Tractors to drive M&M growth

Volume gains in the high-margin business will offset the dip in utility vehicle sales

While Mahindra & Mahindra (M&M) has been facing pressure from competitors in the utility-vehicles space, the performance of its farm equipment business over the last quarter has helped it to assuage investor concerns.

For the June 2013 quarter, while sales of utility vehicles were down 13 per cent year-on-year, tractors registered a growth of 19 per cent compared to the year-ago period. With normal monsoons this season, analysts expect the tractor division to post double-digit volume growth for FY14 compared with a fall of five per cent in FY13. With tractors expected to take a bigger share of the volume pie, expect margins to look up in FY14.

The farm-equipment segment margins at 16 per cent are 500-600 basis points more than automobile segment’s. 100 basis points are one percentage point. Another positive has been the improvement in Ssangyong’s global performance, with the Korean subsidiary (70 per cent stake) registering its second month of robust numbers in June at a record 12,858 units.

While the recent global alliance with CIE Automotive of Spain for its auto component business might not have a material impact on M&M’s valuations, analysts believe that the management focus on value unlocking of subsidiary investments is a positive. Further, with the merger of its information technology (IT) arms, the prospects of M&M’s 48 per cent subsidiary Tech Mahindra, too, look bright. Given the improvement in product mix, better show from subsidiaries, most analysts (two-thirds according to Bloomberg) have a buy rating on the stock. The sum-of-parts valuation pegs the target price for the company between Rs 1,100 and Rs 1,200. This suggests an upside potential of 12-23 per cent from current levels of Rs 978.

Tractor sales on a high
While the company has given a six-eight per cent growth forecast for the sector for the current financial year, most analysts believe this is likely to be revised upwards, given the first quarter numbers. Yaresh Kothari, auto analyst at Angel Broking, says the growth in the first quarter was much ahead of Street’s expectations.

With the monsoons remaining favourable and the increase in minimum support prices, the overall growth for tractors, too, is likely to stay robust. Kothari expects the company to register volume growth in the tractor segment in the region of 10-12 per cent, outperforming the sector.

Analysts at Asian Market Securities believe the company’s outperformance is likely to be on account of demand recovery in the south, where M&M has high market share.

Competitive worries for UVs
After the performance in the quarter, which was pegged back by rise in excise duty, higher fuel prices and product launches by competition, most analysts have scaled down their volume expectation for the company’s auto portfolio. Motilal Oswal Securities has pegged the FY14 volume growth for auto at 5.7 per cent. This is in sharp contrast to the 30 per cent growth registered by M&M’s auto segment in FY13 on the back of a slew of successful launches and demand for diesel powered vehicles. Pravin Shah, Chief Executive, Automotive Division, M&M, says the de-growth (in June) came amidst an overall decline in the auto industry.

The spiralling fuel costs, high interest rates and the additional excise duty on SUVs have further dampened prospects. Though the company had launched a couple of products in CY12 and is likely to launch new variants in this fiscal, analysts say competition is likely to eat away some of M&M’s market share. They estimate a loss of about 200-300 basis points in FY14 as against the company’s market share of 48 per cent in FY13.