Mahindra & Mahindra: Cloudy outlook

Deficient rains and talk of additional excise duty on diesel vehicles dampen the market sentiment

The outlook on Mahindra and Mahindra (M&M) has been changing since its tractor business hit a speed-breaker. Analysts say there are no real triggers for its shares to move up in the near term. M&M, which derives 60 per cent of its revenues from rural India, had guided tractor volumes to grow five per cent in FY13, after volumes dipped sharply towards the end of 2011.

The Street, therefore, does not expect the company to meet its tractor volume guidance, going by the 4.5 per cent year-on-year decline in sales volume over April and May. Emkay Global expects tractor volumes to dip five per cent this year. Ten states (Uttar Pradesh, Andhra Pradesh, Bihar, Gujarat, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Karnataka and Tamil Nadu) accounted for 85 per cent of M&M's tractor sales in FY12. If these states get deficient rainfall then the demand for tractors will be further affected. Sharekhan's Deepak Jain, too, had earlier built in a five per cent growth in tractor volumes in FY13, but has scaled it back and now expects volumes to remain flat. As a result, the standalone earnings per share (EPS) estimate would be impacted by 4.2 per cent.

The change in estimates also has to do with the monthly sales trajectory over April and May. The company's tractor sales in this period were down 4.5 per cent year-on-year. Going by the trend, analysts expect June to be weak, too, as the company sold 22,730 units in June 2011. Given the high base, the company would find it difficult to even match these volumes. In order to grow volumes by five per cent in FY13, it would have to grow tractor volumes by 10 per cent, which looks rather tough at this point.

However, analysts are not downgrading the stock just yet. While the market does not expect any negative surprise from the automotive segment, which is estimated to grow at 13.5 per cent, being a high-margin business, the farm equipment segment’s contribution to profitability is higher. While tractors contribute 37 per cent to revenues, these contribute nearly 50 per cent of the company’s earnings before interest and taxes (Ebit). The farm equipment business has a superior margin profile (between 15-17 per cent), while the auto segment enjoys margins of 8-10 per cent.