M&M's growth engines roar to life, launches to drive gains

The stock of Mahindra & Mahindra (M&M) has been touching successive all-time highs on the bourses and, over the past year, gained 81 per cent.

While the S&P BSE Auto Index has not performed poorly, registering gains of 73 per cent, it still trails the company by 800 basis points (bps) during this period.

There are multiple reasons why investors are beating a path to M&M’s counter.

The success of launches, the focus on growth, the hopes of a recovery in tractor sales, and below-industry valuations are attracting investor interest.

Among the recent triggers are launches and market-share gains.

The company’s value market share went up by 230 bps year-on-year (Y-o-Y) to 14.4 per cent in 2023-24 (FY24), and it has likely become the No. 2 player in the passenger vehicle industry, says Axis Securities.

Analysts, led by Nishit Jalan, believe that the strong performance of the Scorpio, whose revenue has doubled Y-o-Y, and the Thar/XUV700 were the key drivers of share gains.

The company is the market leader in the mid-sport utility vehicle (SUV) segment as well as the premium SUV segment, with a share of 36.9 per cent and 30.6 per cent, respectively.

After reporting a declining trend in the 2015-16 through 2019-20 (FY20) period when annual revenues fell 3.8 per cent, the company has recovered with growth in the FY20-24 period estimated to be 39.2 per cent.

This is the second-highest growth in the passenger vehicle space after Tata Motors, which is slated to end this period with an annual growth of 51 per cent.

The trigger going ahead is increased sales from launches.

The company launched the XUV 3XO, which is the modified version of the XUV300, on April 29.

Given that the introductory prices for the entry-level petrol and diesel variants are cheaper than the XUV300, it could help the SUV major ramp up sales.

While the production capacity of the vehicle is 9,000 units a month, this can be increased to 10,500 units.

Although the company does not figure in the top four of the compact SUV segment, it is targeting a leadership position (first or second) over the next three years.

The total volume in this segment for the sector is pegged at 600,000 annually.

While the XUV sells about 4,000 units a month, given its pricing and features, it has the potential to double its volume trend, say analysts.

The launch supports Nomura Research’s view that M&M will continue to outperform the industry, given the sharp focus of its brand on SUVs, supported by continuously improving products, technology, and safety.

Kapil Singh and Siddhartha Bera of the brokerage expect that this should continue to drive re-rating from current levels of 10.5 times its 2025-26 enterprise value-to-operating profit, which is below peers at 15 times on the same metric.

Another trigger for the stock is expectations of an improvement in tractor volumes.

The company sold 35,805 tractors in April, which was a per cent higher than the year-ago period.

It had posted a 6 per cent Y-o-Y decline in FY24 sales at 364,0000 tractors.

After the April sales announcement, the company highlighted that the government’s wheat procurement operations are going on in full swing with good mandi arrivals, keeping rural cash flows healthy.

India Meteorological Department’s forecast of above-normal monsoon rains and festivals in April has helped bring positivity to rural sentiment.

Terms of trade continue to stay positive, and good cash flows from the rabi harvest are likely to boost tractor demand in the coming months, said the management of the country’s largest tractor maker.

While brokerages expect tractor sales for the sector to rise by 5 per cent in 2024-25, normal monsoons could lead to higher sales.

At the current price, M&M is trading at 21 times its FY26 earnings estimates.

Of the analysts covering the stock, about 87 per cent have a ‘buy’ rating.

However, given the consensus target price of around Rs 2,071 (the current price of around Rs 2,192), there is no immediate upside.

Any weakness in the stock price could be an opportunity to buy for the long term, as growth from launches, especially in SUV segments where it is weak, and the recovery in tractor volumes should boost volumes and margins.

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