Our channel checks indicate that underlying demand for M&M’s key offerings continues to be strong.
Our channel checks indicate that underlying demand for M&M’s key offerings continues to be strong. The recent weakness in tractors sales is a seasonal blip. Key takeaways: 1) Tractors: Festive season has started off well driven by good cash circulation in the system. 2) LCVs: Demand remains strong on the back of availability of finance from NBFCs with no visible impact from the recent liquidity squeeze. 3) UVs: The new Marazzo has had a good response with waiting of 2–8 weeks. As such, the recent sharp correction is a buying opportunity.
After strong 19% YoY growth in Q1FY19, a 4% YoY slide in domestic tractor sales in Q2FY19 raised fears about slowing demand. We believe the decline in Q2FY19 is attributable to seasonality and thus expect volumes to recover. Our first hand checks indicate that the festive season in October has begun on a good note. LCVs particularly seem to be unaffected by the recent liquidity squeeze with demand continuing to be strong. Similarly, our channel checks regarding the recently launched Marazzo indicate a healthy waiting period of 2–8 weeks. Smaller cities have longer waiting lists. We expect management to ramp up production to 4K–5K units/month.
We estimate FY18–20 core EPS CAGR will be 22% driven by strong growth in Uvs (operating leverage). Maintain ‘Buy/SO’ with an SOTP-based TP of `1,071 (15x FY20Ecore EPS, `118 cash/share and `272 for listed subsidiaries). At current price, the stock is trading at FY20E PER of 14x (excluding subsidiaries).M&M’s operatons are classified into nine segments—automotive, which involves sales of UVs/CVs and 3Ws, spare parts and related services; farm equipment, which includes tractors, spare parts and related services; financial services; steel trading & processing; infrastructure; hospitality; IT services; Systech, the business relating to automotive components and other related products and services; and Others, spanning logistics, after- market, 2Ws and investments.
The tractor business is in a sweet spot to benefit from robust industry demand and sustain market share gains on the back of launches and network expansion.