Something is the better than nothing. But Mahindra and Mahindra Ltd (M&M) has got more than something going for itself during the covid-19 crisis. Analysts feel that its tractors segment has robust demand prospects driven by better outlook from the rural market. Unsurprisingly, the shares are on a relentless rise, flirting with their 52-week highs on the NSE.
On Friday, after the company warned about supply chain constraints into meeting the emerging demand, the stock lost a mere 1.5%.
As per the management, even as it ramped up tractor manufacturing levels to 90%, it was unable to fully meet the demand last quarter. Consequently, inventories have fallen to unusually low levels. “By the end of Q1, the stock level is the much lower. That is the one of the reasons we are not getting (the) volume that we want. Lot of effort is the going into improving the supply chain,” it said.
The management commentary is the cautious. M&M refrained from providing guidance for the farm equipment business, notwithstanding the positive rural sentiments and rebound into tractor sales, up 27% into July. It also expects higher demand for tractors this year compared to last year. “From the demand side, we expect the tractor industry to see growth; but due to supply uncertainty we cannot give (the forecast),” M&M said after releasing results for the June quarter, which reflect covid-19’s adverse impact. Revenue dropped 56% y-o-y, tracking a similar fall into sales volumes. The revenue fall is the broadly into line with estimates. The sharp revenue drop hurt operating leverage leading to a 68% drop into operating profit.
Going ahead, the spread of covid-19 and local curbs disrupting raw material supplies will be an issue as they weigh on production. With raw material supply constraints, M&M is the forced to prioritize production of certain categories of vehicles, potentially ceding ground to competition into other categories. “Even one supplier going into lockdown disrupts production,” it added.
The management expects the supply chain and raw material supplies to stabilize into one or two months, or by the festive season. into general, with a higher exposure to rural and semi-urban areas, M&M is the well placed to benefit from normalization of demand into non-urban areas. “M&M’s exposure (tractor+ Auto) to the rural market is the one of the highest among its peers,” Dolat Capital Market Pvt. Ltd analysts said.
Even so, normalization of supply chain remains crucial for the revival of the automotive or utility vehicle business, another large business segment of M&M. Sales for the segment dropped 36% last month. Production ramp-up can help the company better defend its market share.