M&M: New launches to add to November show

Rebound in earnings growth may lead to a re-rating in the stock, which is trading at a discount to peers

In an otherwise muted month for auto companies, M&M stood out with sales in both its automotive and tractor segments registering strong growth. For November, while its automotive sales grew 21 per cent year-on-year, tractor sales were up 42 per cent due to a low base last year and some rub off from higher festive period demand. While tractor sales grew for the first time after 13 months of year-on-year decline, utility vehicles (UV), which were struggling against more nimble opponents for a larger part of the last few quarters, saw a second consecutive month of growth.

The growth of UVs, up by 37 per cent y-o-y (financial year-to-date 2.4 per cent), has been led by new product launches such as the TUV 300 as well as higher sales of existing products Bolero, Scorpio and XUV 500. While growth of UVs (including pick ups aided by launch of Jeeto LCV) for the month was up 25 per cent y-o-y, for the financial year-to-date it was up 3.3 per cent. Analysts at Motilal Oswal Securities expect growth rate for the last four months of the financial year at nearly 20 per cent. Overall, FY16 growth of M&M in this segment is pegged at nine per cent.

While year-to-date tractor sales for M&M are down 15 per cent, it is expected to see an improvement with the fall restricted to five-10 per cent for FY16. The M&M management is hoping for a recovery in the rural economy to improve its farm equipment sales. The Street will keep an eye out for tractor sales as the farm equipment segment gets M&M nearly 30 per cent of revenues with margins at 16.4 per cent (September quarter), which are more than double that of the auto segment.

Going ahead, the recovery is expected to gather pace and improve further in FY17. Analysts at Nomura believe that new launches are expected to drive a re-rating of the stock with FY17 being the first year since FY12 which could see a simultaneous growth of UVs and tractors.

While volume growth is a trigger, the other reason analysts have a buy on the stock is valuations. About three quarters (75 per cent) of its sum-of-the-part valuations target price of around Rs 1,500 is accounted for by the auto business with its 26.7 per cent holding in Tech Mahindra, the second largest contributor at about 16 per cent.