Dip in tractor sales a temporary blip for M&M, demand seen rising again

Farm sector worries and marginal market share loss resulted in tepid tractor sales in December

The stock of automobile major Mahindra and Mahindra (M&M) was the biggest loser among the BSE Sensex pack, dropping about 5 per cent on Wednesday. 

Uninspiring December sales numbers, particularly that of its tractor division, led to selling in the stock. 

While the overall sales numbers came at 39,755 units, up just a per cent higher than December 2017 volumes, weakness was significantly felt in the tractor division. 

Tractor volumes for the month dipped by 6 per cent year-on-year, led by a 2 per cent dip in domestic demand and 45 per cent decline in exports.

A host of reasons, ranging from farm sector stress, decline in funding by non-banking financial companies and overall reluctance in buying sentiments, led to December’s weak show.

Yet, analysts say it would be premature to judge the strength of rural demand. 

“After the state elections, volume growth should resume from February,” says Ankit Merchant of SMC Global. 

Even M&M’s management echoes similar views. Pawan Goenka, managing director of M&M, feels that the insipid festive season demand in 2018 resulted in the dip in volumes. 

“Both November and December were spent in the selling-off of piled up inventory. The January-February-March period should see a true reflection of where the demand lies,” he adds.

Marginal ceding of market share to competition may also be one of the reasons for the fall in tractor volumes. Analysts say that with Escorts growing its domestic tractors volume by 28 per cent in December, it could have disturbed M&M’s sales. 

Nonetheless, M&M with 42 per cent market share retains its lead position.

This is why Merchant is hopeful that as farm loan waivers materialise, it should help revive demand for tractors. That aside, tractors and utility vehicles (UVs, in which M&M is again the market leader), tend to attract higher demand ahead of elections. 

“We’ve seen this trend in the past 20 years and believe that it will again play out from March-April, when election campaigning picks momentum,” says an analyst from a brokerage firm.

Therefore, while there could be a month or two of pain ahead for M&M, analysts remain bullish in the stock. Its reasonable valuation (14.5 times FY20 earnings) after the recent correction also adds an appeal to the stock.