M&M: Tractor show, new launches could lead to rerating

Mahindra Jivo tractor
The Mahindra & Mahindra (M&M) stock could see upsides given the outlook for its farm equipment business, new utility vehicle launches as well as valuations which are at the bottom of the list of large-cap automakers. 

The March sales numbers, too, were better than expected due to higher tractor sales (which are more profitable) and traction in its commercial vehicles, which were up by 31-32 per cent year-on-year (y-o-y). The six per cent fall in utility vehicle (UV) sales was expected given the lack of new launches. 

What helped cushion the fall was the disposal of BS-III inventory. Across product categories, M&M has indicated it was able to sell half of the inventory valued at Rs 2,000 crore at discounts of up to 15 per cent and was left with about 18,000 units. Given that not all of this will either be exported or converted to BS-IV, the company would have to take a short-term hit.

First, sales momentum for its tractor segment in FY18 could be strong. Rajesh Jejurikar, president of the farm equipment segment, expects market sentiment to be positive given the government’s support to agriculture, and expectations of a bumper rabi crop. 

M&M’s tractor sales were up 23 per cent y-o-y in FY17 to 262,000 units. The company closed FY17 with the highest market share in tractors. 

Within the agri space, M&M has identified five product/geographic segments — agriculture, farm machinery, Africa, Mahindra USA, and Power Trail, with revenue targets of $1 billion each, over the next five-seven years. 

Barring Mahindra USA (with revenue of $500 million), all other segments have a revenue of $60-$175 million. 

The near-term trigger would be normal monsoons, which would help M&M maintain its tractor sales growth momentum. 

ICRA has pegged industry tractor growth for FY18 at six-seven per cent and believes long-term growth drivers are intact, given the government’s focus on rural development and agri-mechanisation, and irrigation penetration (which will reduce dependence on rainfall). Increasing rural wages and scarcity of farm labour will also boost volumes. 

The Street, however, will watch for signs of an uptick in UV sales volumes, which were stagnant at 222,000 in FY17. While M&M has had some success with the launch of KUV100 and TUV100, selling about 100,000 vehicles since launch, it is betting big on two new launches — the U231 multi-purpose vehicle (launch in FY18) and a vehicle based on the Ssangyong platform (launch in FY19). What could turn out to be a winner is its portfolio of electric vehicles which see more demand. 

At Rs 1,290, the stock is trading at 14 times its FY19 estimates which is attractive. Most analysts have a “buy” with a price target exceeding Rs 1,400.