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Tractors curtail M&M's good Q3 show

Mahindra & Mahindra (M&M) 14.9 per cent year-on-year increase in revenues for the December 2015 quarter were in line with expectations, led by higher volumes and realisations. While volume growth for the auto segment grew by a strong 15 per cent year-on-year on the back of new launches, tractor volumes disappointed growing just 4.9 per cent. Although net profit at Rs 820 crore was way lower than Bloomberg consensus estimate of Rs 914 crore, the stock gained 3.8 per cent to Rs 1,168 on Friday. There are reasons for this.

For one, the management indicated that M&M gained market share as industry volumes fell 1.5 per cent in the period. The management indicated that industry sales for tractors, which have fallen 13 per cent year-to-date, could finish FY16 with about a 10 per cent fall-indicating good growth in March quarter.

For utility vehicles (UVs), while the year-to-date industry growth has been 4-5 per cent, the management expects this to improve on the back of new launches and the segment would catch up with the passenger vehicle growth of 10 per cent year-to-date. Notably, given the nine new launches and variants in the fiscal so far, M&M expects stronger growth in the year ahead for its UV portfolio.

For M&M, the key monitorables will the progress of the monsoon not just for farm equipment, but also for automotive, as well as any adverse decision either by the government or the judiciary on diesel vehicles.

While blended realisations were higher on a year-on-year basis given price hikes taken in FY16, they were weak sequentially both for tractor as well as automotive. While pricing pressure and discounting has pegged back farm equipment realisations, analysts attribute the pressure on auto realisations to lower priced product KUV 100.

Better topline performance coupled with a 200-basis-point gain on the raw material front, helped M&M report an operating profit margin of 13.5 per cent, up 166 basis points year-on-year. Margins would have been better but for the lower share of tractor volumes (down 200 basis points to 32 per cent). Tractors fetch 15 per cent EBIT margins, while auto gets about 10 per cent. Additionally, one-offs also pulled down Ebidta by about Rs 100 crore.

While the reported net profit at Rs 820 crore was down 15 per cent year-on-year, adjusted for last year's exceptional gain of Rs 300 crore, net profit was up 23 per cent year-on-year despite the 73 per cent jump in taxes and fall in other income.

In short, the operational performance was good. And while auto segment is expected to do well going ahead, a good monsoon could perk up tractor volumes too. 37 of the 47 analysts have a Buy (rest have Hold) on the stock with an average target price of Rs 1,423.