Mahindra & Mahindra share price rises 2% on D-Street - BS-VI norms, new launches, monsoon to play major role going forward

While the benchmark indices ended on a negative note, passenger carmaker Mahindra & Mahindra (M&M) beat the cautious investor sentiment overall. M&M’s stock rose by nearly 2% on Sensex, after finishing at Rs 635.45 per piece up by 1.31%. The stock also touched an intraday high and low of Rs 637.45 per piece and Rs 626.65 per piece on the index respectively. Going forward, a host of factors will play role over the movement of M&M stock. The management recently had an investors meet, where they projected the outlook for fiscal FY20.

Rishabh Kale, analyst at IndSec Securities and Finance cited key takeaways from management meet. 

New launches to lead incremental sales: M&M had launched 1) XUV300, 2) Marrazo and 3) Alturas in the last one year. Management expects volumes of around 8-9K units per month from these three models. In the month of may, M&M has sold 1381 units of Marrazo, 5113 units of XUV 300 and 209 units of Alturas.

Transition to BSVI will impact the overall industry: Manufacturing cost in the overall industry is expected to increase by about 12-15% for PVs and about 15-20% for commercial vehicles due to BS-VI emission norms along with the new safety norms. M&M believes that given its expertise, it is best placed to offer the most cost-effective BSVI vehicles.

Normal monsoon is key for Farm segment: The India Meteorological Department (IMD) has forecasted a normal monsoon for the four month season beginning June. However, any deficit in the rainfall may have an adverse impact on tractor sales.

Impact of axel norms and recent entry into the Intermediate Commercial Vehicle (ICV) segment: The recently introduced axel norms negatively impacted the overall CV industry. Axel norms mostly impacted the MHCV segment, where M&M has a small presence. Therefore the impact on the sales was minimal as compared to industry. M&M entered into ICV segment with the launch of Furio. The management expects the ICV segment to lead the CV sales going ahead.

Cost control measures to be prioritized: The disruption in the overall auto industry mainly due to the liquidity crunch and rising commodity cost had serious impact to the OEM’s margins; M&M was no different. The margins stabilized in the range of 12-13% and the management expects the margins to be in the same range going forward. Margin expansion will occur only when volumes start picking up. 

Focus on Export markets: Exports have shot up 36% YoY. This is largely driven by the new Scorpio Pickup in Africa and Latin America, and KUV100 in Italy and other EU markets. In the Fes segment, management intends to ramp up global sales to 50%(currently 37%). Revenue from outside India stood at USD1.2bn (34% of total). The company is aiming for an EBIT margin of 3–5% over the next 3–5 years. This will be achieved by increasing operating leverage and cost rationalization. Moreover, the company has a well-defined strategy charted out for each country. 

Focus on Electric Vehicles (EV): The company will focus on electric vehicles in line with the government’s decision, without ignoring the hybrid space. There are expectations that regulations will mandate all new 2W to go electric from 2025. M&M had tied up with Ola to launch EVs for the Bengaluru-based ride hailing unicorn. The company also increased its commitment to the Nagpur pilot project . Out of 10k EVs sold this year by M&M, 8k units came from the E-alpha mini product, which has a lead acid battery (not lithium ion).

On stock price, Kale said, “At a CMP of Rs 630 the stock currently trades at 15.3/14.9x its FY20E/21E consensus estimates. We feel the current valuations are relatively attractive. The introduction of 3 new products, pre-buying before BSVI and a good monsoon should boost overall volumes. The current political stability in India, coupled with an expected increase in rural income should augur well for M&M. Hence, we hold a positive view on the stock.”