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Headwinds in tractor business may limit gains for M&M

M&MThe stock of India’s largest tractor maker MahindraNSE 0.60 % & Mahindra is expected to have limited upside on moderating volume growth over the last four months and forecasts of below normal monsoon showers.

This is expected to weigh on earnings as the farm equipment segment generates a third of its volumes and about half of its operating profit.

Volumes for the tractor industry fell 8 per cent in the last four months after growing at 21 per cent in 2018.

During the January-March quarter of FY19, Mahindra’s tractor volumes fell 14 per cent to 60,878 units, while for the industry the dip was 5.8 per cent. This led to the company’s market share in the tractor segment falling to 35.8 per cent in the March quarter from 40.53 per cent in the previous quarter, KIE data show.

This shrunk revenues from the tractor segment to 23 per cent in the March quarter from 36 per cent in the previous quarter. In FY19, the company’s tractor volumes grew at 4 per cent, as against an average of 22 per cent during the previous two fiscals. Mahindra projects volume growth of 5 per cent in FY20, the company told analysts after the March quarter results.

The Street is pencilling in a negative-to-low single-digit volume growth for FY20 after private weather forecaster Skymet said monsoon showers could touch only 93 per cent of the long-period average and the India Meterological Department observing that the pre-monsoon period has been the second driest in 65 years.

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In addition, the current inventory levels are three weeks higher than the average for the industry, which could keep discount levels elevated and impact profitability.

The operating margin of Mahindra’s farm equipment segment fell 330 basis points to 16.2 per cent in the March quarter. Analysts are factoring in a 150-200 basis points drop in FY20 from 19.3 per cent in FY19.

The gloomy scenario in farm equipment notwithstanding, Mahindra’s automotive business has seen a gradual recovery in volumes due to new launches such as the XUV 300 and Marazzo, which has added 7,000 units per month over the past three months. The models made up 30 per cent of the total SUV volumes, but legacy model sales remain sluggish. Several models will be retired in compliance with crash test and emission norms.

The company’s passenger vehicle volumes grew 4.8 per cent in FY19 against a 0.1 per cent drop in the previous fiscal.

The stock is trading at 11 times its core auto segment earnings of the next 12 months, which appears reasonable. However, multiple headwinds may keep upside limited.


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