The market rally over the last year has seen cyclical stocks move up sharply on hopes of an economic recovery. Mahindra & Mahindra (M&M) has benefited from this trend, gaining about 67 per cent in this period. Also in favour of M&M was the double-digit growth in tractor sales in 2013-14, which more than made up for the slowdown in utility vehicle (UV) sales.

It has not all been rosy, however. Since the start of the financial year (2014-15), tractor sales have hit the speed-breaker and utility vehicle sales for the company have not shown any meaningful recovery.

This situation is not expected to change for the rest of this year. For one, tractors will continue to face challenges from the after-effects of intermittent monsoons. Two, the company still cedes market share in the utility vehicles segment to rivals with compact utility vehicles.

Investors can, hence, book profits on the stock as triggers for further upside in the next six months seem limited. Valuations too have climbed. At the current price of ₹1,390, the stock trades at 22 times its trailing-twelve month standalone earnings, higher than its 5-year historical average of 18 times.

Tractors lose steam Thanks to the runaway demand for diesel vehicles in 2012-13, UVs had a dream run, with industry sales growing at 52 per cent. However, gradual diesel price hikes have worn away the diesel advantage. This, coupled with a high base, resulted in UV sales dropping by 5 per cent in 2013-14.

Even as UV sales slowed, the tractors division, which brings in 30-40 per cent of revenues for M&M, held the fort last fiscal. Aided by good monsoons and higher minimum support prices for crops, domestic tractor sales for M&M grew by 22 per cent in 2013-14. Tractors generally notch up operating margins of around 15 per cent, compared to the 8-10 per cent in UVs. Hence, besides benign input costs, their robust sale played a significant role in improving profitability last year. While sales for 2013-14 remained flat, profits grew by 13 per cent to ₹3,713 crore.

This advantage has faded this year. For the six months ended September 2014, domestic tractor sales for M&M grew just 1 per cent. The company expects to finish the year with 5 per cent growth, if the rabi crop turns out to be good. This is a downward revision from the 8-10 per cent growth expected initially.

Gap in UV portfolio Support for growth may also not come from UVs. Even as the UV segment has benefited from a slow revival in auto sales in the last few months, the company continues to sell fewer UVs than in the same period last year. This is because M&M is facing stiff competition from recent compact UV launches such as the Ecosport, Duster, Terrano and Mobilio.

From about 47 per cent market share in UVs in 2012-13, M&M’s market share came down to 42 per cent last fiscal and has further dropped to below 40 per cent so far this year.

With the Quanto, its compact UV not taking off as expected, the company could not latch on to the shift in demand for compact UVs. M&M’s two new compact UVs are expected to be launched only in FY16. Even if they are successful, they run the risk of denting auto segment margins for the company.

For the quarter ended June 2014, net sales rose by 2 per cent (over June 2013) to ₹10,096 crore, while net profits dropped by 6 per cent to ₹882 crore. Operating margins recorded were 12.3 per cent, a bit lower than the 12.8 per cent for the same period last year.

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