Hitting The Accelerator To Speed Ahead

Mahindra & Mahindra Ltd (M&M) is engaged in the manufacture of tractors, passenger cars and commercial vehicles. The company’s automotive segment comprises sales of automobiles, spare parts and related services and its farm equipment segment comprises sales of tractors, spare parts and related services, while the information technology services consists of services rendered for IT and telecom. 

The company also operates in financial services segment, which comprise services relating to financing, leasing and hire purchase of automobiles and tractors; steel trading and processing. Its infrastructure segment comprises operating of commercial complexes, project management and development, while it hospitality segment comprises sale of timeshare and others segment comprises of logistics, aftermarket, two-wheelers and investments. The company acquired 70 per cent stake in Korea-based Ssangyong Motors Company in FY11 to become a global SUV company. 

M&M is the market leader in tractors with a share of about 42 per cent and is gaining market share for the last 3 to 4 years on new launches. The global revenue accounts for over 49 per cent of the group’s turnover. 

Automotive segment expected to pick up company needs to realign itself with the
changing customer profile. With limited
success of its recent launches, it has
become critical for M&M to get is next

Over the last three years, M&M has been losing its market share in utility vehicle (UV) segment. Its market share has come down from 38.2 per cent in FY16 to about 26.1 per cent in FY18. This can be attributed to lack of petrol variants and absence in the fast-growing mid-size SUV segment. To regain market share in the UV space, M&M is expected to launch new models with petrol variants, which is a high volume segment; and makeover its other existing variants. During FY19, the company plans two new launches, including Mahindra S201 and Mahindra U321, which could boost the overall revenues of the company. 

Re-entry in China to exploit farm machinery opportunity 

M&M had exited a Chinese joint venture last year. However, it is now planning to return to the $25-billion agriculture equipment market in China, this time on its own. The re-entry in China is a part of the company’s larger plan to generate over half its business from international markets, compared with about 35 per cent currently. China is an important part of M&M’s globalisation agenda, since it is one of the largest markets for farm machinery along with tractors. There are good prospects for M&M to exploit the farm machinery opportunity in China with transplanters and harvesters that it has added to its portfolio through its deals with Mitsubishi and Sampo-Rosenlew. The global farm machinery business is valued at about $94 billion, which is about 50 per cent more than the pure tractor business. According to M&M, the farm machinery business is expected to grow faster than the tractor business and may almost double in the next 5 to 7 years to $180 billion. 

Investment in EV: To leverage first mover advantage 

M&M, being a leader in the nascent EV market in India, recently signed two MoUs with the Government of Maharashtra regarding EVs. The company will be investing an additional Rs 500 crore at its Chakan plant in Maharashtra to expand its electric vehicles portfolio and deploy 1,000 EVs in the state in the next one year. M&M is making efforts to become fully electric ready by further investing in its Chakan plant for manufacture of EVs, e-motor, controller, battery pack and other electric vehicle components for multiple mobility applications. M&M has earmarked a total outlay of Rs 900 crore for the EV vertical. Apart from Rs 500 crore investment in Maharashtra, the company also plans to put in another Rs 400 crore in its other plants across the country. 

Improved sales in May 

M&M registered a 12 per cent growth in the automotive sector, led by the pick-up trucks and commercial vehicles during the month of May. The company sold 46,849 vehicles in May 2018 as against 42,003 vehicles sold during May 2017. The passenger vehicles segment sold 20,715 vehicles in May 2018, registering a growth of 2 per cent. In the commercial vehicle segment, the company sold 18,748 vehicles in May 2018, registering a 15 per cent growth. In the medium and heavy commercial vehicles segment, M&M sold 1,152 vehicles during the month. Its domestic sales stood at 43,818 vehicles during the month, registering a growth of 8 per cent, whereas its exports stood at 3,031 vehicles, registering an exceptional growth of 134 per cent. 

Q4FY18: Robust financials 

M&M reported good results in the fourth quarter of FY18. The revenue of the company rose 25.6 per cent year-on-year to Rs 13,189 crore, driven by the farm equipment segment. The revenue from the farm equipment segment, which contributed 28 per cent to revenue, rose 33 per cent year-onyear to Rs 3,716 crore. Its operating income or the earnings before interest, tax, depreciation and amortisation shot up by 70.4 per cent on a yearly basis to Rs 1,995 crore and its margin expanded 400 basis points to 15.1 per cent, as compared to the same quarter last year. Its PAT touched Rs 1155 crore in Q4FY18, witnessing an increase of 50 per cent from the year-ago period. 

In FY18, the company recorded its highest-ever tractor volumes for both domestic and export markets, and retained the leadership position for the 35th consecutive year. The company’s management has guided tractor industry growth of 8-10 per cent in FY19, with an upside risk. 

On the valuation front, the company has a PE ratio of 28.41x as against its peers Escorts Ltd (32.32x) and Maruti Suzuki (34.86x). The company’s Return on equity (RoE) and Return on capital employed (RoCE) stood at 13.92 per cent and 43.30 per cent, respectively. M&M has a debt to equity ratio of 0.11x. The company has been maintaining a healthy dividend payout of 21.93 per cent. 

Risks associated 

M&M is a conglomerate with interests in various segments and managing a complex group structure could divert focus from the core business and could pose execution risks. Also, M&M’s UV market share hIn FY18, the company recorded its
highest-ever tractor volumes for both
domestic and export markets, and
retained the leadership position for the
35th consecutive year. The company’s
management has guided tractor
industry growth of 8-10 per cent inas been on a decline. The company needs to realign itself with the changing customer profile. With limited success of its recent launches, it has become critical for M&M to get is next launches right and start gaining market share. Further, the company has been incurring losses in some of its unlisted subsidiaries at operational level. In the event of failure to turn around the business, the company might have to infuse more capital, which will drag down the performance of its core business. 

Conclusion 

M&M has announced plans to invest a whopping amount of Rs 15,000 crore over the next three years. Out of this, about Rs 10,000 crore will be classified as capital expenditure for expanding capacity for its utility vehicles, tractors as well as commercial vehicles, in addition to product development. M&M expects about 8 to 10 per cent growth in tractor sales and 10 to 12 per cent growth in commercial vehicle sales in the current financial year. The company also anticipates construction equipment and truck businesses to turn EBITDA positive in FY19. The normal monsoon forecast by IMD; expectations of MSP hike and improved rural sentiments could drive demand across segments in FY19. We recommend our readerinvestors to HOLD the stock.