After a strong Q1, it’s now crunch time for Mahindra
Investors need to ask post the run-up in Mahindra share price is whether this strong show will continue
Shares of Mahindra and Mahindra Ltd have gained around 32% over the past year, as the company reported strong sales volume and earnings. The performance remained robust in the June quarter (Q1) with revenue and net profit growing 23% and 67%, respectively. The company benefited from healthy volumes and low raw material costs. Operating margin at the tractor division reached record levels.
Even so, the question investors need to ask post the run-up in the share price is whether this strong show will continue. The company faces both challenges and opportunities.
For perspective, the strong first quarter comes on a favourable base. Performance in the year-ago quarter was weighed down by the implementation of the goods and services tax. As the industry adapted to the new tax system and volumes recovered, aided and abetted by a recovery in demand, Mahindra reported strong performance in subsequent quarters. So it has to be seen how volumes will fare from here.
The challenges also lie in the recent rise in raw material prices and interest rates. Mahindra is yet to fully pass on the rise in input costs. Finance costs for buyers are rising. If the current trend of uneven spread of monsoon rains continues, with deficiency in some regions, then demand may slow down. In that case Mahindra will have to absorb some part of the input cost rise to maintain its volume momentum. This can either cap or weigh on the profitability of the tractor business.
Thankfully, the tractor volume off-take is strong. Tractor volume in July rose 20%. Another farm equipment seller Escorts Ltd has raised its domestic tractor industry volume growth outlook for the current fiscal year, points out Kotak institutional equities.
Even so, as Mitul Shah, vice president (research) at Reliance Securities Ltd, says, the upsides from the traction in the farm equipment business are broadly captured in the stock right now, trading at a 17.6 times one-year forward price-to-earnings multiple.
For the stock to continue to outperform, the utility vehicles business, another key business segment of Mahindra, has to revive. XUV5OO is the last most successful utility vehicle from the company, points out Shah. As subsequent launches and relaunches failed to keep up the momentum, Mahindra lost share in the utility vehicle segment.
The company has new vehicle launches lined up this festive season. Expectations are the new products will add to the current momentum in the tractors business. But much depends on the success of these products, leave alone the competition and pricing challenges. “Given the competition in the segment, expect the new vehicles to be priced competitively,” adds Shah of Reliance Securities.
What Mahindra needs now is a new success in the utility vehicles segment. That will help the company regain market share and volume momentum, crucial for its long-term earnings trajectory.
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