Volumes in the tractor sector are expected to be 5-10 per cent lower, compared to a fall of over 20-25 per cent for all other segments. Analysts expect the company to maintain its market share at 40-41 per cent in the year. The higher sales of tractors to its overall volumes are a positive for M&M, as margins in the farm equipment segment at 18 per cent are thrice the auto segment’s.
Though a large chunk of the volumes in the auto space comes from the rural segment, analysts believe M&M will struggle to sell even the Bolero and Scorpio, as demand for discretionary spends is expected to pick up only gradually, as retail showrooms (utility and light commercial vehicles) continue to be under lockdown.
Demand worries and plant shutdown impact were visible in March for the auto segment, which witnessed an 88 per cent decline year-on-year in volume.
The other positive from the Street’s perspective is the improvement in the capital allocation policy. Recently, the firm decided not to invest more capital in its subsidiary SsangYong Motor Company, given the risks from Covid-19. The firm will invest $32 million, compared to $406 million over the next three years.
Analysts believe the firm could delay or review investments across its loss-making subsidiaries as well as capital expenditure plan for core operations.
In the near term, the key triggers would be the March quarter results. The company is expected to post a 38 per cent fall in revenue, led by the auto segment, while margins are expected to decline by
220 basis points to 11 per cent.
Though analysts expect a 60 per cent fall in net profit to about Rs 400 crore, compared to over Rs 1,000 crore in the year-ago quarter, there is no balance sheet risk. The company, according to IIFL, is expected to end 2019-20 with net cash of Rs 3,000 crore.
While there are positives on tractor sales, capital allocation policy, and valuations (reasonable on a price-to-book basis of around 1x), investors should be cautious as there are little signs of recovery for the utility and light commercial portfolio of the firm.