Normal monsoon to aid strong rebound in tractor industry: Sanjeev Prasad, Kotak Institutional Equities

Normal monsoon to aid strong rebound in tractor industry: Sanjeev Prasad, Kotak Institutional Equities

Posted On - 25 Jul 2016

ET Now: The markets are rejoicing the fact that IMD has predicted that it is going to be a normal and timely monsoon this time around and that cheer is pretty much spreading across the tractor space as well. We have just been talking about it. We just chatted with the M&M management as well and the farm equipment head Mr Jejurikar who was saying that this could indicate a bump up of almost 20 per cent in volumes. Do you think time has run out now to buy into names like M&M and likes or do you think the going has begun to be good? 

Sanjeev Prasad: Keep in mind that the tractor industry has had two years of decline as far as volumes are concerned. So from a low base, if you have normal monsoon as indicated by IMD and the private forecasters, you should generally see pretty strong growth. Tractors have seen a reasonably cyclical business which is obviously linked to the health of the rural economy. 

So if you see normal monsoon this time around, you could actually see a big 15-20 per cent rebound in volume growth as far as tractor industry is concerned. Hopefully, that could continue for one or two years more after that and that has been the historical scenario. If you have a series of bad monsoons, you will also typically have a series of good monsoons and that will result in a fair amount of purchasing power in the hands of agricultural community which results in two orthree years of recent volume growth in tractors. If that is the case, this time around also, then I do not see any reason why one should exit the stocks immediately. There has been a decent run up in some of the agri and rural related stocks, but it is not as if the valuations are very expensive. If I look at M&M for example, you take out Rs 40 for the value of all the subsidiaries it has. You are effectively getting the automobile part of the story at roughly about Rs 90 and if you look at  the EPS which you are forecasting Rs 70-71 kind of a number, then this stock is still somewhere about 13-14 times which is not very expensive. So I would probably stay invested at current levels. 

Source- economictimes



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