Strong tractors sales to power Mahindra and Escorts growth; shares gain

Growth in current financial year is expected to be in high single-digits after record sales in FY18

Share prices of Mahindra and Mahindra (M&M) and Escorts gained up to three per cent, as both the tractor makers ended FY18 on a strong note, growing their domestic tractor volumes by over 50 per cent each.
 
Escorts’ tractor sales doubled in February and grew 65 per cent year-on-year in March. M&M’s tractor sales were up 50 per cent over the year-ago period and 38 per cent on a sequential basis.
 
Strong demand for tractors was led by positive rural sentiment, higher rabi production and new model launches over the past couple of months.
 
Given the 20 per cent growth by M&M, Escorts and other tractor players, tractor sales in FY18 is expected to hit an all-time high of 650,000 units, beating the FY14 record of 634,000 units.
 
Sales in FY15 and FY16 had seen a declining trend before recovering in FY17, with 18 per cent growth. Demand grew in FY18, on the back of successive normal monsoons, declining interest rates, higher minimum support prices and loan waivers by states.
 
M&M is looking at growing its tractor market share through its new brand called ‘Trakstar’. This will be introduced through Gromax (60:40 joint venture with the Gujarat government). It will be priced 5-10 per cent lower than competitors, which will position the brand at the lower end of the market.
 
M&M, which has a market share of 43 per cent, will look to increase its share further, riding on Trakstar and strong growth is expected in FY19. The company expects tractor sales for the sector in FY19 to grow 8-10 per cent. Tractor sales are important for M&M, as 30 per cent of its revenue comes from this segment but crucially 50 per cent of its profits are contributed by tractors.
 
The other segment that has done well for M&M this year has been the light commercial vehicles (CV), sales of which are up 20 per cent in FY18. The company is the market leader in this segment, with a 40 per cent share and contributes 30 per cent to the automotive segment revenue.
 
The company is lagging in the utility vehicles (UV) segment. Its market share in the segment has declined to 25 per cent, from 56 per cent in FY12. Volumes in March 2018 registered a 4.7 per cent growth over the year-ago period, while FY18 sales, too, came in at a disappointing 5.3 per cent.

In FY19, the company will bank on its three new vehicles in the compact UV, mid-size multipurpose vehicle and sports utility vehicle segments to improve sales.
 
The stock is trading at 12 times its one-year forward estimates, which is at a significant discount to peers, making it attractive, according to analysts at Jefferies.
 
For Escorts, which is looking to double revenue from the agriculture segment over FY17-22, higher sales of the largest segment in its portfolio, which contributes 80 per cent to its consolidated revenue, will act as an enable.
 
Supported by new products and network expansion, especially north and central regions where it has lower presence, the company expects to garner a market share of 15 per cent in tractors from the current level of 11 per cent. New launches are also expected to help improve margins, as they are in the more profitable 41-50 horsepower range.
 
Analysts at Quant Broking believe the company's focus on agri implements, railways and construction equipment to reduce its dependance on the tractor business. The brokerage believes the company deserves higher one-year forward valuation multiple of 17.5 times against the current 16 times. In addition to tractor makers, analysts believe Hero MotoCorp and Maruti Suzuki should also gain from the higher rural demand because significant proportions of their sales are from tier-II and lower segments.