M&M gains from tractor, UV volumes

Tractors & Bolero are likely to see a volume uptick in second half on account of higher farm income and pre-election spending

The M&M stock is down 15 per cent since May on the back of higher excise duties, rising diesel costs and new product launches by rivals in the utility vehicle (UV) space. While M&M’s domestic UV sales numbers continue to be muted, expectations of improvement in volumes on the back of higher rural demand could help it steady the ship. In fact, excluding Thursday’s rise, the stock went up about four per cent last week as analysts bet on its rural-oriented product portfolio especially tractors to get a demand boost.

Amit Mishra of Macquarie Capital Securities India believes that M&M is the best play on revival in rural demand. “Tractor sales have recovered and we believe demand is likely to be sustained on the back of strong farm income growth,” he says. Echoing this view, CLSA analysts, too, in a recent report on rural growth highlight three preferred picks to play the rural theme with M&M being the only one in the automobile space. “The company’s tractor volume growth has improved to 15-20 per cent year-on-year in FY14 from a declining trend in FY13,” they add. Both the research firms have an outperform rating on the company.

Why analysts are betting on M&M is because in addition to tractors, which forms about 29 per cent of overall volumes, Bolero and its variants (sales mostly in semi-urban/rural markets) also form over half of its UV volumes. The fall in its urban-oriented portfolio of utility vehicles could be compensated by volume growth in the rural and semi-urban markets. Says the company’s chief executive, automotive division, Pravin Shah, “Going ahead with monsoons being normal and crop prices likely to better, momentum in sales in the rural/semi urban market should pick up.”

Edelweiss analysts believe most near-term growth concerns on high fuel prices, interest rates and negative sentiment are priced in the M&M stock. Analysts have a sum-of-the-parts target price of around Rs 1,000 for the stock which is currently (Rs 855) trading at 13 times FY15 standalone earnings estimates indicating that valuations too are reasonable.

Tractor sales get a boost
After falling five per cent in FY13, tractor sales have seen a rebound. In this financial year, tractor sales in the domestic market have jumped 22 per cent year-on-year so far (till August). Given the expected rise in farm income, analysts estimate that M&M will be able to achieve a 14 per cent growth in tractor volumes in FY14.

While the August sales growth has moderated at nine per cent, the company’s chief executive for tractor and farm mechanisation, Rajesh Jejurikar in a recent statement said the kharif sowing crossing the 100-million-hectare mark and normal monsoons are clear indicators of stronger growth for the agricultural sector in the coming months.

Share of tractors as a percentage of overall M&M’s volumes (standalone) is also likely to move up to 33-35 per cent from 29 per cent in FY13. With the tractor division contributing about 40 per cent at the Ebit level and margins of the segment higher at 15-17 per cent compared to 9-10 per cent for UVs, there will be a positive impact from the same going ahead.

UVs: Recovery hopes in H2
The key concern of the Street has been the fall in volumes of the company’s UV portfolio on the back of higher duties, diesel prices and aggressive competition. For the April to August period, UV sales fell 13 per cent year-on-year. The fall is sharper at 25 per cent for the company’s urban-oriented portfolio comprising XUV, Scorpio and Xylo among others.

Among other reasons Pravin Shah says the sales have been impacted by hike in excise duty. While its urban-oriented portfolio has borne the brunt of the impact, being rural and semi-urban, Bolero sales (and Scorpio sales) have held up so far, says Shah. Sales of Bolero are up about two per cent year-on-year in the April to August period.

While the company is getting impacted by new launches, the M&M management is relying on its tried and tested product base of Bolero and Scorpio, which as Shah points out have more than 12 years of product lifecycle.

While most analysts believe the company will see its UV volumes fall by 10-15 per cent in the current fiscal, Edelweiss analysts say that while April-August volumes have witnessed a sharp contraction of 13 per cent, they are still hopeful of the exceptional brand franchise of Bolero/Scorpio and improvement in the expected re-launch of XUV5OO to lead to some recovery in the remaining part of FY14. Strong farm incomes should help volumes in UV segment, especially for Bolero and its variants, which have strong acceptance among rural folks.