ET Intelligence Group: Four summers ago, the first showers of rain revived India’s parched farmlands that had weathered consecutive years of drought. As tillers ploughed through the moist earth in farms across the country’s rural heartland, the seeds of growth were sown for a raft of agri equipment industries. Tractors headed that list.
Four years later, that cycle of business revival is showing tell-tale signs of growth fatigue. Mahindra & Mahindra, India’s largest tractor-maker, has already trimmed the industry guidance for FY19 to 10 per cent from 12-14 per cent earlier, and the leader does not expect double-digit growth in FY20 either.
Yet, it might not be time to log out of the stock because of the attractive valuations. M&M is trading at nine times its core auto earnings, a 43 per cent discount to the average for leading auto companies. On an absolute basis, the stock is trading one standard deviation below its mean.
About Rs 320-350 per share of its fair value is derived from investments in companies such as Tech Mahindra, Mahindra CIE, Mahindra Holidays and Mahindra Logistics, while the remaining comes from core auto manufacturing operations.
To be sure, the revised guidance for tractors implies that there will be flattish volume growth in the fourth quarter. The company reduced its tractor guidance because of lower than expected retail sales—vehicle sales by the dealer to the customer.
Historically, the tractor cycle in India lasts for an average of 4.7 years and the current cycle already entered the third year of upcycle. Hence, the industry is bound to show moderate growth. Therefore, several brokerages have already started factoring in 5 per cent and 3 per cent industry volume growths for FY20 and FY21, respectively.
Despite the reduced volume growth forecasts, the company has maintained its long-term guidance on market share improvement, mainly gained through the newly launched low-priced tractor Trackstar.
Operating margin in the December quarter fell 271basis points and 129 basis points for auto and tractor segments, respectively, due to higher raw material prices, higher discounts, and lower introductory pricing on the new MPV Marazzo. So, EBITDA fell to 13.2 per cent from 14.7 per cent in the same quarter in the last fiscal.
The margin pressure may continue for the fourth quarter due to the launch cost of the XUV 300. However, it should ease from the first quarter of FY20 owing to the price increases in Marazzo and lower metal prices.
Mahindra is gradually able to arrest the fall in the UV market share after 10 quarters. The Marazzo MPV volume has averaged around 3,300 per month, and the new SUV XUV 300 received more than 3,000 bookings ahead of the formal launch on February 14. Three UVs—Marazzo, Alturas, XUV 300–launched in the current fiscal should support volume growth in FY20. The Street expects a 20 per cent growth in the UV segment because of the full-year impact of the three newly launched vehicles and pre-buying ahead of the imposition of the new emission norms.
Source: Economic Times