Muted outlook to weigh on M&M stock; price hikes to make matters worse

In addition to the cut in the GST from the current 28 per cent, the company hoped for scrappage policy to boost demand

India’s largest tractor and utility vehicle company Mahindra & Mahindra posted a weak operational performance, led by a 10 per cent year-on-year fall in the April-June quarter volumes. The volume decline was more in the case of tractors, sales of which were down over 14 per cent from the year-ago quarter. Revenue decline was, however, restricted to 4 per cent, given the price hikes and better product mix. With demand remaining weak for the first four months of the current financial year, volume declines are expected to continue in the near term.

Given the uncertainty on the demand front, the company has refrained from giving growth guidance for the auto segment. The management indicated that the passenger vehicle segment needs regulatory interventions if it is to see an uptick in demand.

In addition to a slowing economy, the company indicated that the sharp rise in product costs, led by regulatory changes, has dented demand. In addition to the cut in the goods and services tax from the current 28 per cent, the company hoped for scrappage policy to boost demand.

While demand has been weak, what would add to the woes of the sector are higher costs due to safety norms effective from October 1 and later the transition to Bharat Stage (BS)VI next year. While the safety norms will impact the sales of entry-level vehicles, BSVI introduction is expected to increase the cost of diesel-powered vehicles by 8-10 per cent.

Though the passenger vehicle sector has been hit hard, the company indicated that four new launches have helped arrest the slide. Utility vehicle sales in the June quarter were about the same as in the year-ago quarter, and retail sales have been in positive territory, which should help it to gain market share. Over the medium-term, the company’s electric push will be critical from the Street’s point of view. In addition to electric three-wheelers, it is looking at launching three electric vehicles in the passenger vehicle segment.  

The key worry for the company is revival in volumes in the farm equipment (tractor) sector. Weak monsoons, lower government spending, falling rural wages in the non-agricultural segment, lower crop prices, and weak rural spending have kept volumes muted. The company believes that the tractor sector may not be able to post 5 per cent growth for 2019-20 it had guided earlier. Given the sharp fall in volumes in the first four months of the financial year, the company believes the sector will end up with flat volumes.

The positive for the tractor segment is the fact that rain deficit — which was at 16 per cent a month ago — has come down to about 6 per cent now. A weak year-ago base is also a positive for the segment.

Operating leverage has been weak, given the volume decline, which has dented the margins in the quarter. Margins came in 180 basis points lower in the quarter at 14 per cent, which disappointed analysts. What helped to keep the decline in check were the model mix and cost management strategies adopted by the company. While margin pressures will continue due to lower volumes and increase in prices due to BSVI emission norms, lower commodity costs should help offset some of the pressure.

After the results, the stock shed nearly 6 per cent. Given the outlook, expect it to remain under pressure.