Mahindra and Mahindra Faces Turbulence, Tractor Sales Slump Raises Concerns

In a market riddled with challenges for tractors and a potential shake-up in SUV sales, Mahindra and Mahindra finds itself at the center of analysts' caution. The company, the sole major automobile player to experience a downgrade in November, is closely watched by 43 analysts, with 35 urging a ‘buy’, six opting for a ‘hold’, and the remaining two sounding a ‘sell’ call, according to Bloomberg's latest data. Closing at Rs 1,635 on December 12, the company's stock witnessed a decline of over a percent from the previous close on the NSE.

Tractor Troubles: InCred Equities analysts point to a troubling 33 percent surge in tractor sales volumes over the past three years, potentially resulting in non-performing assets for financiers. Factors such as low down payment schemes and erratic rainfall in certain southern states have contributed to NPAs in the tractor segment. Analysts foresee a looming slide of over 20 percent from its FY23 peak volume in the next two years.

With the tractor segment being a significant contributor to Mahindra and Mahindra’s profitability, the company stands vulnerable to a decline in sales volumes from this peak.

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Farm Segment Woes: The 2nd quarter of FY24 witnessed a decline in tractor sales volumes due to a weak monsoon in southern and eastern India. Adding to the company's woes, the international market remains sluggish due to inflation challenges, and analysts predict overall growth for the year to be flat from March 2024.

Regulatory Shift Impact: While reduced raw material costs offered some relief, a shift in emission standards from BS4 to cleaner BS6 norms, coupled with the anticipated one-time cost impact in the third quarter of FY24 due to Mahindra and Mahindra's role as the broadcast associate sponsor for the Cricket World Cup, have posed additional challenges.

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Despite these hurdles, the company witnessed positive trends in the automotive segment during the second quarter of FY24. SUV revenue soared by an impressive 28 percent year-on-year, accompanied by a market share gain of 90 basis points.In the segment of light commercial vehicles, the company experienced a notable increase in market share by 280 basis points, reaching 49.6 percent. The EBITDA margin for the quarter saw a rise of 200 basis points, primarily propelled by the leverage gained from operational efficiencies. Models like Thar, XUV700, and the recently revamped Scorpio reported robust demand, contributing positively to the company's performance.

However, the demand for small cars remains lackluster, presenting a challenge for Mahindra and Mahindra. The company reported a substantial 67 percent growth in standalone net profit to Rs 3,451.88 crore in the three months ending September, up from Rs 2,068 crore a year earlier.

As the automotive industry grapples with uncertainties, investors closely observe Mahindra and Mahindra's strategies for navigating these challenges and securing its standing in the market, with a particular focus on the critical tractor segment.

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