SUVs to tractors: M&M not taking foot off pedal, on recovery road

Favourable agri macros, improving SUV demand, and easing commodity prices augur well for automaker

The automotive industry had a difficult time since the pandemic. While supply-chain issues have persisted, the boom in commodity prices led to higher raw material costs as well. In addition, weak rural and semi-urban demand led to downturn in domestic tractor and two-wheeler sales.

The first quarter of 2022-23 (FY23) has seen more optimism across the sector. The tractor segment in particular could see revival in demand and better volumes.

Automobile companies are still suffering from chip-sourcing issues which exacerbated after the Russia-Ukraine stand-off, but expect these shortages to start easing in the second half of the financial year. Commodity prices, especially prices of industrial metals, have started to soften, aiding margins.

A positive farm output and better agricultural commodity prices are being driven to some extent by the war since Ukraine and Russia are major players in the global market and their absence may lead to opportunities for other nations.

Tractor volumes are likely to improve month-on-month through the first quarter of FY23, with expected volume growth of 10 per cent for Mahindra & Mahindra (M&M) in the domestic market. The M&M management is giving guidance for single-digit growth in volumes year-on-year (YoY) — this may still be lower than 2020-21 (FY21) sales.

Weak demand notwithstanding, M&M beat Street expectations with a profit after tax (PAT) in the fourth quarter (Q4) of 2021-22 (FY22) on higher other income and lower tax rate. The tractor margins had shrunk on lower utilisation and limited price hikes to pass on cost inflation, but the company gained 1.8 per cent market share.

Revenues in Q4FY22 were at Rs 17,124 crore, which is 28 per cent higher YoY, while earnings before interest, tax, depreciation, and amortisation (Ebitda) at Rs 1,945 crore was slightly lower YoY and the Ebitda margin was down to 11.4 per cent (from 14.7 per cent YoY).

Net PAT adjusted was at Rs 1,167 crore, (16.4 per cent growth). Quarter-on-quarter revenue rose 12.4 per cent and Ebitda was up 7.7 per cent, with PAT down 13.7 per cent.

The sport utility vehicle (SUV) margins were encouraging and the management believes demand outlook is positive in both segments. There’s a strong order book for SUVs, with interest in the new Scorpio-N launch. The low-base effect should have a positive impact. The farm machinery segment could also be a growth driver.

Analysts see a growth rebound in FY23, with revenue up 4 per cent and unit volume growth beyond pre-pandemic levels.

For M&M, domestic tractor sales, which fell from 343,000 units (FY21) to 337,000 (FY22), could rise to 347,000 in FY23.

Passenger vehicles grew from 157,000 units (FY21) to 225,000 (FY22), and could grow till 322,000 (FY23).

Domestic commercial vehicles grew from 156,000 (FY21) to 177,000 (FY22), and could grow till 221,000 (FY23).

Exports grew from 29,015 units (FY21) to 50,156 units (FY22), and could grow till 55,000 (FY23), which could be a significant boost, given a weaker rupee.

Blended realisations/unit sales were at Rs 7 lakh (FY22), and could rise till Rs 7.45 lakh (FY23).

The stock is trading at Rs 1,090 after hitting a 52-week high of Rs 1,121 on Tuesday.

Analysts with a ‘buy’ rating have targets ranging between Rs 1,186 and Rs 1,250.