Why Mahindra & Mahindra is stopping the tractor ride. | Tech US News

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Mahindra & Mahindra Ltd’s (M&M) high-margin farm equipment business (tractors) was on the back foot this year, even as its automotive segment saw a notable turnaround. The good news is that prospects for tractors are improving.

Retail sales of tractors rose nearly 10% year-on-year during the festive season, the automaker said on Friday in its post-September quarter (Q2FY23) earnings call. M&M’s market share in tractors was 41.4% in FY23 till October, up 80 basis points (bps) year-on-year. A basis point is 0.01%.

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M&M continues to expect a growth of over 5% for the tractor industry in FY23 after factoring in a higher base in Q4FY22. Rural spending is a key oversight here.

“October wholesale volumes for tractors and festival retailers indicate initial signs of recovery in the tractor industry. We view M&M’s guidance as conservative,” said Kumar Rakesh, automobile and technology analyst at BNP Paribas Securities India. are and see tractor volume as an upside risk. M&M’s tractor wholesale volume grew by around 11% year-on-year in October. M&M admitted that growth could be between 5.2% and 6.5%, however, it is still 5 % sticking to its earlier guidance.

A higher tractor volume will lead to better margins. In Q2, the tractor and auto businesses’ earnings before interest and tax (Ebit) margins increased by 40 bps to 16.4% and 6.1%, respectively. Price increases in the 1-2% range in recent months should help margins for both segments, along with a general softening in commodity prices.

The auto segment will also benefit from the elimination of introductory prices for the XUV700 and Thar.

New launches will be a drag on the company’s margins. However, M&M isn’t worried because the mature product “should be able to withstand losses slightly less than the new margin.”

In Q3FY22, when the auto abit margin was 3.7%, the company had guided for a 300 bps increase. The automaker has improved to 240 bps margin.

Moreover, as auto volumes expand with an easier supply situation and production ramp-up, operating leverage will begin to build. Q2 saw the highest volume ever at 174,098 units. The lack of a chip needs to be closely monitored because, according to the automaker, it’s still not out of the woods on that front.

Given the growing traction of sport utility vehicles (SUVs), the company is expanding capacity in this segment. M&M is looking at a monthly capacity of 39,000 by the end of FY23 and 49,000 by the end of FY24. However, demand will remain far ahead of capacity. As of November 1, M&M’s SUV order book was over 260,000 units.

Low cancellation rates for products like the XUV700 are satisfactory at less than 5%. However, long waiting periods are a dangerous risk. According to Varun Baki, analyst at Normal Bang Equities, there is a risk of duplication in orders. “If it is higher, the actual order book may be less than the current numbers,” he said.

Investors in M&M’s shares have noted the meaningful recovery in its auto business. Surprisingly, the shares have gained nearly 54% so far in CY22 versus the 19% rise in the Nifty Auto Index. A sharp rally may well cap significant volatility in the near term.

Meeting strong demand is critical to the company’s stock’s continued support. Also, investors will do well to keep an eye on the growing competition in the SUV segment and the implementation of its electric vehicle plans.

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