest ever. The increase in the tractor guidance and its faster than industry growth could translate to more market share gains going ahead. The company expects passenger vehicle growth to be in the 12-15% range for FY17.

With a higher proportion of more profitable tractor sales expected in the second half of FY17, M&M’s margins could increase going ahead. Ebit margins in Q2FY17 at 17.85% were 170 basis points higher year-on-year. 

In comparison, auto margins came in at 9.66%, marginally ahead of the year-ago number of 9.59%. While M&M will continue to launch refreshes, it has planned a new product on the auto side in the second half of next year (FY18) which will be followed by another launch in FY19. The company expects the launches of the last year to keep the sales momentum going.