Stocks to buy: Escorts, M&M among top picks in tractor market, industry growth expected to be slow
Nuvama Institutional Equities reiterates 'buy' rating on M&M and states that Escorts continues to be its top pick.
Following a meeting with a zonal manager of the tractor manufacturer Tractors and Farm Equipment Limited (TAFE), domestic brokerage, Nuvama Institutional Equities, reiterated its 'buy' rating on Mahindra & Mahindra (M&M) and stated that Escorts continues to be its top picks.
According to the report, the tractor market would remain flat during the festive period, that the volume of tractors would likely remain flat or even decline in FY24E due to a high base and a deficit monsoon, that M&M would gain market share due to the improved acceptance of the Swaraj brand, and that Escorts would gain from Kubota's assistance in the development of new products and improved quality.
As a result of Global Kubota's involvement as a promoter, Nuvama contends that Escorts should be evaluated on the basis of its promising medium-term potential. The support of Global Kubota, according to Nuvama, is anticipated through a combination of the Kubota trade company with Escorts, the opening up of new export opportunities, and technological assistance for product development.
"In all, we reckon a revenue compound annual growth rate (CAGR) of 23%/20% over FY23–26E/FY23–28E; we build in an EPS CAGR of 43%/33%. We reaffirm ‘BUY’ with a Sep-24E TP of INR4,000 at 30x P/E—justified, in our view, given robust growth prospects and the changeover to MNC ownership," said the brokerage.
Regarding M&M, brokerage Nuvama anticipates strong growth momentum with a revenue CAGR of 11% over the period of FY23-26E, driven by strong growth in the auto category and moderate growth in the agricultural segment. Additionally, improved net pricing in the auto sector would increase profitability and support a 16% CAGR in core earnings between FY23 and FY26E.
“This would sustain post-tax RoIC at 30%-plus. Maintain ‘BUY’ with a Sep-24E target price of ₹1,850. We argue that M&M’s core FY25E/26E P/E of 12x/11x is inexpensive,” added Nuvama.
Nuvama's view: Muted FY24E; pickup in FY25E
Due to worries about a sub-normal monsoon and a high base, Nuvama has factored in flat growth for FY24E. Due to a weak monsoon, Kharif Corp. production is predicted to be flat YoY. Additionally, the volume base (FY23) is high due to an earlier-than-usual festive period, which resulted in slightly higher volumes.
"We expect FY25E volume growth to recover to 7% (broadly in line with historical mean growth)," added the brokerage.
Due to far lower tractor penetration than necessary, medium-term growth prospects are still favourable. Compared to the existing population of roughly 8 million tractors, the potential population of tractors is predicted to be around 17 million units.
"Our analysis of historical sales data spanning the past 30-years indicates that upcycles generally last for four–six years. We believe that the new/latest upcycle commenced in FY23; accordingly growth should sustain for the next two–four years," the brokerage said.
M&M and Escorts are expected to maintain their market shares in FY24E at 41% and 10%, respectively. With Kubota included, the share of escorts is greater at 13%.
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