New COVID-19 cases continue to rise in India, thus, the pan-India lock-down, continues to remain, albeit with relaxed norms. Rural demand is expected to recover on expectation of positive monsoon, generating demand for the tractors over the other vehicle categories like two-wheelers (2W) and Passenger Vehicles.

Mahindra & Mahindra (M&M) is the major beneficiary of this emerging trend, being the significant player in the domestic tractor industry with market share of over 40% in the last decade. However, supply chain bottlenecks, social distancing norms, COVID-19 cases among workers, and labor shortage are few of the key issues that will continue to persist.

The company reported 2% growth in tractor sales during May despite the lockdown. The timely relaxation of the lockdown for the agricultural sector helped ensure speedy recovery of the tractor demand.

Rural sentiment is likely to remain positive in the near-term due to several developments including robust Rabi crop production, higher procurement, good price realizations, and the forecast of a normal monsoon that bodes well for a good Kharif crop. Recent cabinet decision to increase the minimum support prices (MSP) for 14 Kharif crops for the current year is a big relief for farmers which will increase the income level for rural house hold. The combination of the above mentioned factors augurs well for tractor demand going forward in the domestic market.

With structural reforms like amendment of APMC act and increasing private participation in the farm sector on the government’s agenda, M&M's leadership position and focus on Farm-Tech prosperity, sets it up well to encash these opportunities.

Meanwhile, the passenger vehicles segment continues to remain muted as the demand curve for the auto industry continues to remain muted. The PV segment of M&M also continues to face strong challenges from superior quality and operating efficiency of Maruti Suzuki.

If you look at M&M's last 5-year financial performance, revenues increased at 8% CAGR to Rs 1,04,721 crore as compared to Rs 71,448 crore in 2015. The Profit of the company increased from Rs 2,593 crore to Rs 6,017 crore, a growth of 18% CAGR during the same period. In terms of profitability, the company has maintained its Return on Equity (RoE) well above 10% over the years above the industry median of 8.4%. However, increasing debt is a concern. Company’s current debt-to-equity ratio has increased from 1.53x to 1.77x.

Final Thoughts:

No bull market in India can start without auto sales booming. Number of tractor sales is usually the first sign of demand bottomed out.

India being the world's largest tractor market with a growing rural economy, presents a good opportunity for players in farm mechanization space. Hence going forward, the competitive intensity in the farm mechanization space is expected to increase, leading to new product launches and product offerings at high value points.

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