Growth in agricultural output offers hope for Mahindra & Mahindra, but new vehicle launches remain essential
Considering that utility vehicle (UV) launch is expected this year, a large part of earnings growth next year hinges on tractor volume growth.
A revenue growth of 20 per cent in the quarter to December from the farm equipment segment (FES) has eased pressure for the automotive division, which has seen a decline in revenue growth of 12 per cent.
M&M has provided for a guidance for a tractor volume growth for FY14 at 18 per cent and now sees a volume growth of 8-10 per cent in FY15. Considering that utility vehicle (UV) launch is expected this year, a large part of earnings growth next year hinges on tractor volume growth.
Operating profit margin in the December quarter expanded by 185 basis points to 13.1 per cent yearon-year, while revenue contribution from the tractor segment increased to 39 per cent from 32 per cent a year ago. The realisation for the tractor segment dropped 2 per cent to Rs 5.22 lakh/unit, but with volume growth of 20 per cent during the quarter, the margin for the FES segment improved by 211bps to 17.60 per cent, a consistent improvement over the past six quarters.
On the automotive front, EBIT margin rose by 97 bps to 9.47 per cent mainly led by volume growth in the vehicle pick-up segment. The company now has a market share of 65 per cent from 53 per cent a year ago in the vehicle pick-up segment. The real challenge is to boost volume in the utility vehicle segment, where it is losing market share, particularly in the UV1.
The UV1 segment now constitutes nearly 55 per cent of the total pie compared to 40 per cent, about two years ago. The company said in a post-earning conference call that UV1 will be new battle ground. M&M is planning three new platforms in early 2015, of which two would in be in UV1 segment and sounds quite confident of clawing back market share after new offerings.
On the two-wheeler front, M&M says it needs to sell at least one million units to achieve breakeven. Earnings growth in this segment is likely to be reported only after FY16. Net profit grew 12 per cent to Rs 934 crore, led mainly by volume growth in tractor segment and higher other income. The odds on the company outperforming the market are low.