Mahindra and Mahindra bounce back may be priced in

The prospects for the year to 31 March have brightened for Mahindra and Mahindra Ltd (M&M) as the tide turns in favour of its product portfolio.

Utility vehicle (UV) sales, within the auto segment, are growing at a robust pace. The demand for farm equipment is expected to get better soon on the back of a normal monsoon. Its Korean unit, too, is clocking reasonable sales numbers.

The March quarter has reignited hope for the M&M stock.

A host of new launches in the passenger vehicle segment made up for lost market share, at least partly, in the UV segment. Note that the company faced bad times in this segment for about eight quarters, with UV sales plummeting as increasing diesel prices and higher duties turned away customers.

Add to this, M&M was caught on the back foot as foreign automobile firms flooded the markets with compact UVs, a segment that M&M did not brace itself for.

Further, farm equipment sales that have languished, thanks to weak demand after deficit rains for two consecutive years, are inching up.

During the March quarter, the company’s sales were 15% more than a year ago in the auto segment and 13% in the farm equipment business.

Pent up demand with better prospects for farming should rev up tractor sales, in the coming months.

A higher farm share in M&M’s product mix will boost the company’s operating margin.

That said, the downside risk to profit margins comes from rising raw material costs and marketing expenses to combat competition.

Besides, M&M’s initiative to have petrol variants for its vehicles will take time to establish in the market.

Its portfolio is predominantly diesel-driven, which itself is a threat to sales growth, given the ban on large diesel passenger vehicles in some states and the losing cost edge versus the petrol ones.

In any case, the Street has charted out a 15-16% revenue growth for M&M, including its unit, Mahindra Vehicle Manufacturers Ltd, during FY17.

This is good news as it comes after a revenue contraction in FY15 and a low single-digit growth in FY16.

Meanwhile, Ssangyong Motor Corp., its South Korean subsidiary, clocked two consecutive quarters of operating profit, which is valuation accretive.

All this optimism across business segments has taken the stock up by about 15% since the beginning of April.

However, at the current market price of Rs.1,390, M&M’s shares are trading close to their five-year highs as the Street was quick to price in the positives in the firm.