M&M: Muted quarter, new launches key trigger

Market share in UV space stabilises, company guides for 6-10% industry growth in the UV and tractor space

Mahindra & Mahindra (M&M)’s March 2014 quarter performance was slightly below expectations, on both profitability and net profit parameters. Margins and net profits (adjusted for the merger of Mahindra Truck and Buses with M&M in the March quarter) stood at 13.4 per cent and Rs 923 crore, respectively.

Margins were impacted, both on account of adverse product mix as well as dealer compensation for the excise duty cuts, which were passed on to end consumers. Lower proportion of higher margin tractors (sub-30 per cent), compared to 38 per cent earlier, meant margins were lower than the 14 per cent analysts had predicted. Tractors fetch M&M margins of about 17 per cent, while the auto segment earns it 11 per cent. Adjusted net profit of Rs 923 crore was down four per cent year-on-year and nine per cent on a sequential basis.

The key concern area for M&M over the past 18 months has been the shift in preference of consumers towards smaller compact vehicles (like Duster and Ecosport). As a result, the share of M&M's heavier vehicles, such as Bolero and Scorpio has been coming down. For the industry, the share of smaller compact vehicles in the UV mix has gone up to 55 per cent, from 30 per cent a couple of years ago.

M&M, which had a market share of 46 per cent in the June 2013 quarter, however, indicated its market share has stabilised at 42-43 per cent, from the 40 per cent witnessed in the December quarter on the back of higher sales of Scorpio and XUV. To gain share in the compact UV space, M&M plans to launch two new utility vehicles in CY15. This indicates any significant market share gains in the near term are unlikely. The company expects the UV sector to grow 8-10 per cent in FY15. But, if growth in the UV segment picks up from end-2014 on the back of higher economic growth as anticipated by analysts M&M could be among key beneficiaries.

Unlike the 16 per cent fall in overall volumes in the UV space in FY14, on the tractor front, M&M has been able to put up a better show, with volumes growing 20 per cent. However, the impact of El Niño will have to be watched out for. The company has indicated the tractor space should see a growth of six-eight per cent in FY15.

Most analysts continue to have a ‘buy’ rating, given the diversified product portfolio, stabilising market share and expectations the company will improve its share, led by new products. Of the 54 analysts tracking the stock, 44 continue to have a ‘buy’ on the stock, while eight have ‘hold’ with two putting out a ‘sell’ call.