Stock Fundamentals

Mahindra & Mahindra Stock Call: Is the worst over?

Parvatha Vardhini C | Updated on October 06, 2019 Published on October 05, 2019

The slowdown in the industry has beaten down the stock. This may be an opportune time to accumulate it

The Mahindra & Mahindra stock is a good bet for investors with a long-term perspective. Though automobile sales are now stuck in first gear and may take some time to pick up, the company’s focus on utility vehicles (UVs) — which is gaining a larger share of the passenger vehicles pie — will stand the company in good stead once the tide turns. Signs of a turnaround in tractor sales are visible in the last one or two months. This bodes well for the company, which derives about 35 per cent of its standalone revenues from tractor sales.

The slowdown in the industry has beaten down the stock by almost 30 per cent since our earlier ‘buy’ call in end-December 2018. The fall may be an opportune time to accumulate the stock. At the current price, the stock trades at an attractive valuation of 14 times its trailing 12-month standalone earnings. This is much lower than the three-year historical average valuation of 28 times.

 

UV presence, an advantage

New vehicle sales growth, which slowed to 5.15 per cent in 2018-19, dropped sharply by15.9 per cent in the first five months of this fiscal. The latest September sales too have not been any better. Though the government announced various stimulus measures to boost auto sales, the much-expected GST rate cut hasn’t happened.

Given the attractive discounts, good monsoon and the festival season, demand may improve across rural and urban India to an extent. The benefit of lower corporate taxes for some companies may be passed on to consumers in the form of price cuts that can help improve sales. Cheaper loans could also help convert fence-sitters into buyers. Yet, the proposed transition to BS-VI emission norms on April 1, 2020 could be a dampener to sales this year. However, given that the industry is perhaps near the bottom of the cyclical downturn, sales could begin looking up from FY21. M&M is a good bet on this expected revival.

Structurally, the Indian auto buyer is gravitating towards bigger cars and UVs. UVs constituted 27 per cent of the total passenger vehicles sold in 2018-19, up from about 12 per cent in 2010-11. The share of UVs has increased further in the first six months of this fiscal. The focus on UVs is M&M’s strength. It has spruced up its UV portfolio through launches such as Marazzo and Alturas G4 in the mid- and premium segments.

The XUV 300 in the highly competitive compact segment was launched towards the end of the last fiscal. Since it has a predominantly diesel portfolio at a time when BS-VI emission norms would make diesel engines relatively more expensive for smaller UVs, the company is working on having only petrol options on smaller UVs such as the KUV 100 under BS-VI.

M&M expects demand for the petrol version of the XUV300 to go up after the BS-VI norms kick in. The latest JV with Ford will help the company derive synergies in component sourcing, product development and manufacturing over the long term, thereby saving on costs. The JV’s initial focus will be UVs. Three jointly-developed UVs are in the pipeline.

 

 

Green shoots

While tractor sales have been nothing to write home about so far, the worst seems to be over. Sales fell between 8 and 19 per cent in each of the first five months of this fiscal. But the company was able to arrest this fall and record a flat growth in September 2019. In the months to come, the low base of last year (volumes for the company fell 4.2 per cent in the second half of the last fiscal, against 17.9 per cent growth in the first half) will help. Besides, the bountiful rains and good outlook for the upcoming rabi crop season bode well for tractor sales. M&M is the market leader in tractors with 43.3 per cent share at the end of the June 2019 quarter.

Financials

Weak volumes resulted in lacklustre numbers for the company in the June 2019 quarter. During the quarter, auto segment volumes fell by 6 per cent, while those of farm equipment, by a sharper 14.5 per cent.

As a result, M&M’s standalone revenue from operations dropped 4.4 per cent to ₹12,923 crore, while profits (excluding exceptional items) fell 22.4 per cent to ₹947 crore.

Operating margins too shrank to 15 per cent from 15.7 per cent a year ago.

Published on October 05, 2019
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