FY19 likely to see turnaround for M&M's utility vehicles

Led by strong volumes for both automotive and farm equipment segments (FES or tractor business), Mahindra and Mahindra (M&M) ended the fiscal on a strong note. Net sales was up nearly 26 per cent largely on the back of a 40 per cent jump in tractor volumes and 20 per cent uptick in the auto space. 

The strong volume performance, price hikes and richer product mix also reflected on the margins as well as the bottom line. While margins came in at a strong 15.1 per cent, the bottom line was up nearly 50 per cent compared to the same period in the previous year. 

Profits were boosted by a Rs 478.6 million exception gain on account of profit on sale and reversal of impairment loss of certain long-term investments. Even after adjusting for the same, performance has been strong and ahead of consensus estimates.

Pawan Goenka, managing director of the company, said it was a record quarter as volumes for the farm equipment sector, which includes tractors and other agricultural implements, hit its highest level in 31 quarters while sale numbers for its auto segment which include passenger vehicles, commercial vehicles and three wheelers, was the highest in 21 quarters.

In addition to the strong volume contribution in what has been a record year for the tractor sector, the company’s profitability bump up of 390 basis points is largely on account of M&M’s tractor portfolio. This is because the tractor portfolio is twice as profitable as the auto business. For the March quarter, segment margins for tractor came in at 19.4 per cent as compared to the auto segment’s 10.6 per cent.

Things could get only better from here given that the company has guided for sector growth of 8-10 per cent for FY19 (on high base of FY18) given expectations of normal monsoons. Analysts expect the company to grow in line with the sector growth on the back of a strong portfolio and addition of a third brand of Gromax to its existing brands of Swaraj and Mahindra. With the company taking regular price hikes to pass on the higher commodity inflation coupled with higher share of larger horse power segment, it can expect more gains on the profitability front, going ahead. While price hikes in FY18 were to the tune of over 3 per cent, it has taken another hike in the current quarter.

In the auto segment, especially utility vehicles (UVs), the company has been losing market share and lagging behind peers. Its share at the end of FY18 stood at 25.38, about 400 basis points lower than a year ago. It is banking on three new product launches — U321, S201 and Y400 which coupled with its plans to aggressively expand its dealer network should aid in volume growth. While the segment is extremely competitive, what should help M&M in the context of rural presence is the strong pick up in rural demand. About 43 per cent of auto sales (including commercial vehicles) comes from tier two markets and lower with rural sales growing at a faster pace. While the rural segment is growing at 14 per cent, urban growth in comparison is at 10 per cent. The company expects the passenger vehicle sector to grow at 10 per cent.

Within the auto segment, a positive trigger in the quarter has been the breakeven levels achieved by the trucks business. The company indicated that the segment helped it improve margins by 50 basis points and was weighing down overall profitability, given lower volumes. Strong demand for heavy trucks on the back of infrastructure investments such as road as well as mining is helping push up demand. How the segment fares is critical given the discount levels continue to be high.

Given the robust volume growth outlook, expect FY19 to be a strong year for M&M. While the company has indicated that it is cautiously optimistic, if the sector growth numbers pan out, M&M, given its rural heavy portfolio, will be one of the biggest beneficiaries. Margins, too, could see an upward bias given price hikes and cost reduction efforts.