M&M Braces Up To Binge On Market Share

No Indian automobile manufacturer has set foot in as many segments as M&M (Mahindra & Mahindra) has. The auto giant has a presence in tractors, cars, jeeps, trucks, tempos, motorcycles, scooters, three wheelers, electric cars and luxury cars.

Owing to the kind of risk diversification that is possible with this ubiquitous presence (including other factors of course), we recommended investors to buy M&M in Dalal Street Investment Journal’s Volume 27, Issue No. 19 (dated August 27 - September 9, 2012) at a price of Rs 783 per share. Although post recommendation it touched a high of Rs 974.80 per share, we recommended holding the stock due to the potential upside it has beyond that level.

M&M has been in a dynamic state with news flowing in from every front that the company operates in. So where are these developments headed?

Commercial Vehicles

The Indian commercial vehicle (CV) segment has been severely hampered due to the macroeconomic conditions. M&M’s presence in this segment through Mahindra Navistar, in which M&M recently bought its partner’s stake, has been no exception to this trend. Medium and Heavy Commercial Vehicle (M&HCV) sales were down by about 20% in February 2013, which is not unusual considering the trend in the recent past.

In terms of volume, the CV space is currently being stabilised by the strong growth in Light Commercial Vehicle (LCV) sales. Overall, the CV sales for M&M saw a growth of 9.46% even with its depressing M&HCV sales. The reason for this is a growth in the sales of LCV by 12.17%. This trend is not specific to M&M and is being witnessed among all the players with a strong presence in this segment.

M&M was the first player to foray into the 0.5 tonne ‘micro-truck’ market, which is placed between three wheelers and mini-trucks like Maxximo and Ace, through the launch of Gio. However, the model lost sheen to Tata Motor’s Ace Zip. M&M now plans to launch a new product in this segment to firm up competition.

In the mini-truck segment, it recently launched the Maxximo Plus which gives the customers an option to choose between high power and high mileage. This model will come closer to Ace’s shoulder and beef up sales for M&M.

Passenger Vehicles

Passenger vehicle (PV) manufacturers have been facing the brunt of a dismal demand from customers. Their desperate situation is being highlighted by the almost ridiculous offers that companies and dealers have been offering to boost sales. Uncanny exchange schemes, ultra heavy discounts and freebies are being resorted to for boosting sales. The interesting part being, there is no improvement in sales volume data.

The recent PV sales have been skewed towards diesel cars and Utility Vehicles (UV). M&M, because of its consistently strong presence in UVs, has been in a rather rosy position these days. Where companies have been struggling with sales volume declines, M&M has been growing like there is nothing wrong. In the domestic PV segment, Hyundai, with its February 2013 sales amounting to 34002 units, is currently the second largest player while M&M is the third one in line with 23421 units sold in the same period. However, while the average YoY sales growth of Hyundai from April 2012 to February 2013 has been 0.44%, the figure stands at a massive 27.29% for M&M.

To further strengthen its already strong presence, M&M recently said that it would be investing around Rs 700 crore to Rs 800 crore every year over the next three to five years. This investment would be on the development of new products alone and would not include capacity expansion for the automotive business. For this year, it has lined up several models including a sub-4 metre Verito, Reva NXR and three UV variants; new version of the Bolero and Scorpio and a new micro SUV. The company aims to enter new segments and bring out variants of existing products to leave no gaps in prospective growth.

With this, we have no doubts that M&M will overtake Hyundai to become the second largest player in the domestic PV space, after Maruti Suzuki, within the next 12 months.

Two-Wheelers

Since its inception, the performance of M&M’s two wheelers has not caused a bang. Tough competition in the two wheeler market has kept M&M’s products from catching the pace that the company has seen in its other segments. The loss-making subsidiary of M&M has been in the news over a possible IPO to raise about Rs 700 crore for new products and capacity expansion. Since the subsidiary is making losses and operating at the utilisation levels of close to 50%, it has been reported that M&M is instead investing Rs 265 crore in the business through a rights issue.

Although the performance of this segment has not reached satisfactory levels or levels significant enough to cause a stir in the markets, M&M’s efforts to get there have been visible through its product development, product launches and continual investments. While it stands true that even with non-performing subsidiaries, M&M’s cumulative performance has been increasingly getting better, a turnaround in these will only add to the performance.

Overall, the performance of M&M has been robust even with all its other competitors being in deep trouble. This combined with the prospective performance of all the segments it is present in, offers a huge upside potential for M&M. We thus maintain our bullish stance on M&M and recommend investors to stick to this scrip.