Posted On - 20 Aug 2016
Tractor business to lift Mahindra & Mahindra, auto segment becomes weak
ET Intelligence Group: Recovery of the rural market due to better monsoon and significant volume growth in the tractor segment, where it is the market leader, are likely to improve investor sentiment towards Mahindra & Mahindra (M&M).
Upward revision in the tractor industry forecast by the company is also likely to support the stock that has been losing steam in the last one month due to rich valuations. However, the degree of optimism may be limited by lower margins in the auto segment, which is affected owing to increasing competitive intensity in the utility vehicle space. Tractor business for M&M contributes nearly one-third of its revenues and two-third of the operating profit.
The company has managed to outperform the industry, recording 20 per cent volume growth in June quarter against tractor segment's growth of 14.7 per cent. Operating profit margin (EBIT margin) of tractor business increased by 121 basis point to 18.8 per cent. Buoyed by the pace of sowing and higher Rabi output, M&M has raised its volume guidance for the tractor industry for FY17 to mid-teens from 10 per cent.
Based on the company's guidance and optimism in the recovery in rural income, the Street is likely to revise its guidance for M&M upwards.
It must be noted that seasonally second quarter accounts for nearly 30 per cent of total sales volumes of the tractor industry. Hence, there are fair chances that M&M may surprise on volumes in Q2. On the passenger vehicle (PV) side, however, the financials are not that encouraging.
Operating margin in the segment dropped 252 bps YoY to 7.8 per cent mainly due to the expiry of tax benefit at its Haridwar plant.
It appears challenges are mounting owing to rising competitive intensity, price correction by its peers and lower demand for diesel vehicles. What is more worrisome for the company is that volumes of newly launched vehicles such as KUV100 and TUV300 are moderating, and it has no new vehicle launch planned for the current fiscal.
At current price of `1,447, it is trading at 15.45 times of FY18 earnings, nearly 21 per cent premium to its long-term average.