Weak tractor segment furrows M&M’s story

Mahindra & Mahindra's launch pipeline includes a five-door version of the Thar and a mid-cycle refresh of the XUV300.
Mahindra & Mahindra's launch pipeline includes a five-door version of the Thar and a mid-cycle refresh of the XUV300.

Summary

The automaker has a strong order book and pipeline for its utility vehicles, but its tractors business is facing headwinds both in domestic and overseas markets

Mahindra & Mahindra Ltd’s journey is a tale of two parts. On the one hand, its automotive business is on a strong footing, and on the other, it is a rocky road for its farm equipment segment (tractors).

In the auto segment, M&M expects its sport utility vehicle portfolio to grow by 15-19% in FY25. This is meaningfully ahead of the Society of Indian Automobile Manufacturers’ forecast of 10-12% for utility vehicles.

It helps that M&M had a robust SUV order book of about 226,000 units as on 1 February. But the order book has fallen sharply by 21% from the levels seen on 1 November, partly due to a high cancellation rate in November and December.

The order backlog may fall further as the company is ramping up its capacity to reach 49,000 units per month by the end of the March quarter (Q4FY24). At the same time, it is encouraging that average new bookings are holding up at about 50,000 units per month.

Despite the increase in capacity, M&M’s volume growth in Q4 is expected to be similar to that in the preceding quarter as it is ramping down its XUV300 model for a mid-cycle refreshment. That would effectively mean lower volume of this product in the near-term.

M&M is also facing a mismatch in variant demand and capacity. It helps that the company’s upcoming launch pipeline is healthy—including the five-door Thar and the mid-cycle refresh of the XUV300.

The auto segment’s upbeat prospects could perhaps explain the over 7% rise in M&M’s shares over the last two days following its Q3 results.

This comes even as the tractor segment’s outlook isn’t particularly striking. M&M expects domestic tractor industry volume to fall by 5% in FY24. For FY25, tractor volume growth largely hinges on a normal monsoon. However, it augurs well that M&M gained market share in Q3 amid an industry decline.

In the export markets, the Red Sea crisis is delaying the delivery time of M&M’s Oja tractors in North America. For now, there is no supply chain disruption risk, but things could get worse if the situation prolongs.

“We forecast a 4% revenue CAGR over FY23–26 with a deficient rainfall season driving a weak performance in FY24," said Nuvama Research in a report on 14 February. For the auto segment, Nuvama expects revenue CAGR of nearly 15% over FY23-26.

To be sure, the falling share of tractors can have a bearing on M&M’s overall profitability given that the tractors business is a comparatively high-margin one. In Q3, the tractors segment’s Ebit margin stood at 15.5%, versus 8.3% in the automotive segment.

Kotak Institutional Equities expects M&M’s profitability to remain steady, which will result in healthy cash flow generation that can be deployed to scale up the company’s electric vehicle business across the utility vehicle and last-mile mobility segments.

Against this backdrop, M&M’s shares hit a 52-week high of 1,784.90 apiece on Thursday. Continued strong momentum in the auto business and improving demand conditions in the tractor business can support the stock.

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