Market volatility coupled with subdued second quarter results has beaten down the Mahindra & Mahindra (M&M) stock in recent times. A rise in input costs and a forex loss on revaluation of its external commercial borrowings dragged profits down to Rs 737 crore, about 3 per cent lower than the second quarter of last year.

This has taken the spotlight away from the robust top-line growth of 37.5 per cent to Rs 7,307 crore, which came at a time when the auto industry was going through a slowdown. The company has announced price increases since then and raw material costs are expected to moderate in the second half.

This, combined with a strong volume outlook for tractors and utility vehicles, promises good earnings prospects for M&M. At Rs 659, the stock trades at a valuation of about 15 times its trailing twelve-month standalone earnings. Investors with a perspective of one year or more can buy the stock.

For April-November 2011, M&M's automotive volumes grew by a healthy 31 per cent, while tractors recorded a 21 per cent rise. As against the 12 per cent growth expected initially, the tractor industry is likely to close FY12 with 18 per cent growth thanks to higher minimum support prices, good monsoons and increased agricultural output.

With material and interest cost pressures too set to ease, continued labour shortage and greater farm mechanisation would benefit M&M. The company is the market leader in tractors and derives about 42 per cent of its revenues from this. A visible shift in demand towards the more-than-40 HP tractors bodes well for its margins.

Aside of the higher HP Arjun, it has access to tractors up to 125 HP through a joint venture in China. These can be used for haulage and material handling beyond agriculture. An Arjun multi-application tractor has also been launched.

At the other end, to cater to small farmers, it has pioneered the ‘Yuvraj', a 15 HP tractor, which has been received very well.

A strong portfolio of diesel vehicles coupled with successful launches such as a refreshed Bolero, the XUV 500, Genio, Maxximo mini van and the Gio compact cab will keep volumes ticking on the automotive front.

Aside of the upcoming global launch of the XUV 500 and the mini Xylo, over the medium-term, Ssangyong's premium UV products will also add to the volumes and better realisations. Ssangyong's foothold in major global markets will also help the company in its plans to increase its share of global revenues and volumes to 20 per cent by 2016 (5 per cent currently).

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