The movement in the Mahindra and Mahindra Ltd (M&M) stock in the past six months is somewhat like that of a tractor struggling to plough through hard soil. Most of its peers, meanwhile, have experienced a decent bounce-back after hitting 52-week lows in July-August last year.
Weak demand, keener competition and a slow transition to BS-VI norms have hammered the M&M scrip. December’s moderation in its sales decline, and recovery in tractor sales failed to impress investors. The stock has managed to rise only about 7.7% from its 52-week low, while most of its peers rebounded 26-81%. Keeping M&M company is Hero MotoCorp Ltd, whose shares have risen only 6% from its lows.
Indeed, all auto firms have to battle the last-mile hurdle of BS-VI transition, which has brought in uncertainty over price hikes for consumers and impacted margins of original equipment manufacturers. Analysts reckon the challenges are relatively greater for M&M given that 90% of its utility vehicle (UV) portfolio comprises diesel vehicles, where the price increase on account of the BS-VI transition will be higher.
Analysts at Motilal Oswal Securities Ltd expect a 2-3% price hike in petrol vehicles, but a higher impact on diesel ones (8-12%). A few dealers say that there was a marginal shift in some UV segments to petrol engines already, as a result.
That’s not all. The going has been tough for M&M even before the transition. With entrants such as Kia Motors India Ltd and MG Motor India, and incumbents Hyundai Motor India Ltd and Maruti Suzuki India Ltd getting aggressive in the UV segment, the company is ceding market share. Between April and November, its share at 20.1% is lower than 24.2% a year-ago. Meanwhile, new entrant Kia has captured a 6% share, even as Hyundai’s rose from 13.9% to 19%.
Furthermore, the slowdown in commercial vehicle (CV) sales is likely to continue until the macroeconomic environment improves. Year till date, M&M’s CV segment sales fell 12%, albeit better than its peers.
If anything, green shoots of a sales recovery in tractors bring hope to investors. In December, domestic tractor sales rose by 4% year-on-year on the back of a better monsoon and rabi sowing. The farm equipment segment accounts for one-third of revenue, but nearly two-thirds of earnings before interest and tax.
Interestingly, this segment is not impacted by BS-VI norms. So, improved demand for farm equipment should offset the pain, at least partially, from the auto segment. The M&M stock is trading at a price-to-earnings ratio of about 9 times FY22 earnings. That’s a consolation in the risk-reward sweepstakes.