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

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Mahindra Jivo tractor



The Mahindra & Mahindra (M&M) stock could see upsides going ahead 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. Further, 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. 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 that it was able to sell half of the inventory valued at Rs 2,000 crore at discounts of up to 15 per cent and is still left with about 18,000 units. Given that not all of this will either be exported or be converted to BS-IV, the company would have to take a short-term hit.

Analysts are, however, bullish on M&M's prospects given multiple triggers. The first is the sales momentum for its farm equipment (tractor) segment. Rajesh Jejurikar, the president of the farm equipment segment, expects market sentiment to be positive in this space given the government support to agriculture, and more importantly, the expectation of a bumper Rabi crop. This could keep the momentum for FY18 strong. M&M's tractor sales are up 23 per cent year-on-year in FY17 to 2.62 lakh units. The company closed FY17 with the highest market share in tractors given new platform launches, restructuring of dealership network as well as rejigging of management team.

Within the agri space, M&M has also 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 to seven years. Barring Mahindra USA (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 6-7 per cent and believes that long-term growth drivers are intact given 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 over the long term.

The Street, however, will keep an eye out on signs of an uptick in UV sales volumes, which were stagnant at 2.22 lakhs in FY17. While M&M has had some success with the launch of KUV100 and TUV100 selling about a lakh of vehicles since launch, it is betting big on two new launches-the U231 multi-purpose vehicle (launch in FY18) and another vehicle based on Ssangyong platform (launch in FY19). What could turn out to be a winner for M&M is its portfolio of electric vehicles which see more demand as environment-friendly transportation options are being opted for increasingly.

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.