Lower Tractor Sales Of M&M Not To Impact Positive Outlook

According to media reports, Pawan Goenka, president of the Automotive & Farm Equipment Division at Mahindra & Mahindra (M&M), said on Thursday that the company estimates sales to expand by 2 per cent in the year ending March 31, 2013. This cut in forecast from the earlier estimates of 10 per cent was on the back of the worst rainfall in three years that has drastically affected crop sowing, giving another reason to slow down the tractor sales and adding to existing factors like expensive fuel and funding, weak industrial and agricultural output and labour shortage. The immediate market reactions led to a drop in stock prices by 1.55 per cent and 1.19 per cent on Thursday and Friday. Regardless of this, we maintain a strongly positive outlook on the company and recommend investors to buy the stock.

India’s monsoon this year started off on a delayed note, indicating a dry spell with rainfall deficiency as high as 23 per cent on June 27, 2012. This negative deviation of the rainfall gradually diminished with the deficiency reaching 14 per cent on August 22, 2012. As of this date, of the 36 geographical sub-divisions in India, as per the Indian Meteorological Department (IMD), 14 regions have received deficient rainfall in the range of 20 per cent and 59 per cent, two have received scanty rainfall (60 per cent to 99 per cent deficiency) and 20 regions have received normal rainfall. This has affected tractor sales in key areas like Maharashtra, Karnataka and Andhra Pradesh which account for up to 30 per cent of the volumes for M&M.

M&M has been facing an issue with tractor sales since November 2011 with YoY monthly domestic sales volume for tractors having a median growth of -4.71 per cent. Though it is an important fact that farm equipment sales contribute to about 29.49 per cent of the company’s revenues and to a larger percentage of profits, the impact of this negative growth has been offset and in fact reversed by the robust performance coming in from the automotive division. This has been a result of the above 30 per cent growth seen in the sales volumes of utility vehicles in most of the months of CY12.

Moreover, factors like its presence in commercial vehicles and two-wheelers, an unwavering position in tractors and utility vehicles, margins and valuations lead us to adopt a positive stance on the company’s performance. To read more on the company, find a detailed analysis in the latest issue of our flagship magazine Dalal Street Investment Journal currently available on the stands.