Rural recovery powering growth for Mahindra's tractor, UV business

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

Tractors growing rapidly

The biggest trigger for the company will come from its tractor portfolio, which saw a 32 per cent year-on-year 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 share from 41 per cent in FY16 to 46 per cent currently with gains across key states, is expected to benefit from rising rural incomes, push to direct benefit transfer scheme and, government's rural focus both in terms of infrastructure as well as target of doubling farm incomes. Market share gains for M&M, most importantly, has come from the 41-50 horsepower segment, which has grown the fastest and is also the largest accounting for 46 per cent of the sector's volumes. M&M has 49 per cent market share in this category.

The sector trends towards higher horsepower vehicles are positive for M&M as premiumisation will also help boost its profitability and not just revenue. Segment margins for the tractor business at over 21 per cent are almost double that of M&M's utility vehicle business. Further, new product launches such as the Jivo introduced earlier this year for horticulture and row cropping applications as well as autonomous (driverless) tractors, for which the company is seeking regulatory approvals, should give it a volume impetus and keep it ahead of the competition on the product innovation front. All these steps and macro triggers should translate to healthy demand for tractors. Analysts at Citi expect M&M's tractor volumes to grow by 17 per cent in FY18 and 14 per cent in FY19.

Uptick in UVs too

The segment where M&M has been struggling is the utility vehicles. Sales of this segment grew 20.5 per cent year-on-year in November. M&M's volumes in the segment have been falling six per cent on an average over the FY13-17, which is a function of the emergence of compact sports utility vehicle (SUV) where M&M did not have a presence as well as muted rural demand. While its compact SUVs have not clicked, analysts at Motilal Oswal Securities said the expected recovery in the rural market, one new product launch each in FY18 and FY19 along with several upgrades and refreshes should help M&M's passenger utility vehicle volumes to grow at healthy rates. Analysts add that the utility vehicle space and tractors could for the first time in four years grow at double-digits over the FY17-20 period.

Other opportunities

With an eye on the future, the company is stepping up its investments in the electric vehicle (EV) space. While the company 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 moves will strengthen its portfolio, which came into its fold with the acquisition of Reva Electric Car Company in 2010. With government aggressive pushing for electric vehicles, this business, though a small contributor currently, should also get a boost.

Another trigger going ahead for M&M is the entry into the US market by its Korean subsidiary, Ssangyong, which has also seen an improvement in its profitability. The board of the Korean auto company will meet early 2018 to evaluate its US plans and launch sports utility vehicles.

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.