Mahindra and Mahindra Limited (M&M) has seen splendid growth from F08 to F13, for which it has been appreciated by the Industry veteran Mr. Ratan Tata in 2012, which Mr. Anand Mahindra, Chairman of M&M termed “pat on the back from a big brother”. Surprisingly, the story thereafter suggests that his company sat back on its laurels. The praise should have worked as an advanced propellant for attaining new glories. But depths rather than new heights mark the business trajectory since then. Deceleration has set in. Since then, the company has lost more than half of its market share from as high as 23.1% in F14 to 11.0% in F17. Major reasons for the loss of momentum were:
- Shrinkage in the disparity of prices of Petrol and Diesel led to dip in the share of diesel vehicles to 40% in F17 from 58% in F13. M&M was over-dependent on diesel vehicles and it took more than three years for the company to come up with the petrol variant.
- Stiff competition from global majors, who now command around 88% share in the automobile sector in India.
- The Company could not better understand changing market needs in its strong foothold of Utility vehicles, where the company has lost market share to 29.2% in F17 from as high as 47.7% in F13. Also, its leading products have touched a plateau. In 2016, it launched ‘TUV300’ and ‘KUV100’ in compact SUV segment after almost 4 years after witnessing the failure of its launch of ‘Quanto’ in November 2012.
The company also had a bright spot in terms of Farm equipment, where it continues to gain market share. However, the volumes in the segment are always like roller coaster rides due to dependency on Monsoon. The company has also gained high market share in the commercial vehicle segment, but it could only deliver sales volume, not profits as companies in this segment offer high discounts to garner market share. There are also a few misfires during the journey like forays into the passenger car segment or two-wheeler segment.
The company is also a pioneer in electric vehicles in India but its future looks uncertain to us. Recently, the company was L-2 in a bid to Energy Efficiency Services Limited (EESL) tender, where it has an option to match successful bidder Tata Motors Limited for the supply of as much as 4,250 vehicles but this option would cost it around INR 850 mn. Too much diversification in unrelated sectors acted as net income margin dampener for the company. During the period from F13 to F17, the company has spent INR 200.9 bn as capital expenditure and INR 16.6 bn on inorganic investments, which have garnered only 22% increase in aggregate revenue over the period of five years, while net income is still waiting to match the numbers as reported in F13.
M&M has underperformed S&P BSE AUTO Index by 42.9% over the period of last one year, we are of the view that given the key risks highlighted in this report and uncertainties on future growth prospects, the stock will continue to UNDERPERFORM the sector.
There are few questions regarding the holding of its shares by various trusts including ESOP trust and its disclosure regarding dealing with cash during the period of demonetization are being raised by us.
Full report is available on Smartkarma
Cheers
Nitin Mangal
SEBI Registered Research Analyst (INH000004723)
Your feedback will be highly appreciated. You may reach me at nitin@nmadvisors.com
Nitin Mangal's Blog 