The share price of Mahindra and Mahindra (M&M) rose 6.4% intraday on the NSE to Rs 1,448.50 on the back of positive outlook for the company’s tractor and utility vehicle segment. Brokerage house Sharekhan maintained its ‘BUY’ rating on the stock with a target price of Rs 1525. The utility vehicle and tractor major will invest an average of Rs 4,000 crore every year for the next three years with about Rs 2500 crore being spent as capital expenditure while the rest Rs 1500 crore will be spent on investments in group companies and for mergers and acquisition.
“M&M volume growth is likely to improve from 5 percent CAGR in FY2015-2017 period to 10 per cent CAGR in FY2017-2019 led by strong outlook for the tractor industry and new launches in the utility vehicle segment. Further given the improved volume scenario and benefits of operating leverage we expect M&M to sustain strong margin performance reported in Q4FY2017. We have raised our earnings estimates by 5 per cent/6 per cent for FY2018 and FY2019 respectively given the better than anticipated margins in Q4FY2017 and strong volume outlook. We retain Buy rating on the stock with a revised PT of Rs1,525,” said Sharekhan in a research report.
The Mumbai-headquartered company on Tuesday reported a strong set of numbers in its earnings report for Q4 FY17.
“M&M margins for Q4FY2017 were better than our as well as consensus estimates adjusting for one time BS3 transitions expenses. The topline grew 4.3 per cent YoY to Rs 10,612 crs (in line with our estimate of Rs 10.40 cr) driven by a 2.4 per cent YoY volume growth. The FES segment volumes were up impressively by 16 per cent YoY buoyed by a good Rabi crop. The auto segment volumes however dipped 1.8 per cent on the back of market share loss in the utility vehicle segment due to lack of new product launches. Blended Realisation/ vehicle grew 1.8 percent on the back of price hikes taken by the company. The operating margins for the quarter contracted 100 BPS YoY. However M&M had BS3 transitional costs to the tune of Rs 171 cr. Adjusting for the same, the operating margins stood at 13.3 percent, which is ahead of our estimates of 12.1 per cent. Higher other income at Rs 294 cr (up 207 per cent yoy) lead to the profit coming in better than estimates Adjusted Net Profit at Rs780 cr was higher than our estimate of Rs 654 cr. Further, M&M realized exceptional gain of Rs 94 cr on back of sale of long term investments which further boosted profitability,” the research report said further.
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The company’s tractor business has a positive outlook as sales seem poised to grow in strong double digits in FY2018 on the back of a normal monsoon forecast.
“M&M’s tractor volumes grew impressively by 23 per cent for FY2017 post two consecutive years of de-growth. Going ahead the strong growth momentum for the FES segment is expected to continue on the back of normal monsoon forecast for 2017. Further higher MSP’s and increased crop production has lead to strong cash flow for farmers which augurs well for the tractor growth in FY2018. Basis the above positives, the management has guided for a strong double digit growth for FY2018. We expect M&M’s FES segment to grow by 14 per cent in FY2018,” the report explained.
The company’s growth in LCV segment will remain strong and the planned new launches and upgrades in the utility vehicle segment will help boost sales.
“M&M has planned two new products in the utility vehicle space over the next two years (one MUV in FY2018 and one compact UV in FY2019). In addition to the new launches, M&M has also planned a refreshed/ upgrades to its existing offering which include the KUV 1OO, XUV5OO and the Scorpio, to be launched later in FY2018. Further, the LCV segment growth is likely to be strong given the improved economic growth post GST implementations and evolution of hub and spoke model. Cumulatively we expect M&M’s auto segment volumes to grow at a CAGR of 9 per cent between FY2017-FY2019,” the report concluded.