Mahindra and Mahindra Ltd’s (M&M) stock jumped 6% on Wednesday after the company’s management allayed analyst concerns on poor tractor sales in November. Tractor sales volumes stood at 17,527 units last month, down 2.6% from a year earlier and a whopping 44.9% lower than the preceding month. M&M shares had fallen about 11% since the time this announcement was made in early December.

By Bloomberg

There are some factors that support this optimism. First, the quantum of tractors bought using cash payments has increased to 20-25% of sales, compared with 10% earlier, which reflects buoyancy in rural incomes. Two, about 40% of the current tractor demand is from the replacement market. Three, the management reckons that there has been no increase in the level of non-performing assets (NPAs) of private banks and non-banking financial companies, which fund about 55% of M&M’s tractor sales. But some analysts counter this saying that in recent months NPAs related to tractor purchases have increased with public sector banks.

Another concern on the Street is whether the market would absorb additional capacities put up by tractor makers. Also, given the increasing competition from firms such as John Deere and Escorts Ltd, it remains to be seen if M&M will hold out on pricing to sustain profit margins.

Also See | Sustaining shocks (PDF)

Intraday movement (PDF)

So far, M&M has been able to successfully pass on costs, across product categories. That said, M&M will find it hard to sustain operating profit margin at 14.2%, which it registered in fiscal 2011. Consensus estimates indicate a 100-150 basis points contraction in operating margin for the current year. This could be one reason the stock has corrected since the September quarter results, though it must be noted here that the stock has outperformed benchmark indices.

Analysts expect the December quarter performance to be subdued on account of lacklustre sales of both utility vehicles and tractors.

Graphics by Yogesh Kumar/Mint

We welcome your comments at marktomarket@livemint.com

Close