>MAHINDRA & MAHINDRA: Management Cuts Tractor Output

■ What's New — MM reported it will cut tractor production in Mar by ~1-2 days per week, till the end of the month. Assuming a 26-day production schedule, a production stoppage of 4-6 days implies a 15-23% reduction in March output.


■ Our takeaways from mgmt’s conf call are as follows — a) There has been a buildup in finished stocks at MM’s factories & stock depots beyond the typical level of 3-4 weeks. Mgmt didn’t state the current level but, given mgmt is targeting a shutdown of 4-6 days (and there could probably be shorter shifts too), we reckon the inventory buildup is perhaps 2-3 weeks above the level mgmt is comfortable with. b) Mgmt attributed the sales slump to i) falling food prices, ii) slower sales in drought impacted AP and iii) falling cotton prices. Our analysis indicates that the three main cotton growing states (AP, Maha and Guj) accounted for >40% of tractor industry growth in 9mFY12; the slump in cotton prices doesn’t augur well for FY13 outlook. c) Mgmt’s outlook remains positive – FY13 tractor volume growth is forecast at ~7-8%; the slump in volumes post Nov is a blip – not a cyclical trend. This is predicated on resumption in GDP growth, lower inflation and an expected decline in interest rates. d) Capex continues per plan – 100k tractor capacity will be operationalised in 2HFY13 – capacity will rise ~40% - a tad risky from an op. lev. perspective, if volume growth doesn’t escalate at that juncture.


■ Earnings Implications — Our PAT estimates are ~9% / 3% lower than consensus for FY13/14 respectively, with the variance attributed to our flat tractor volume forecasts for FY13. We will await trends in 1Q13 before adjusting forecasts / earnings. We don’t think a 5 month slowdown is a blip; it remains to be seen if the tractor cycle continues on its downward trajectory into FY13, or if it exhibits a muted recovery.


■ Maintain Neutral…given sharp underperformance over the past few months, and the fact that some of the negatives are priced in. We look to the upcoming budget for pointers on the legislation front, which will influence the demand for farm equipment into FY13. From a sector perspective, we prefer Tata Motors (TAMO.BO; Rs279.20; 1) and Maruti (MRTI.BO; Rs1,341.90; 1).


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