On track - Mahindra and Mahindra: Buy

Mahindra and Mahindra (M&M) is on a strong wicket right now with robust tractor sales, cheaper utility vehicles (UV) under the GST regime and upcoming launches to strengthen its market leadership position in these segments. Both urban and rural consumption are looking up, thanks to benign borrowing costs, low inflation and measures to improve farm incomes. Hence, prospects for both UVs and tractors seem rosy. Investors with a one to two-year perspective can buy the Mahindra and Mahindra stock. It currently trades at about 21 times its trailing 12-month standalone earnings. This is slightly cheaper than its historical three-year average valuation of about 22 times.

With models such as the Bolero, Scorpio and XUV500, the company is the market leader in the UV segment. But M&M’s market share in the UV space has declined steadily from 47 per cent five years ago to about 30 per cent by end 2016-17. The company has seen erosion in market share due to several reasons. For one, the deregulation of diesel narrowed the gap between petrol and diesel prices and led to some drift to petrol UVs, while M&M primarily had diesel offerings. Secondly, M&M had to face stiff competition from compact UVs such as the Ecosport (Ford), Duster (Renualt) , SX4 S-Cross, Vitara Brezza (Maruti Suzuki) and Creta (Hyundai) in the last few years.

With the Quanto not taking off as expected, the company had a gap in its product portfolio until it introduced compact UVs such as the TUV300 and the KUV100 about two years ago. But these were not a runaway success too. Later on, in 2016, the ban on sale of diesel vehicles with engine capacity over 2000 cc in Delhi for over six months affected the sale of models such as the Scorpio and XUV500. Demonetisation also took a toll on sales.

With many players now in the game, M&M may not be able to go back to its 45-50 per cent market share. But, there is still steam left in this segment for the company. Structurally, the Indian auto buyer is gravitating towards bigger cars and UVs, indicating a maturing of the market. UVs now constitute one-fourth of the total passenger vehicles sold, from about 12 per cent in the beginning of this decade. Besides, in the next few months, lower indirect taxes under the GST regime will also help. Total indirect tax incidence on utility vehicles which added up to 50-55 per cent earlier, has been brought down to 43 per cent currently.

The company has reduced prices of UVs by an average of 6.9 per cent from July 1. The revival in rural demand bodes well for models such as the Bolero, Scorpio and TUV300. M&M is also sprucing up its product portfolio. During 2016-17, it introduced variants of the Bolero, TUV300, KUV100 and XUV500. M&M will launch a new vehicle pitted against Innova and Ertiga in the current year and another UV based on the successful Ssangyong Tivoliplatform next year.

Two years of bad monsoon in 2014-15 and 2015-16 pulled down domestic tractor sales sharply. M&M, which derives about one-third of its revenues from tractors, saw domestic sales volumes decline by 14 per cent and 8 per cent respectively in these years. But favourable monsoon last year and good hikes in the minimum support prices, coupled with the effect of a low base, helped tractor sales chug along briskly in 2016-17.

Despite a temporary blip due to demonetisation, M&M ended the year with a volume growth of 23 per cent in tractors, outperforming the industry growth rate of 18 per cent. The company’s market share improved by 1.8 percentage points to 42.7 per cent last fiscal. The YUVO launched in April 2016 in the 30-45 HP range, which accounts for a big chunk of the industry, was a huge success.

Measures in the Budget to boost the rural economy, good kharif sowing and normal monsoon should help tractor sales sustain the momentum. To strengthen its product portfolio, the company launched the JIVO, in the sub 25 HP tractor segment recently. It is a product specifically designed for horticulture applications, a segment that has good prospects.

Given the need to improve farm productivity, the company is also focusing on farm mechanisation products such as rotary tillers, cultivators, harvesters, rice transplanters and balers. This goes well with the government’s aim to double farm incomes by 2022.

For the year ended March 2017, M&M’s total operating income grew by 7.7 per cent to ₹41,895 crore. Top line growth was supported by the farm equipment segment where volumes grew 23 per cent vis-à-vis a subdued 2.5 per cent volume growth in the auto segment.

Operating margin was 13.5 per cent, the same level as in 2015-16. Net profit (excluding exceptional items) grew by 11 per cent to ₹3,706 crore.