Policy triggers add vroom to M&M's future

Multiple triggers in the form of farm loan waivers, lower goods and services tax (GST) rates for sports utility vehicles (SUVs) and the recent Cabinet nod to government employee allowances as part of the Pay Commission recommendation are positive for Mahindra and Mahindra’s (M&M’s) two segments of automobiles and farm equipment. A majority of the triggers pertain to the government’s policies, especially for the rural markets, which will immensely benefit the company’s sales of tractor and utility vehicles (UVs).

Farm loan waivers by various state governments, both announced and expected, are a major driver, as these states account for up to 65 per cent of tractor volumes. Analysts at Credit Suisse say the previous loan waiver in 2008 led to a sharp pick-up in tractor volumes, which grew 21 per cent annually in the three years afterward. A waiver means more disposable income with farmers, which can get channelised to investment in equipment, they added. 

The previous farm loan waiver stood at Rs 52,800 crore, while the current ones so far will waive about Rs 84,570 crore. While analysts have built a 12 per cent growth in tractor volumes, there could be further upside on the back of these loan waivers and a good monsoon. M&M, being the largest in the segment, will be a key beneficiary. 

At a structural level, the government’s aim to double farm incomes by 2022 through selling prices, productivity gains, farm mechanisation and insurance facilities will provide ample opportunities for M&M in tractors and allied areas, say analysts at CIMB. 

The company’s plans to scale up its presence in global markets will also help improve volumes and de-risk cyclicality in the business. Tractors, the most profitable segment for the company, account for 38 per cent of total volumes (including commercial vehicles). The farm equipment (tractor) segment fetches an operating profit margin of 18 per cent; the automobile segment profitability is less than half that number. A favourable GST for sports utility and electric vehicles (SUVs and EVs) is expected to improve demand for these products. The rate was reduced to 43 per cent from 50 per cent. 

CIMB says the company is positioned to tap this demand through aggressive product expansion plans, both in the SUV and EV space, over the next three years. Given Niti Aayog’s stress on EVs, M&M plans to raise production to 5,000 units a month, in phases. It sells about 100 units a month. The company, according to analysts at Motilal Oswal Securities, is gradually recovering its market share in its bread- and butter-models of the Bolero and Scorpio, with the XUV 500s volumes at stable levels.

The stock is trading at 18 times its FY19 earnings estimate. Given the triggers, investors can expect good gains over the long term.

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