Mahindra & Mahindra: Turning around, swiftly (Buy)

Expected bounce-back in auto sales and launches will help the company

With a twin play on utility vehicles (UVs) and tractors, Mahindra and Mahindra (M&M) is well-placed to recapture the demand in both rural and urban areas. Populist measures in the run-up to the elections, including farm loan waivers and farm income support schemes, may boost consumption in the first half of 2019.

Why Buy
  • Growing consumer interest in UVs
  • Tractor sales on a high
  • Attractive valuation

Beyond that, pre-buying before the implementation of BS-VI norms in April 2020 (which will make vehicles costlier) will aid higher offtake. The stock trades at an attractive valuation of 19.5 times its estimated standalone earnings for 2018-19. Investors with a horizon of one to two years can buy the stock.

Shifting preference to UVs

With highly successful models such as Bolero, Scorpio and XUV500, M&M has been a dominant player in the UV segment. But M&M’s market share in this space has declined steadily from over 50 per cent in the beginning of this decade to about 25 per cent now. The company has seen erosion in market share over the years due to several reasons.

 

Initially in 2014, 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.

Following this, 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/entry-level UVs such as the TUV300 and the KUV100. But these too were not instant hits.

Later on, in 2016, the ban on sale of diesel vehicles with engine capacity over 2,000 cc in Delhi for over six months affected the sale of models such as the Scorpio and XUV500.

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 structurally, the Indian auto buyer is gravitating towards bigger cars and UVs.

ALSO READ: India is now gearing up for the urban UV boom

UVs now constitute 27 per cent of the total passenger vehicles sold, from about 12 per cent in 2010-11. M&M will be a beneficiary of this trend. It has spruced up its UV portfolio this year through recent launches such as the Marazzo and the Alturas G4 in the mid and premium segments. The XUV 300 in the highly competitive compact segment will be launched before the end of this fiscal.

Tractors chug along

Two years of bad monsoon in 2014-15 and 2015-16 pulled down domestic tractor sales sharply. Industry volumes declined by 11-13 per cent for each of these years.

But then things stared getting better, thanks to favourable monsoon as well as measures taken by the government to boost rural economy.

 

Thus, tractor industry volumes turned around, growing by 18-22 per cent in each of the last two fiscals.

M&M’s volumes moved up in line with the industry or even slightly higher, in 2016-17 and 2017-18.

The company is the market leader in tractors with a 42.9 per cent share as at end-March 2018.

Apart from an upturn in the industry, timely launches also helped M&M. The YUVO launched in April 2016 in the 32-45 HP range — segments which account for 70-80 per cent of the industry — was a huge success.

ALSO READ: Tractor firms shrug off H2 worries, hopeful of a good year

Besides, in the last two years, the company also launched the JIVO in the sub 25 HP tractor segment, specifically designed for horticulture applications, as well as the Novo in the 65-75 HP range.

A higher HP model in the Swaraj brand was also launched in 2017-18.

The company had earlier projected a volume growth of 12-14 per cent for tractors in 2018-19.

Despite the recent slowdown, it expects a 12 per cent growth. Until November 2018, tractor volumes for the company have grown at 10 per cent.

With three successive years of double-digit growth, a high base is a dampener for 2019-20.

Nevertheless, a revival in demand due to reasons mentioned earlier will help tractor volumes.

Financials

For the half-year ended September 2018, standalone net sales grew by 11.4 per cent to ₹26,508 crore, while adjusted profits grew by 32.3 per cent to ₹2,754 crore.

Operating margins improved marginally from 12.5 per cent a year ago to 13.1 per cent in April-September 2018.

But much of this has been influenced by the good performance in the first quarter, thanks to double-digit volume growth in both the auto and tractor segments and margin expansion of about 190 basis points.

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