M&M: Monsoon blues

The Mahindra and Mahindra stock has had a strong run, gaining 164 per cent between March and now, compared with a rise of 87 per cent for the Sensex. However, over the past months, the price has remained more or less flat. That’s mainly because of concerns that a less-than-normal monsoon in four or five states could hurt sales of farm equipment, a profitable business for the company.

Tractors now account for around half the company’s sales and even if a sizeable share of tractors is now used for non-agricultural purposes, a weak monsoon could result in a fall in demand. Tractor volumes in August were somewhat dull, rising 2 per cent year-on-year, though it’s true they came off a high base and, as industry watchers point out, there was also a seasonal effect.

In the current year, tractor volumes should rise 6-8 per cent. In the June quarter, the profitability of the division was strong with an EBIT (earnings before interest and tax) margin of nearly 17 per cent.

Of course, the farm segment included numbers for Punjab Tractors, which was merged with M&M in August last year and, therefore, the results were not strictly comparable with those for the June 2008 quarter. Even on a stand-alone basis, M&M’s tractor volumes weren’t as robust as they were in July. Exports were also disappointing.

However, M&M’s utility vehicles did well in August, posting a remarkable growth of 42 per cent year-on-year, driven by all models, which resulted in automotive volumes increasing by 15 per cent.

At the current price of Rs 836, the stock trades at 13.7 times estimated 2009-10 consolidated earnings.