M&M set for upgrade on tractor uptick

ET Intelligence Group: Mahindra & Mahindra’s stock has underperformed the benchmark Nifty50 by 4% over the past two months following production woes due to supply-side constraints, concerns over the sustainability of tractor sales growth and uncertainty related to its South Korean subsidiary SsangYong.

However, factors such as pick up in construction activity that augurs well for haulage tractors, along with cost control initiatives and expected record profitability of the farm equipment division may support the stock in the near term.

The volume growth of Mahindra’s tractor division was 1.5% lower than the sector volume growth of 14.6% during April-February 2021, affected mainly due to supply disruption amid the pandemic. Lower availability of components such as four-wheel drive and power-steering for tractors impacted its wholesale market share, which dropped by 300 basis points to 38% in FY21 from the yearago period.

On the retail front (dealer to customer sale), however, the company’s market share seems to be stable which means the wholesale share would recover in the next fiscal year given a gradual restoration of the supply chain.

Investors are also cagey over the FY22 tractor volume growth given a large base in the form of 20% expected industry growth for the current fiscal. Historically, the peakto-peak annual volume growth has been 4-10% during a tractor industry cycle. This suggests a high single-digit growth for FY22 supported by higher crop acreage and better crop prices. Its peer

has guided for a double-digit growth at the industry level for FY22.

Rising construction activity amid the government’s focus on capital expenditure is another favourable factor since it improves the volumes of haulage tractors. The category constitutes 10-15% of total incremental tractor demand for the sector during periods of higher construction activity.

For Mahindra, the tractor segment contributes nearly one-third of the total sales volumes and twothirds of the operating profit before depreciation and amortisation (Ebitda). The company is expected to deliver a record margin of above 23% for the current fiscal year given its cost control initiatives.

The company has announced that it would not consolidate losses from SsangYong from the March quarter. The adherence to capital discipline would help in generating a sizable free cash flow from FY22. Analysts have upgraded the company’s earnings per share by 10% a month ago. These factors are likely to support the stock movement in the coming months.