M&M recovery hinges on new product launches

Slowing sales of Mahindra & Mahindra for its key product categories of utility vehicles and tractors is expected to continue over the near term due to a slowing rural economy and lack of new products.

While sales volumes for tractors was down 24% year on year in the December quarter, the company sales in the UV segment were 11% lower.

Tractor sales have been coming down due to weak rural demand accentuated by deficient rains, lower crop production, lower MSP increase and weak global crop prices.

This is also having an impact on M&M's UV portfolio. Ashvin Shetty of Ambit Capital believes that the moderation in rural demand for passenger vehicles would have the most impact on M&M (among auto companies) as Bolero and Scorpio are essentially sold in rural areas and constitute nearly 67% of M&M’s total passenger vehicle volumes in 9MFY15.

Given aggregate sales for the two models are down 4% in 9MFY15, there are already signs of demand stress in these models, according to him.

The M&M management has indicated that signs of rural slowdown have been seen in tractors but there has not been a slowdown in rural automotive sales.

Growth in the tractor segment is expected to pick up over the next couple of quarters. The slowing sales of tractors has a higher impact on profitability of the company given higher margins for the segment which at 14.2% is 600 bps more than the auto segment.

Analysts, however say that the company has been hit by a sector downturn in tractor but has been able to maintain market share at around 40-41%.

The Union Budget presented on Saturday also has little to offer for the company, bar a minor positive for the company’s electric vehicle programme. There is a plant set up fund of Rs 75 crore to fund electric vehicles and extension of lower duties on electric vehicle parts extended by one more year.

In the light commercial space which accounts for over a third of auto volumes, the slowdown has impacted the company’s volumes which were down 8% in 9MFY15.

However, the company’s market share has grown by 400 bps to 39% during this period as the sector has performed worse. The slowdown in LCV segment is largely due to fall in freight availability. However, recovery is at least a couple of quarters away given that the LCV segment improves with a lag to the M&HCV segment.

While volumes across its product segments have been slowing, the key pain point according to analysts is the utility vehicles segment. While industry volumes have grown 6%, the company domestic UV sales are down 6% year to date.

Given a weak product portfolio in the mini-SUV segment and launches by rivals in this fast growing segment, the company has lost market share coming down from about 50% in Q1FY13 to 37% in 9MFY15.

The company was caught off guard as market shifted to the compact UV segment. M&M did not have either the lower displacement engines nor a petrol variant which has impacted it adversely, say analysts.

Given that product/engine development takes at least a year and a half, competitor models (Duster, Ecosport, Terrano) took the lead as they had petrol versions as well as were able to position their product well in this key segment. M&M with its diesel dominated portfolio suffered as the price gap between petrol and diesel narrowed over the last two years from 31% to about 19%.

The company is trying to plug this anomaly by launching three new platforms in CY15, two of which will be in the compact sports utility segment while one be a small commercial vehicle. One of the SUVs, the urban compact crossover vehicle will have newly developed 1.2 litre petrol and diesel engines.

The company is also looking at refreshing three existing models and launching three new variants.The only positive for the company in the UV space is that in the large UV space it continues to maintain its share but sales are currently slow due to weak demand.

Analysts expect the company’s UV sales to look up once the new models are launched in the second half of CY16. Given the expectations of volume growth and market share recovery, analysts at Kotak Institutional Equities Research say the stock at 11 times its standalone earnings is inexpensive.