Mahindra & Mahindra - Sharp moderation in auto growth, better than expected - ElaraCapital

- M&M saw sharp moderation in auto segment sales, with April recording only 1.8% growth, in-line trend but better than expectations, as base kicks up sharply and new products (expect for Quanto) have completed full year of launch

- We have always been wary of M&M's auto division sales, as momentum from legacy models was weakening every month and overall sales were driven only by new launches (XUV5OO, Quanto). Now that XUV5OO has reached base, the weakness in UV sales is getting exposed more and more, with April sales rising by only 0.9%

- We note that base for coming months is higher than April for all the three segments viz. UVs, pick-ups and 3W and thus growth henceforth too, is likely to be lackluster

- Further, amidst rising uncertainties over diesel prices and increasing competition, FY14E volume growth projections bear a bleak vibe, against a roaring 17% growth posted in FY13

- While auto segment growth was better than expected (in the sense that it was lower than projected), M&M got away with it through a strong tractor volume growth of 38%, pushing total volumes up by 12% for the month

- We note that tractor volumes look strong on key harvest related festivals shifting in April this year, which also manifested in strong retail sales for 2W

- With tractor volumes likely to taper down to single digit growth next month onwards, M&M's total volumes remain susceptible of being dragged to low single digit to flat growth, in absence of a strong auto segment growth momentum

Our view: We continue to maintain our stance of sharp moderation in UV sales in FY14E to low double digits at best, as three years of strong volume growth starts subsiding given the present soft demand in 4W categories, which has been getting reflected adequately in other 4W players' sales. Also the excise duty hike from 27% to 30% on SUV's is likely to impact M&M's volumes in the UV segment (also seen as a concern by the management). Maintain cautious stance on stock.

Source : Equity Bulls

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