Mahindra & Mahindra’s utility vehicle segment thrives, contrasting the challenges encountered by its tractors business in domestic and global markets.
Mahindra & Mahindra Ltd: A Tale of Two Segments
Mahindra & Mahindra Ltd (M&M) has an interesting dichotomy within its business segments. While its automotive sector shows strength, its farm equipment segment is experiencing challenging times.
Automotive Business Outlook
In the automotive segment, M&M anticipates robust growth, projecting a 15-19% expansion in its sport utility vehicle (SUV) portfolio for FY25. This forecast outdoes the Society of Indian Automobile Manufacturers’ (SIAM) prediction of 10-12% growth for utility vehicles.
M&M’s current strength is evident as it holds a substantial SUV order book of approximately 226,000 units as of 1st February. However, this figure has dwindled by 21% from the levels observed on 1st November, partly due to elevated cancellation rates in November and December.
With the company gearing up to escalate its capacity to 49,000 units per month by the end of Q4FY24, the order backlog may diminish further. Nonetheless, M&M is maintaining an encouraging average of about 50,000 new bookings per month.
Despite the capacity expansion, M&M anticipates that its volume growth in Q4 will mirror the preceding quarter’s figures, as it prepares to slow down production of its XUV300 model for a mid-cycle refreshment. Consequently, near-term volumes for this product are expected to decline.
Moreover, M&M is grappling with a disparity between variant demand and its production capacity. Nevertheless, the company’s promising upcoming launch pipeline, such as the five-door Thar and the mid-cycle refresh of the XUV300, provides a positive outlook for the automotive segment.
The upbeat prospects for the automotive segment have spurred a notable increase of over 7% in M&M’s shares over the past two days following its Q3 results.
Challenges in the Farm Equipment Segment
Conversely, the outlook for the tractor segment is less optimistic. M&M anticipates a 5% decline in domestic tractor industry volume for FY24, and the growth for FY25 is largely contingent on a normal monsoon. However, amidst the industry decline in Q3, M&M managed to gain market share, which presents a ray of hope amid the challenging conditions.
Red Sea Crisis Impacting M&M’s Oja Tractor Delivery to North America
In the international export markets, M&M’s Oja tractors face delivery delays to North America due to the Red Sea crisis. As of now, there is no immediate risk of disruption in the supply chain, but an extended crisis may lead to potential complications.
Revenue and Profitability Forecast
Nuvama Research, in a report dated 14 February, anticipates a 4% revenue compound annual growth rate (CAGR) for the fiscal years 2023 to 2026. They attribute a weaker performance in FY24 to an anticipated deficient rainfall season. Additionally, Nuvama Research expects a robust revenue CAGR of nearly 15% for the auto segment over the same period.
The diminishing share of tractors in M&M’s product portfolio may impact the overall profitability. The tractors business typically yields higher profit margins compared to the automotive segment. In the third quarter, the tractors segment reported an Ebit margin of 15.5% as opposed to 8.3% in the automotive segment.
Market Outlook and Share Performance
Kotak Institutional Equities foresees steady profitability for M&M, resulting in healthy cash flow generation. This could potentially be utilized to expand the company’s electric vehicle business in the utility vehicle and last-mile mobility segments.
Amid these developments, M&M’s shares reached a 52-week high of ₹1,784.90 per share on Thursday. The continued strong momentum in the auto business and improving demand conditions in the tractor business are expected to bolster the stock performance.
In conclusion, Mahindra & Mahindra Ltd’s journey reflects resilient prospects in the automotive segment while navigating through a tougher road in its farm equipment sector. Despite the challenges, the company’s strategic initiatives and upcoming launches position it for growth and adaptation in the evolving market landscape.
