Volume gains, recovery in PV segment could drive rerating of M&M stock

New product launches, better capital allocation and valuations are the other triggers

Volume upgrades for FY21 after the performance in August, easing concerns on capital allocation, and valuations are expected to have a positive impact on the financials and stock trajectory of Mahindra & Mahindra (M&M). The stock is up 124 per cent since the start of this financial year and it may see further gains, given volume and earnings upgrades going ahead. 

The key trigger for upgrades is the tractor segment, which posted 69 per cent growth in domestic tractor volumes. The utility vehicle segment also had a better-than-expected showing, with 3 per cent growth. This puts to rest worries over volume growth on the back of supply chain disruption (vendor plants and labour availability), the spread of the pandemic to rural areas, and market share loss across segments. 

With production at full capacity and supply-side issues resolved, analysts expect volumes to ramp up and reverse the dip in the tractor segment for both company (FY21 year-to-date sales down 3 per cent) and sector. Most brokerages had estimated tractor sector growth to be either flat or slightly positive for FY21, but this is now expected to change to mid-single-digit growth, led by higher government spending and a normal monsoon. Analysts at JM Financial believe the tractor business is in a sweet spot and the company is well placed to benefit from robust industry demand and sustain market share gains (at over 41 per cent), riding on new launches and network expansion. The company plans to launch a new lightweight tractor platform — K2 — developed in collaboration with Mitsubishi which will have 38 models for four geographies. This, according to Nomura Research, may act as a catalyst for market share gains, not only in India but also in export markets.

The company also posted better-than-expected passenger vehicle volumes. While sales of passenger and commercial vehicles were expected to fall over 22 per cent, the company posted a lower decline of 16 per cent on the back of good demand for sports utility vehicles and pick-ups. 

This was led by rural demand. More than 60 per cent of automotive volumes (Bolero and Scorpio, among others) accounts for the rural segment and there is a preference for personal mobility amidst the pandemic.  In the utility vehicle space, after the launch of Thar last month, the company has lined up more introductions in this space, including those co-developed with Ford. The need for last-mile connectivity is also expected to sustain growth for its light commercial vehicles. However, analysts point out competitive intensity is extremely high in the utility vehicle market and, therefore, market share gains in this segment may be an uphill task for the company. 

Given the volume upgrade for the tractor industry and recovery in the passenger vehicle segment, Mitul Shah, vice-president (research) at Reliance Securities, believes M&M is likely to see an earnings upgrade. 

The higher share of tractors should also reflect positively on the profitability of the company. This, coupled with improving capital allocation policies (action on loss-making subsidiaries), is expected to drive some gains in the stock, which is trading at a discount to its five-year average valuations. Analysts at Bernstein Research have upgraded the stock price recently by 14 per cent to Rs 710. With the consensus target price around this level, the stock has an upside of 12 per cent.