Strong tractor sales may cushion M&M’s revenue but profit is likely to remain under pressure, say analysts

• According to brokerages, M&M is slated to see at least a 19% decline in its profit-after-tax in the second quarter ended September 30.
• Analysts believe that even as overall auto sales suffer, led by a decline in the commercial vehicle segment, M&M’s high margin tractor volumes may offset a large dent in its earnings.
• Low exports were already hurting M&M, and the recent cap imposition by the government on incentives under the Merchandise Exports from India Scheme (MEIS) from September 1 is likely to add to the woes.

One of India’s largest automakers, Mahindra and Mahindra (M&M), witnessed a gradual sales recovery from the lows of the first quarter. It was driven by the re-opening of the economy across various regions, sustained rural demand for its tractors, and the inventory build-up ahead of the festive season.

Even as its overall auto sales continued to suffer due to a decline in the commercial vehicle segment, M&M’s high margin tractor volumes may offset a large dent in its earnings. Profit is likely to remain under pressure, says IIFL.

Brokerages estimate that M&M is slated to see at least a 19.5% decline in its profit-after-tax in the second quarter ended September 30.


Profit may decline, but margins will expand

Analysts expect its margins to expand by 127 bps YoY to 15.4% due to a higher share of the tractor segment and a strong pick-up in utility vehicle sales aided by lower other expenses and employee costs.

Like the other industry players, the outlook for M&M’s commercial vehicle segment remains pretty bleak. An ICICI Direct report highlighted that the “overall automotive volumes declined 23% YoY, while the tractor segment grew 30% YoY.”

Capping of MEIS incentives may add to its woes

Low exports were already hurting M&M, and the recent cap imposition by the government on incentives under the Merchandise Exports from India Scheme (MEIS) from September 1 is likely to add to the woes of one of the largest global automakers. While it’s not clear how much it earned from the MEIS, analysts predict that M&M will bear the brunt of the government move.


The festive season is fuelling hopes

With the arrival of the festive season, M&M too is betting on a sharp rise in sales figures. “The initial market trends do suggest a bigger uptick during the festive season with people’s sentiment improving and the need for personal mobility becoming even more evident in Covid times,” said the Axis Securities report.

The share price reflects a similar investor optimism, with it soaring nearly 20% since the beginning of the second quarter.

The management also confirmed earlier that it is seeing an uptick in demand during the festive season. “For Mahindra, the festive season has started on a positive note with deliveries and bookings being higher than last year. Going forward, this augurs well for a robust festive demand, which in turn will help the industry in the short term,” said Veejay Nakra, Chief Executive Officer, Automotive Division, M&M.

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