Why M&M Share Price is Falling

Share price of Mahindra & Mahindra (M&M) fell over 2% on Thursday this week, and it was among the top losers for the day.

Today again, the stock declined over a percent. In fact, in the past few trading sessions, M&M shares have eroded 10% of the company's marketcap.

The downtrend is seen despite the automaker announcing its partnership with SBI to provide easy loan options for its tractors and farm machinery products across India.

Investors have been taken back by this sudden decline as shares of M&M have rallied big time to hit a new life time high just last month. This was on the back of rally in auto stocks, the change in management, increased focus towards electric vehicles, among other reasons.

M&M share price was rising and it saw tremendous growth in 2022. But the sentiment around the stock right now is negative and investors are worried over how long it will continue.

Let's find out why M&M share price has come under pressure in recent days and what lies ahead for the auto company.

#1 Chip shortage restricting capacity ramp-up

According to M&M's management, the waiting period for the SUVs has come down by 1-1.5 months, largely benefitting from supply chain recovery.

While supply chain issues are improving gradually, the situation is still volatile. For example, February 2023's production was hit by lower availability of crash sensor chips.

The sole issue at this point remains the shortage of semiconductors, while other supply chain issues have been resolved since China's trade opened up.

For this reason, the company is not able to ramp up its SUV production to its full capacity of around 39,000 units per month as against an average wholesale of 30,000-33,000 units, reducing its sales target.

Due to this, it has been struggling to meet customer demands for its passenger vehicle.

#2 Slowdown in tractor sales

For the financial year ended 2022-23, the tractor demand benefitted largely from higher mandi prices of crops than MSPs and three Navratras, apart from other favourable agro-economic indicators.

In the last 11 months, the company has sold 0.4 million (m) tractors.

This sale is expected to go down even in the case of a normal monsoon, as there would be only one Navratra in the financial year 2023-24.

This challenge, coupled with timing differences of festivities and margin assumptions because of the adverse impact of farm equipment ramp-up, has put M&M's stock under pressure. Brokerage houses have reduced their volume assumptions and EPS (Earnings Per Share) targets.

#3 Risk for margin expansion

The company's auto business has a big room for margin expansion in the form of price hikes, easing semiconductor, and cost-cutting measures.

However, against these accelerators for margin expansion, the rising prices for commodities from the lows of the December 2022 quarter remain the key risks for margin expansion.

Further, for the farm equipment segment, the tractor business margins are likely to improve, but a sharp ramp-up in farm equipment may further dilute the margin expansion.

What next?

The Mahindra group has always been a force to reckon with. Even with its subdued performance over the last few years, the group has still been among the leading business groups of the country.

Today, M&M is India's fourth largest carmaker and is currently the second largest commercial vehicle maker in the country.

The company is also the largest tractor maker in the country with a 42% market share and the largest electric three-wheeler maker with a 74% share.

In FY22, the group recorded the highest ever volume and revenue by exporting 17,646 tractors - a growth of 65.5% over the previous year.

It seems like the Mahindra's have been busy laying out a perfect track and the group's growth journey is only getting started.

Research analyst at Equitymaster Aditya Vora shared this about M&M, in one of his recent editorials:

1. After a reasonable time for turnaround, if the subsidiaries didn’t make money or the profitable ones didn’t achieve a threshold ROI, it was time to shut them.
2. The focus was on design and revamping the entire range of passenger vehicles. I’m sure you must be aware how nice M&M cars look today compared to what they were 5-10 years ago.
3. The cash cow, the tractor business, was not used to fund losses of subsidiaries.
4. A rebranding of the organisation.

The confluence of all this factors led to a re-rating of Mahindra as a stock. In fact, the stock price has tripled over the past 4 years.

You can read more here: What's Common Between Mahindra and a Mobile Camera.

How M&M shares have performed recently

M&M shares have declined by more than 10% in the last one month. So far in 2023, the stock is down more than 3%.

M&M touched a 52-week high of Rs 1,397 on 16 February 2023 and a 52-week quote of Rs 671.2 touched on 8 March 2022.

At the current price, M&M trades at a PE multiple of 24.4 times and a price to book multiple of 3.7.

About Mahindra & Mahindra

Mahindra & Mahindra (M&M) is the flagship company of the Mahindra Group, which consists of diverse business interests across the globe.

It operates through the following segments: Automotive, Farm Equipment, and Others. The Automotive segment comprises of sale of automobiles, spare parts, and related services.

The Farm Equipment segment involves the sale of tractors and spare parts. The Others segment includes agri, construction equipment, powerol, and spares business units.

It is one of the most reputed brands in India for automobiles, and since its inception in 1945, the company has been going strong, with its cars among the most trusted and most reliable cars in the market.

Being India's top EV stock, it has already announced its commitment of over a billion dollars to aggressively participate in the EV race, and it expects a significant 30% of its total sales to come from electric SUVs by 2027.

For more details about the company, you can have a look at Mahindra & Mahindra's factsheet and quarterly results on our website.

You can also compare Mahindra & Mahindra with its peers.

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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...