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