M&M's tractor sales momentum crucial for uptick from current levels

Capital allocation and auto segment volume trajectory are the other triggers

The gradual recovery in tractor sales and margin performance of Mahindra & Mahindra (M&M) stood out in otherwise lacklustre June quarter results. The overall volume decline of 56 per cent over the year-ago quarter translated to a similar dip in revenues in the quarter. While demand for tractors limited the sales fall in that segment to 24 per cent, the auto segment’s volumes collapsed 74 per cent.

A year ago, sales in the auto segment, comprising passenger and commercial vehicles, were 54 per cent higher than tractors; in the recent quarter, tractor sales were more than twice that recorded by the auto segment. 

While tractor sales have recovered, the company’s market share fell to 39.1 in the quarter, as compared to 41.2 per cent in FY20. Its listed peer Escorts reported a 12 per cent fall amid a sharper recovery in May and June. M&M highlighted that supply-side issues have been responsible for the fall in sales and the loss of market share.

 

 

While demand trends remain healthy, led by good monsoons and the higher proportion of acreage in the current kharif season, the supply-side constraints, lockdown and pandemic impact on rural areas may lead to some impact on volumes. The company, however, expects the sector to see growth in the current financial year. Analysts expect growth to be in low-to-mid single digits. 

Despite the volume impact, operating performance in the quarter was better than expectations. Led by a better product mix and low other expenses, the operating profit margin fall was arrested to 10.3 per cent. Analysts had pegged the same at around 7 per cent. While the tractor segment margin, which improved 110 basis points to 20.4 per cent, should remain steady, the auto segment is expected to post operating losses. 

Most brokerages are positive on the prospects of the company, given the focus on capital allocation, higher exposure to the rural segment (two-thirds of revenues) and attractive valuation. Despite the 120 per cent gain since the start of FY21, the valuation, according to analysts at Motilal Oswal Research, is at a substantial discount to its five-year average.