M&M: Competition to peg back UV sales

Strong tractor sales and new launches could soften pressure on the utility vehicles front

The Mahindra & Mahindra (M&M) stock has gained 10 per cent over the past month on expectations of higher tractor sales and traction from new utility vehicle (UV) launches. While tractor sales are set to firm up on the back of a good monsoon and pent-up demand, the outlook might not be as rosy in the UV space. Regulatory hurdles and competition could peg back the company’s sales. The National Green Tribunal on Tuesday ruled  diesel vehicles older than 10 years running on Delhi roads be deregistered.

While replacement demand would be a positive, the shift is in favour of petrol-driven vehicles owing to regulatory issues and change in fuel pricing in favour of petrol. The proportion of diesel-powered passenger vehicles in the industry declined from 58 per cent in FY13 to 43 per cent in FY16. In December 2015, the Supreme Court had banned the registration of passenger vehicles with diesel engine capacity above two litres in the Delhi National Capital Region. M&M is likely to be the most impacted, given that 90 per cent of its sports utility vehicles are powered by diesel engines.

Nomura has highlighted the fall in the market share in the UV segment for M&M despite the launch of new vehicles. M&M’s market share in the first quarter of FY17 stood at 26 per cent compared to 30 per cent a year ago, given the competition from Maruti (Brezza) and Hyundai (Creta). The company, however, has been launching petrol versions as well as lower-capacity diesel engine vehicles in all its new launches and variants to tide over the shift to petrol and meet legal stipulations. This has, to some extent, helped arrest the decline in marketshare. More clarity will emerge in the coming months on how successful the new launches have been.

While lower goods and services rates are a positive, analysts believe stiffer competition than in the past will cap near-term upsides for the company. Nomura has cut its FY17 UV volume growth for M&M from 21 per cent to 14 per cent.

The bright spot is tractor sales. Though tractors account for about 30 per cent of overall volumes, they fetch higher margins than the UV segment.

At current price, the standalone entity is valued at Rs 1,110, which is 15 times its FY18 earnings estimates of Rs 74. Adding the value of its investments gives it an overall price of Rs 1,550-1,650, translating into a marginal upside from these levels.