Stock Performance Lags Fundamentals

The Street is beginning to view Mahindra & Mahindra (M&M) in a positive light as fundamentals are looking better, as sales of tractors and light commercial vehicles (LCVs) surprised the market. In FY18 (year to date) tractor sales grew 19 percent year-on-year, while LCV sales rose 21 percent. Domestic tractor sales account for 30 percent of sales and 50 percent of profitability, while LCVs account for 30 percent of revenues. Analysts expect tractor sales to sustain on the back of government spending ahead of the 2019 general elections. What will act as a catalyst are good monsoons?

According to analysts at brokerage firm Jefferies, in the passenger vehicles segment, M&M’s performance should be helped by some new launches. Says IIFL Institutional Equities, “M&M plans to launch three new utility vehicle models in FY19; two of them before the 2018 festive season. According to the management, the addressable market would be 12,000-15,000 units per month for the upcoming MPV and 20,000 per month for the upcoming compact UV. The third model (Rexton) would be high-priced, and hence low-volume.” Even in the tractor segment, the company is looking at strengthening its position by launching a new affordable brand called Trakstar.

M&M’s margin has improved by 100 basis points in the current fiscal compared to FY17. Over the past 12 months, the stock has risen by 11 percent, compared to a 14 percent rise in the Nifty. This gives investors an opportunity to enter the stock. Another key trigger could be its preparedness for Bharat Stage VI emission norms. M&M conveyed to analysts that it would develop petrol engines for all its top-selling models by 2020, as diesel engines would be more expensive. It is also prepared for the BS-IV emission norms deadline, which kicks in by 2020, for diesel engines too.

M&M is also looking at developing high-voltage electric vehicles (EVs) with longer range and higher top speeds. It is looking at tie-ups with partners for electric systems, says IIFL. The plan is to boost EV capacity to 70,000 per annum by 2020.

The company has invested `600 crores in EV technology. Its medium and heavy commercial vehicle segment, which has been making losses, is expected to break even in FY19. Based on these assumptions, analysts expect an EPS  growth of 18 percent in FY19.

Emami Poised For Double-Digit Growth

Consumer staples have outperformed the broader indices in FY18, just as it has in seven out of the last ten years. Analysts expect the new fiscal to see some recovery in sales as the impact of GST wears off and rural demand picks up. The Street feels that, among all consumer companies, Emami could deliver double-digit sales and profit growth over the next two years, thanks to innovative launches, direct reach expansion and recovery in rural demand.

According to the company’s management, the fourth quarter has seen a recovery in demand for Kesh King. However, the demand for Pancharishta has remained stagnant. While a prolonged winter has impacted sales of some of the company’s summer products, analysts believe a pick-up is expected in FY19 first quarter. The brand was relaunched last year but is yet to see a significant increase in demand. According to Antique Stock Broking, “Emami witnessed a recovery in the performance of Kesh King during the fourth quarter of FY18. This was driven by upfront trade discounts as against deferred trade discounts earlier. However, Pancharishta is yet to witness any meaningful recovery in performance post the change in the packaging and marketing campaign. The management expects its initiatives to revive Pancharishta by the second quarter of FY19.”

Trade channels have stabilized after the launch of GST and Emami plans to expand its direct reach, which increased to 0.83 million outlets compared to 0.73 million in March 2017. Also, a demand recovery is seen in rural India, which accounts for 50 percent of sales. Jefferies, a foreign brokerage, said normal monsoon should lift sentiments and rural cash flows, thereby, aiding rural recovery.

HDFC Securities believes that Emami is well-placed because of its leadership position in 70 percent of its portfolio and its focus on high-margin categories. It also has new launches planned.

On the downside, gross margins will come under pressure due to rising prices of mentha oil. Emami’s low-cost inventory of mentha has been exhausted in the third quarter. Higher advertising spends during the fourth quarter of FY18 will also impact the company’s margins. Despite the short-term pressure, Antique Stock Broking expects the company to report sales and post-tax profit CAGR of 20 percent and 26 percent, respectively, over FY18-20.