Stock Call. Why you should ride on Mahindra & Mahindra stock

The Mahindra & Mahindra (M&M) stock is a good bet for investors with a perspective of at least two years. Its presence in the tractor segment, which is seeing good pick-up in sales, along with the company’s efforts to rationalise investments in loss-making subsidiaries/other entities, bode well for the stock in the near to medium term.

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 are gaining a larger share of the passenger vehicles pie, will stand the company in good stead once the tide turns.

While the stock has more than doubled since the March 2020 lows, it currently trades at about 24 times its estimated earnings for FY21 and 17 times the estimated earnings for FY22. This valuation is cheaper than the other listed four-wheeler player, Maruti Suzuki.

Even as automobile sales have been a drag on overall profitability, tractors have led from the front in the March and June quarters.

Tractors drive growth

M&M is the market leader and has a tractor market share of 39.1 per cent as at end of the June quarter. Domestic tractor sales volumes grew by 1.8 per cent (year-on-year) in the three months ended March 2020. After showing an 83 per cent fall in volumes in April due to the complete lockdown due to Covid-19, tractor sales volumes grew by 3 per cent, 13 per cent and 28 per cent in May, June and July, respectively.

For the quarter ended June, 62 per cent of the revenues came from farm equipment sales. This segment also clocked margins of 20.4 per cent during this period. On the other hand, the auto segment was not profitable.

In the months to come, tractors could continue to drive volumes and profits for the company domestically. Rural demand is expected to remain sanguine, thanks to relatively lower impact of the pandemic and the optimistic outlook for the agricultural sector.

Normal monsoon is a positive. The company has launched a new Plus series of its existing range tractors. About 85 per cent of the farm segment dealers have restarted business after the lockdown and M&M’s farm equipment plants are operating at over 90 per cent capacity currently. Disruptions in the supply chain due to localised and regional lockdowns could impact production though.

UV presence, an advantage

M&M’s automotive segment sales volumes plunged 78 per cent (year-on-year) during the quarter ended June . While there was no sales in April, volumes have dropped sharply in May and June. July though has been slightly better, with the fall in volumes getting arrested at 35 per cent.

Going into FY21, M&M had kept stock levels low due to the BS-VI transition. Even then, as of early August, capacity utilisation in the automotive segment stands only at over 50 per cent.

The firm’s production is predominantly restricted to Bolero and Scorpio which are seeing good rural demand, besides small numbers of XUV 500. This indicates weakness on the demand front.

With UVs being discretionary purchases, demand may not come back in a hurry, though the company expects some traction from the need for personal mobility as well physical distancing due to the pandemic. Over the long-term though, presence in the UV segment is an advantage.

Structurally, the Indian auto buyer is gravitating towards bigger cars and UVs. UVs constituted 34 per cent of the total passenger vehicles sold in 2019-20, up from about 12 per cent in 2010-11.

Two new passenger vehicles of the firm, currently codenamed W601 and Z101, are expected to be launched in FY22.

Financials

Weak volumes resulted in lacklustre numbers for the company in the June 2020 quarter. As a result, M&M’s (standalone + Mahindra Vehicle Manufacturers) revenue from operations dropped 56.4 per cent to ₹5,589 crore, while profits plunged 97 per cent to ₹68 crore. Operating margins, too, shrank to 10.2 per cent from 14 per cent a year ago due to the dismal performance of the auto segment.

M&M has used the pandemic-induced slowdown as an opportunity to tighten capital allocation to group entities.

Over the year, the company will be reviewing its investments across loss-making subsidiaries/entities and taking suitable action. This is good news for investors as losses from international subsidiaries have ballooned over the last few years — from ₹53 crore in FY17 to ₹5,257 crore by FY20.

In the March 2020 quarter, the company wrote down investment worth ₹2,719 crore in South Korea-based vehicle maker SsangYong and it electric scooter and bike business in North America, GenZe. The company is looking to bring down its investment in Ssangyong to below 50 per cent.

COMMENT NOW