• JUNE 5, 2000

Agriculture impacts M & M's tractor volumes

Automobile major Mahindra & Mahindra ( M & M's) tractor sales performance is directly linked to the performance of the agriculture sector. However the effect of this on the company's performance is normally with a time lag of one year. The impact of agricultural performance on rural incomes affects the performance after one year.

Mahindra & Mahindra ( M & M) is a dominant player in the UV market (58.2% market share in FY2000) and the tractor market (27.4% market share in FY2000). The strategy of introducing new products, and increasing retail sales has paid off and the company was able to increase its market share in both these segments in FY2000.

As can be seen from the above chart, agriculture production has been quite buoyant in the last couple of years, except for FY98 when agricultural growth reported a decline. Besides the impact of YoY growth of agriculture production on tractor sales, the fact that India is entering the 13th consecutive year of normal monsoons augurs well for the sector. In FY99 the agricultural production was 8.2% YoY, while tractor sales for the industry grew by only 1.2% YoY in FY2000. This can be attributed to over production by tractor manufacturers leading to higher dealer inventories in the past, the impact of which was felt in FY2000 .

Considering that the current CMIE agricultural production forecast for FY2000 is -3.1%, hence it is expected that tractor sales in the current financial year are not expected to do well, due to the time lag. Also keeping in mind the drought conditions in many parts of the country in the current year agricultural growth would remain affected due to this.

Going forward the success of the company's new models in the utility vehicle and tractor segment, its market leadership, the potential of its software investments and its venture Mahindra British Telecom in which the company has a 60% stake are positive for the company.

M & M at the current price of Rs 221 is trading at a price to earnings multiple of 9.3x FY2000 earnings.

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