Rural portfolio could reverse M&M's volume downslide

Tractors and utility vehicle Bolero likely to see volume uptick in second half of the fiscal

The M&M stock is down 17% since May on the back of higher excise duties, diesel costs and new product launches by rivals in the utility vehicle space. While M&M’s domestic 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 the stock went up about 4% over the 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's best play is to focus on 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 auto space.  

“The company’s tractor volume growth has improved to 15-20% YoY 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% of overall volumes, Bolero and its variants (sales mostly in semi-urban/rural markets) also form over half of its utility vehicle 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 that 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 trading at 11-13 times FY15 earnings estimates.

Tractor sales get a boost

After falling 5% in FY13, tractor sales have seen a rebound. In this fiscal, tractor sales in the domestic market have jumped 22% year-on-year so far. Given the expected rise in farm income, analysts estimate that the company will be able to achieve a 14% growth in volumes in FY14.

While August sales growth has moderated at 9%, the company’s chief executive for tractor and farm mechanization, Rajesh Jejurikar in a recent statement said that the Kharif sowing crossing the 1,000 lakh 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 in M&M is also likely to move up to 33-35% from current levels. With the tractor division contributing about 40% at the Ebit level and margins of the segment higher, there could be a positive impact from the same going ahead.

Utility vehicles: Not firing this fiscal

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 have fallen 13% year-on-year. The fall is sharper at 25% for the company’s urban-oriented portfolio comprising XUV, Scorpio, Xylo among others.

Among other reasons, Shah says that 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 2% 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 that the company will see its UV volumes fall by 10-15% in the current fiscal, Edelweiss analysts say that while April-August volumes have witnessed a sharp contraction of 13%, 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.