Rural recovery to power M&M

The tractor and utility vehicle segments are expected to clock double-digit growth over FY17-20

The stock of Mahindra & Mahindra (M&M) has gained nearly 10 per cent over the last three weeks and in the process touched its all-time high on expectations of a strong volume growth, given its rural-heavy portfolio. Almost 56 per cent of the company’s standalone revenues and 72 per cent of its profit come from the rural markets. The company, which has gained market share in tractors, is also expected to benefit from the upcoming launches in the utility vehicle space as well as from the initiatives taken on electric vehicles front.

Tractors growing rapidly

The biggest trigger for the company will come from its tractor portfolio, which saw a 32 per cent year-on-year (y-o-y) increase in volumes in November on the back of a healthy monsoon, robust kharif output and increased minimum support prices for crops. The company, which has increased its tractor market pie to 46 per cent from 41 per cent in FY16, with gains across key states, is expected to benefit from the rising rural incomes, push to direct benefit transfer scheme and, the government’s rural focus, both in terms of infrastructure and target of doubling farmers’ income. Market share gains for M&M has come from the 41-50 horsepower segment, which has grown at a fast pace and is also the largest, accounting for 46 per cent of the sector’s volumes. M&M has a 49 per cent market share in this category.

The trend towards higher horsepower vehicles is a positive for M&M as premiumisation will help to boost the firm’s profitability, and not just revenue. Segment margins for the tractor business at over 21 per cent are almost double than that of M&M’s utility vehicle business. Product launches such as the Jivo introduced earlier this year for horticulture and row cropping applications as well as autonomous (driver less) tractors, for which the compa- is seeking regulatory ny approvals, should also give it a volume impetus and keep it ahead of competition. All these steps and macro triggers should translate into a healthy demand for tractors. Analysts at Citi expect M&M’s tractor volumes to grow 17 per cent in FY18 and 14 per cent in FY19.

Uptick in utility vehicles, too

The segment where M&M has been struggling is the utility vehicles (UV). However, after a decline in the June quarter, the September quarter saw M&M’s UV volumes increase 17.7 per cent y-o-y. With November sales growing 20.5 per cent y-o-y, the fiscal year-to-date UV volumes are up 5.3 per cent. M&M’s volumes in the segment have fallen six per cent on an average over FY13-17, mainly due to the emergence of compact sports utility vehicles (SUVs) where the company did not have a presence, and muted rural demand. While its compact SUVs have not clicked, analysts at Motilal Oswal Securities say the expected recovery in rural market, one new product each in FY18 and FY19, along with several upgrades and refreshes, should help M&M’s passenger UV volumes to grow at healthy rates. Analysts said the UV space and tractors could for the first time in four years grow at double-digits over the FY17-20 period.

Other opportunities

The company is stepping up its investments in the electric vehicle space. While it has launched an electric rickshaw in September this year and has won an order from the Energy Efficiency Services for 10,000 units, it has also lined up two new electric vehicles over the next two years. These are expected to strengthen its portfolio, which came into its fold with the acquisition of Reva Electric Car Company in 2010. With the government aggressively pushing for electric vehicles, this business should get a boost.

Another trigger is M&M’s entry into the US market through its Korean subsidiary, Ssang-Yong, which has also seen an improvement in profitability. The board of the Korean auto company will meet early 2018 to evaluate its US plans and launch SUVs.

In this backdrop, many analysts are positive on the company. At the current price, the M&M stock is trading at 20 times its FY19 earnings estimates. Investors can consider the stock on dips.