Tractor demand will continue to remain buoyant – M&M

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Tractor demand will continue to remain buoyant – M&M

Edited excerpts of an interview with Mr. Hemant Sikka, President, Farm Equipment Sector (FES), Mahindra & Mahindra Ltd with Business Standard dated 5th August 2020:

Hemant Sikka commented that the company noticed a turnaround in tractor business in December. Things were going very well.

• Comments on key factors driving sales: This is the peak season for tractors. The strong demand momentum continued, aided by positive sentiments due to good cash flows to farmers, higher kharif sowing, a timely and normal monsoon cumulatively across June and July, and continued higher rural spending by the government. While it is too early to share target figures for the entire year, it is expected that this demand will continue to remain buoyant in the coming months.
• He informed that 75% of the tractor sales are on finance, M&M have aligned finances very well starting in May itself building out further in June and July. In addition to land preparation, tractors provide machine power for performing various farm applications and can be used to pull a variety of farm equipment, while also relieving the burden on farm labor and improving farmer’s livelihood.
• When asked about the supply chain constraints he replied that with tractor capacity at nearly 95%, some localized lockdowns enforced in certain cities are hampering the ramp-up of the supply chain, thus affecting production at OEMs. More than 90% of the dealers have started.
• When asked about the Capex plans, he said that K2 is a large investment, and K2 will be over by the end of FY21, some will be before FY22. (Under K2 project, the company is creating a new platform on which a new range of tractors, developed in collaboration with Mitsubishi of Japan, to further strengthen its position, both in the domestic).
• The company also made engine investments in the recent past. Investment in Swaraj tractor was also made by M&M. He further added that they are not compromising with the products for the future. It’s just that the company is completing a peak of Capex in this Capex cycle.
• While FES has a strong tractor portfolio, M&M is building technology skill sets beyond it and working on introducing a range of farm machinery, with the idea of taking technologies used in large landholding farms around the world and making them affordable and accessible to small landholding farmers. This is based on having established three global technology Centers of Excellence in Japan, Finland & Turkey, through acquisitions made over the last couple of years, from new products will be launched in FY21.
• Simultaneously, M&M is also focusing and developing Farming as a Service vertical (FaaS), which will focus on giving farmers advisory and precision farming technologies to help our farmers increase their productivity and get more output from their efforts.

Consensus Estimate: (Source: market screener, investing.com websites)

• The closing price of M&M was ₹ 610/- as of 06-Aug-2020. It traded at 24x/18x/16x the consensus earnings estimate of ₹ 25.7/34.0/39.5 per share for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 585/- implies a PE multiple of 15x on FY23E EPS of ₹ 39.5/-

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