Mahindra sales bucking the trend, at least for now

Mahindra sales bucking the trend, at least for now

Auto maker Mahindra and Mahindra Ltd in June bucked the trend of a slowdown in the four-wheeler segment. Sales were up 32% over June 2010, taking the quarterly tally of sales volume up by 23% from a year earlier.

Mahindra’s buoyancy amid sluggishness reported by most other peers such as Maruti Suzuki Ltd and Tata Motors Ltd was largely driven by its utility vehicles (UVs) and tractors. The two segments, together comprising a major chunk of total revenue, grew in excess of 20% during the quarter.

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A key reason was that the supply constraints, which Mahindra had been battling with for the last few quarters, have eased. Besides, higher affordability in rural areas could have been a fillip for tractor sales. Robust sales of utility vehicles, in which Mahindra has the largest market share, could be because its vehicles are mainly diesel-driven.

Will the sales momentum hold? While the recent diesel price hike was long overdue and anticipated by the Street and the consumers, it could impact sales with a lag. The months ahead, therefore, remain crucial as utility vehicles comprise about half the firm’s sales volumes.

Mahindra’s management, in a media interview last week, said that from a situation of long waiting period for utility vehicle sales in some models, demand and supply are just matching. Further hikes in interest rates and competition from firms such as Tata Motors Ltd and Toyota Motor Corp. would also weigh on sales, although the management hopes to keep consumer interest high through a series of new launches in the second half.

But, if utility vehicle sales moderate and coincide with lower tractor sales, which is the trend for the second half of the fiscal year, growth rates could moderate.

Meanwhile, the going has been good at its recently acquired Korean subsidiary, Ssangyong Motor Co. Ltd, whose domestic sales volumes doubled from a year before. Mahindra’s strategy is to focus on ramping up tractor exports from Ssangyong to African and Chinese markets in the next two years.

So far, the steady growth posted in the last six quarters is reflected in Mahindra’s stock price—over a one-year horizon it has outperformed both the BSE sensex and the auto index.

That said, the Street expects profitability to be affected by rising material costs.

Mahindra had hiked prices in April by around 2% to pass on rising costs to consumers. So far it has maintained operating margin at around 15-16% in the last few quarters. The forthcoming March quarterly results will determine earnings estimates for the next two years and, therefore, valuations.

Any news on a turnaround of Ssangyong could catalyse the stock price, too.

Graphic by Ahmed Raza Khan/Mint

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