Tractors spoil M&M's robust Q3 show

While auto sales were boosted by new launches, tractors continue to struggle in a weak environment

Mahindra & Mahindra (M&M)’s 14.9 per cent year-on-year (y-o-y) increase in revenues for the December 2015 quarter were in line with expectations, led by higher volumes and realisations. While volume growth for the auto segment grew by a strong 15 per cent y-o-y on the back of new launches, tractor volumes disappointed by growing only 4.9 per cent. Although net profit at Rs 820 crore was way lower than the Bloomberg consensus estimate of Rs 914 crore, the stock gained 3.8 per cent to Rs 1,168 on Friday. There are reasons for this.

While the reported net profit was down 15 per cent y-o-y, adjusted for last year’s exceptional gain of Rs 300 crore, it was up 23 per cent y-o-y despite the 73 per cent jump in taxes and fall in other income.

  Second, the management indicated M&M gained market share as  industry volumes fell 1.5 per cent in the period. The management indicated industry sales for tractors, down 13 per cent year-to-date, could finish FY16 with  a 10 per cent fall, indicating good growth in the March quarter.

For utility vehicles (UVs), while the year-to-date industry growth has been four-five per cent, the management expects this to improve on the back of new launches and the segment would catch up with the passenger vehicle growth of 10 per cent year-to-date. Notably, given the nine new launches and variants in the financial year so far, M&M expects stronger growth in the year ahead for its UV portfolio.

The key monitorables will progress of the monsoon  only for not farm equipment but also for automotives as well, as any adverse decision either by the government or the judiciary on diesel vehicles.

While blended realisations were higher on a y-o-y basis given price hikes taken in FY16, they were weak sequentially   for both tractor as well as automotives. While pricing pressure and discounting has pegged back farm equipment realisations, analysts attribute the pressure on auto realisations to the lower-priced product TUV300.

Better top-line performance, coupled with a 200 basis-point gain on the raw material front, helped M&M report an operating profit margin of 13.5 per cent, up 166 basis points (bps) y-o-y. Margins would have been better but for the lower share of tractor volumes (down 200 bps to 32 per cent). Tractors fetch 15 per cent earnings before interest and tax margins, while auto gets about 10 per cent. Additionally, one-offs also pulled down earnings before interest, taxes, depreciation and amortisation by Rs 100 crore.

In short, the operational performance was good. While the automobile segment is expected to do well going ahead, a good monsoon could perk up tractor volumes, too. Thirty-seven of the 47 analysts have a ‘buy’ (rest have ‘hold’) on the stock with an average target price of Rs 1,423.