Markets
Mahindra & Mahindra shares zoom on strong prospects
Summary
During the earnings call, Mahindra’s management eased worries, claiming a low correlation between El Niño conditions and the tractor industry’s growthShares of Mahindra & Mahindra Ltd (M&M) rose nearly 4% in Monday’s morning trade and were also the top gainers in the Nifty 50 index. While the March quarter (Q4FY23) results announced on Friday were pretty much in line, the automaker’s outlook commentary appears to have cheered investors.
Investors have been concerned about the potential impact of El Niño conditions on Mahindra’s key tractor business. But during the earnings call, Mahindra’s management eased worries, claiming a low correlation between El Niño conditions and the tractor industry’s growth. The phenomenon of El Niño creates a hotter summer and weaker monsoon, posing a potential threat to agriculture.
Further, despite a high base in FY23, M&M expects the tractor industry to grow in low single digits. The growth would be driven by factors such as an increase in government spending in rural areas and healthy water reservoir levels.
Mahindra, which held a 41.2% market share in FY23, strives to bolster its position even further. The company is set to launch OJA, a new product expected to fill existing gaps in its portfolio. Encouraging growth in the tractor segment bodes well for the company’s margins, as this division boasts healthy earnings before interest and tax (Ebit) margin of 16.7%, compared to 7.3% in the automotive segment.
Even so, the automotive segment is on a strong footing and would offer support if things go south in the tractor segment. As on 1 May, open bookings for sport utility vehicles (SUV) was over 292,000. To support the robust demand, it expanded its production capacity to 39,000 units per month during Q4. It further plans to ramp up to 49,000 units per month by Q4FY24 end.
“We have increased FY2024-25E Ebitda estimates by 4-7%, led by (1) higher volume assumptions for the auto segment and (2) 2% increase in average selling price assumptions," said analysts at Kotak Institutional Equities in a report on 27 May.
Nevertheless, there are still challenges to overcome. Supply chain issues in the automotive segment remain, with the company unable to manufacture about 10,000 vehicles in Q4 due to semiconductor shortages. An improved supply chain is thus crucial to meeting the robust demand.
Shares of M&M have risen by over 39% in the past year. The outlook for tractors is decent but investors would do well to track the volume trajectory here.
“It (M&M) has seen a substantial re-rating in FY23 as the stock is now trading in line with its five-year average core price-to-earnings (against discount of 30% earlier) driven by a strong performance in the SUV segment, market share gain in tractors and new launch pipeline in electric vehicles," said analysts at Motilal Oswal Financial Services in a report on 27 May. The broking firm’s sum-of-the-parts based target price stands at Rs1500 apiece. The M&M stock is currently trading at Rs1328.
