Growth hurdles for Mahindra & Mahindra

Increasing competition, higher product prices post Budget and running costs could moderate growth rates, going ahead

Mahindra & Mahindra (M&M) was the most impacted among automobile stocks due to the rise in excise duty on sports utility vehicles (SUVs), falling over 2.2 per cent on Budget day. The stock, however, recovered after the company announced another set of robust sales numbers (for February), with double-digit growth, in contrast to the falling sales of most other auto makers.

However, JP Morgan analysts believe the continuing fuel (diesel) price hikes and increase in taxes on SUVs will further impact consumer sentiment. Also, given the high base of FY13, the next financial year is likely to see moderation in growth and higher competitive intensity, which could keep margins in check. While most analysts have a target price in the range of Rs 860-1,000 for the M&M stock (now at Rs 878), this could be at the risk of a revision if the company is not able to improve volumes in the auto and farm equipment segments.

Though the company’s operations span financial services (M&M Financial), hospitality (Mahindra Holidays) and IT services (Tech Mahindra and Mahindra Satyam), among others, 70-80 per cent of the consolidated revenue and operating profit comes from the auto and farm equipment segments. Sum-of-parts valuations, reflect this, with 75 per cent valuation given to these two segments.

Auto: Holding ground, so far
On sales front, while M&M’s bread and butter utility vehicles (UV) segment is holding steady so far, farm equipment sales continue to disappoint. While UV sales are up 14 per cent year-on-year (y-o-y), tractor sales were down three per cent in February. Given that year-to-date sales are down five per cent for tractors, expect the company to end FY13 with a fall in sales volumes. The management expects tractor sales to pick up during the harvesting season, starting April. In UVs, although FY13 has seen strong growth, led by new product launches, there are some concerns on the outlook for next fiscal.

Increasing competition
M&M has lost market share with new models being launched by competitors who want to be part of the India UV growth story. Though the new excise duty norms are a negative, models such as the Duster, which is doing a monthly run rate of 6,500, will not be impacted as its engine size is less than 1,500 cc. With Ford’s Ecosport, GM’s Enjoy and Maruti’s SUV XA Alpha launch ahead, expect M&M to face the heat in FY14. Says Yogesh Aggarwal of HSBC Securities, “In the UV business, the company has no new significant product launches in the next 12 months, although there are more than four product refreshes. This should impact the growth rates of the UV business.”

Slowing growth
After growing at 20 per cent and 36 per cent in December and January, respectively, the company’s UV sales were up 14 per cent y-o-y but down 13 per cent month-on-month. Morgan Stanley’s Binay Singh and Shreya Gaunekar say the recent rise in taxes in the Budget will hurt SUV growth in the coming months and they expect the segment growth at 15 per cent in FY14 versus over 50 per cent in FY13.  While this is a negative, analysts such as Ajay Shethiya of Centrum Broking say a high base (good sales of XUV 500 and Quanto) in CY2012 are likely to lead to a moderation of growth for M&M, going ahead. Echoing these views Rohan Korde of Anand Rathi says while the increase in excise duty and the price hikes itself are unlikely to be big dampeners, the high base and increase in diesel prices are likely to temper growth rates in FY14 to the low to mid double-digits.

Q3 consolidated results
Meanwhile, the company’s robust showing so far got reflected in the consolidated December quarter results declared this Monday (March 4), which were in line with expectations.

 

While the standalone core auto segment did well, the company’s other businesses in this space, Ssangyong, commercial vehicles (CVs) and two-wheelers continue to lose money.

Aggarwal of HSBC Securities says subsidiary losses are likely to increase further in the March quarter led by the impact of the Navistar stake buy-out by M&M in the CV business.

While Ssangyong should see some decline in losses as volumes grew strongly in the December quarter (partially led by the cut in consumption tax and introduction of new models), it is not enough to impact the overall losses, he adds. These losses were primarily responsible for the fall in margins for the consolidated entity. The management expects Ssangyong to turn around by 2015.