M&M’s tractor biz twice as valuable as automotive

M&M, the country’s biggest tractor maker, has seen its market cap swell by over ~100 billion since the start of the new financial year, giving it a valuation of ~1.04 trillion. The stock hit a new high of ~841 on Tuesday, posting a cumulative increase of over 12 per cent since the beginning of April.

The visible trigger for this price increase is the forecast of a normal monsoon by private forecaster Skymet as well as the India Meteorological Department. Even though the company’s tractor division (farm equipment segment) is much smaller — roughly half in revenue compared to the automotive segment (SUVs and commercial vehicles or CVs) — an improved outlook for the segment has improved M&M’s overall growth prospects. M&M is the market leader in the domestic tractor segment with a 43 per cent share. In the year ended March 31, 2018, the company sold a record 304,019 tractors in the domestic market with a growth rate of 22 per cent. The country had a normal monsoon last year as well.

The company's profit before interest and tax (PBIT) from the farm equipment segment rose 31 per cent in 2016-17 to ~25.62 billion while the profits from the automotive segment declined over 17 per cent to ~21.62 billion (the segment had faced headwinds arising from a shift to BSIV emission norm in CVs and expiry of fiscal benefit at the Haridwar unit). The automotive segment’s revenue during 2016-17 stood at ~272 billion. The EBIDTA margin of the farm segment at M&M was much higher at 19 per cent during 2016-17 compared to just 9 per cent for the automotive business. The gap, according to research reports, is projected to remain at similar levels in the near future. Jefferies, an equity research firm, last month said it values M&M’s farm segment business at ~373 a share and the automotive business at a much lower price of ~174 a share. A valuation of ~297 a share is ascribed to the company’s investments in firms like Tech Mahindra, M&M Financial Services and SsangYong. The research firm has a target price of ~ 860 on the M&M stock.

M&M has lost market share in SUVs and is no longer the segment leader — Maruti Suzuki claimed that spot in 2017-18. The company’s light commercial vehicles, however, were a star performer with a 20 per cent increase in domestic sales to 206,074 vehicles last year. Pawan Goenka, MD of M&M, said the farm equipment industry globally is more profitable than automotive. “In the farm equipment business, our profitability is higher than the global average and the same is the case in the automotive business. But farm equipment’s profitability is higher due to the nature of the industry,” he said in February.