Mahindra & Mahindra - Automotive sales struggling; tractors hold up - ElaraCapital

- M&M's auto sales have seen sharp slowdown in recent months, with May posting a weak 5% YoY domestic and minus 1% overall growth

- We note that the auto division volumes include Verito sales, which might have seen uptick on impending launch of Vibe (M&M's compact car), excluding which, M&M's auto division might have seen a decline in volumes

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

- Further, sharp fall in XUV5OO sales is a worry for coming quarters' margins, as deteriorating productmix here (more post launch of Vibe) will pressurize gross margins starting Q1FY14E, in our view

- For the second consecutive month, M&M posted a strong growth in tractor sales, this time up 24% YoY to a total of 23,626 units in May'13 (we estimated ~21K units)

- On a low base, we expected a rise in tractor sales growth in April and May, ahead of monsoons and it being the key harvest season (as also indicated by the Management). Further, our dealer check confirmed strong uptake in rural areas, particularly in UP, one of the largest markets for tractors

- We note that M&M's YTD tractor sales are significantly above our expectations of 9% YoY growth, and warrant an upward revision in FY14E estimates. However, M&M's auto division sales (up 0.2% YTD v/s expectations of 12% growth) are significantly below expectations, hence an upward revision in tractor sales projections is unlikely to materially change FY14E earnings, given struggling auto division sales

- With strong beginning of the fiscal, tractor contribution on a YTD basis, to overall volumes stand at 36%, up from 30% last year, though on full year basis, it is expected to come down slightly, as base normalizes

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

Keywords