M&M: Launches may help arrest market share decline

Near-term outlook muted; volume uptick next year and valuations are positives

The Mahindra & Mahindra (M&M) scrip has been a laggard on the returns front in the past six months, underperforming both its peer index and the broader markets by a wide margin. The stock has been flat during this period, while the Sensex is up 10 per cent and the BSE Auto index is up nearly 26 per cent. The company is under pressure in both its key areas of the automobile business - utility vehicles (UV), where it has ceded market share to competitors; and tractors, facing a downturn due to weak monsoons. These factors, coupled with pressure on margins, could result in the company reporting a year-on-year earnings decline in FY15 for the first time in six years, according to analysts at IIFL Capital.

While the near-term prospects don't look appealing, the plans of launching products to fill the gap in its product portfolio and attractive valuations could work in favour of the long-term investor. The firm is planning to launch a couple of compact utility vehicles in the coming year, which should boost its market share.

The company is losing share, with year-to-date volumes down 6.5 per cent for UVs/pick-ups.

From a market share of half of the utility vehicles' space, the share has fallen to a little below 35 per cent owing to lack of products in the fast-growing sport utility vehicles (SUVs)'s space, muted response to its launches and successful product launches by competitors, especially in the compact SUV space. While the company dominates the overall UV space, in the compact SUV or multi-utility vehicle (MUV) segment, it has negligible presence, though the space accounts for 38 per cent of the overall UV pie.

The product launches will address that concern.

According to the company, falling fuel prices will help revive demand in the coming months.

In addition to lower running costs, a cut in interest rates will also help aid demand as higher rates were seen as one of the reasons for falling sales.

Tractors, too, have seen sluggish sales, with year-to-date numbers down 6.3 per cent.

While a delayed paddy crop, lower yields and low prices for sugar cane, paddy and cotton have led to lower demand, a pick-up in infrastructure projects and better crop/farm incomes are expected to help the sector achieve growth rates of eight per cent in FY16 against FY15 estimates of a one or two per cent growth.

UV launches and a revival in tractor sales will result in earnings growth rebounding over FY15-17 from a fall in FY15 and a 4.2 per cent growth in FY14.

At the current price, the stock is trading at 13.3 times its FY16 estimates, at a sharp discount to its peers such as Maruti Suzuki India Limited.