Volume upgrades, rural uptick, new launches boost M&M earnings outlook

The new launches of Mahindra & Mahindra expected to improve market share, which has been lagging its key competitors

Volume upgrades for its utility vehicle portfolio and expectations of robust tractor sales could help Mahindra & Mahindra post strong earnings growth over the next two fiscal years. The upgrades come on the back of better-than-expected sales of the recently launched multi-utility vehicle Marazzo. Given the strong response, analysts believe the product will sell about 4,000 units a month as against earlier expectations of 1,500-2,000 units per month.

The other trigger for the stock is new launches, such as the S201 — a compact sports utility vehicle (SUV) scheduled to be launched next month. Analysts at UBS believe that with the new S201 based on the Ssangyong Tivoli monocoque design, M&M may have the right product to address the rapidly expanding urban SUV market.

They added the deal with Ford to jointly develop SUV and connected car solutions will help the company improve its scale and launch more competitive products.

The new launches are expected to improve market share, which has been lagging its key competitors.

In addition to sales of utility vehicles, what should help revenues and margins is the strong demand for tractors. Tractor sales growth for the second half of this fiscal year is expected to be about 13 per cent. Analysts at Kotak Institutional Equities say despite weaker rainfall, tractor sales growth is expected to be good given the sharp rise in minimum support prices, higher sowing levels than last year, and 6 per cent higher reservoir levels than last year that bodes well for the rabi sowing season.

Finally, on the valuations front, the recent correction of 7 per cent over the last week has made the stock attractive, given net profit is expected to grow 19 per cent over the next couple of years. At current levels, the stock is trading under 20 times its FY19 earnings estimates.