M&M: Tractors to keep growth engine going

Muted June quarter marred by GST compensation, one-offs and utility vehicle underperformance

Muted volume growth, especially in the automotive segment, and the impact of dealer compensation due to the goods and service tax (GST) transition reflected in the June quarter performance of Mahindra & Mahindra. The company took a Rs 144-crore hit as it had to compensate its dealers for losses suffered on account of the shift to GST. This, coupled with one-off gains in the year ago quarter as well as higher tax rates, led to a 20 per cent fall in net profit for the quarter at Rs 765 crore. Consensus estimates had pegged the net profit number at Rs 851 crore.

Despite the GST hit, the top line was up 5 per cent year-on-year at Rs 11,576 crore, largely on the back of a 13 per cent volume uptick in the farm equipment or tractor segment and small commercial vehicles (SCVs) and price hikes. At the segment level tractor revenues were up 15 per cent, while auto revenues were higher by about 2 per cent.

Barring tractor and SCVs, all other segments reported a fall in sales volumes over the year-ago period. Utility vehicle sales, which accounts for half of automotive volumes, declined 5 per cent.

The company, which has gained share in the small commercial vehicle space, is hopeful of adding to its market share with the help of launch of new vehicles such as the Jeeto recently. The pain point continues to be the utility vehicle segment where the company is losing ground. Since FY16, it has lost about 900 basis points with the current share standing at about 29 per cent. The company highlighted that it would launch a product called the U321 this year and a smaller utility vehicle (S201) next year to arrest the loss in market share. A revival in rural economy is also expected to rub off positively on sales of Bolero and Scorpio and support overall UV volumes.

The key product in the portfolio keeping its volumes and profitability flying high are tractors. The company hit a record high market share 45.8 per cent in the quarter and expects growth momentum in tractors to continue on the back of normal monsoons, minimum support prices and sowing patterns. It expects industry growth, both in the tractors and passenger vehicle segments, to be in the 10-12 per cent range for FY18. Higher sales of the tractors is good for the margin profile of the company, as tractor margins are close to 19 per cent against company margins of under 13 per cent.