M&M: TUV 300 might not be a game changer

Recent launches haven't arrested volume slide; company looks to raise market share

In line with its plans to recover lost ground in the utility vehicles (UV) segment, Mahindra & Mahindra (M&M) is banking on the TUV 300, which it launched on Thursday. While M&M currently sells around 14,000 UVs a month, analysts expect the new vehicle to add 3,000 units a month, on an average, to overall volumes.

M&M hopes improvement in the demand environment in the upcoming festive season and the attractive pricing of its feature-packed model would help improve volumes.

The price of the new vehicle, which includes an automated manual transmission variant, starts at Rs 6.9 lakh, 10-30 per cent lower than competitors Ford Ecosport, Hyundai Creta and Renault Duster.

While the lower price points and affordability are plus points and M&M is expected to garner good volumes, it might not be a game changer. HSBC analysts believe the UV which might sell about 3,000 units a month might fail to be an aspirational product in urban India. M&M’s stock is down 0.4 per cent (in line with markets) compared to levels before the TUV300 launch.

The company has been facing a double-whammy over the past few quarters with lower demand for its UVs as more customers preferred compact SUVs, and a sharp decline in the more-profitable tractor sales on the back of poor monsoons and rural slowdown. While a lot will depend on the uptick in rural incomes for tractor volumes to reach earlier levels, the new UV launches should arrest the slide in M&M’s market share.

From close to 50 per cent a couple of years ago, its UV market share has dropped to 36 per cent currently. For August, while M&M’s domestic tractor volumes came in just under 11,000 units, 22 per cent lower than last year’s number, UV volumes at 14,200 units were flattish compared to the year-ago number. This was despite the launch of a refreshed Scorpio and the new XUV500, which failed to rev up volumes in a big way.

Going ahead, in addition to the new platforms - Jeeto, a light commercial vehicle (LCV), and TUV300 - M&M is planning to launch three new variants in UVs, LCVs and tractors with new engines in FY16, which should give a bump-up to volumes.

Positively, despite the fall in volumes, M&M has been able to hold on to operating profit margins, which, according to analysts at Karvy Stock Broking, indicates strong management capability and clear focus on financial performance. The brokerage has upgraded the stock to ‘buy’. While the analysts believe M&M would face near-term hurdles due to monsoon deficit and economic uncertainty coupled with competition in the domestic UV segment, they expect some improvement in the second half of FY16. 

Other brokerages are also positive on M&M after the stocks’ recent 13 per cent decline to Rs 1,165. The sum-of-the-part valuations range between Rs 1,250 and Rs 1,500. Investors should await signs of volume pick-up before committing any investments to the scrip.